Auto Industry: India in The Changing World Order

Auto Industry:
India in the
changing
world order
kpmg.com/in
2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
Contents
Global automotive landscape
Indian automotive landscape
Select areas of future Indian

influence in the global market
Key challenges
10
Conclusion 11
Global automotive landscape
As one looks back at the last 50 years of the global automobile sector, clearly the 1960-70s
belonged to the Americas with it being the largest consumer of passenger cars and
commercial vehicles. In the 80-90s the centre of gravity shifted to Europe, particularly the
Western Europe, but the 21st century clearly belongs to the Asia-Pacific, with it being the
largest producer and consumer of the automobiles.1
The market contribution of Americas and Europe has gradually declined from 19.7 percent
and 19.3 percent in 2007 to 16.9 percent and 15.1 percent in 2011 respectively. On the other
hand, Asia-Pacific has grown from 60 percent market share in 2007 to 67.1 percent in 2011.
It is slated to capture over 70 percent of the total market by 2016 (Exhibit 1).2
Asia-Pacific is firmly in the saddle as the key growth market for automotive products with
China, Japan, India and South-Korea being the major contributors. This shift is largely driven
by strong domestic market, emerging middle segment of products and consumers, and
strong thrust on manufacturing.
India comprises of approximately 20 percent of the Asia-Pacific market and is currently the
2nd largest producer of two-wheelers and 5th largest producer of passenger cars globally.
According to the KPMGs Global Automotive Executive Survey 2012, India is likely to be the
worlds 3rd largest producer of passenger cars by 2016.3 It is also expected to be the 3rd
largest automotive Industry globally post 2020.
1 Automotive industry production statistics, OICA

2 Marketline reports on automotive industry, dated June 2012
3 KPMGs Global Automotive Executive Survey 2012 available at:
http://www.kpmg.com/global/en/issuesandinsights/articlespublications/global-automotive-survey2012/pages/default.aspx
Exhibit 1: Automotive production volumes Americas, Europe and Asia-Pacific

19.7%
71.9%
19.3%
16.9%
15.0%
15.1%
60.0%
12.3%
67.1%
2007
2011
2016
Share of global production
2007
2011
2016
2007
2011
2016
Americas
Automotive relative share in 2011
Europe
Asia-Pacific
Passenger Cars
37.5%
Passenger Cars
82.9%
Passenger Cars
Commercial Vehicles
38.7%
Commercial Vehicles
13.5%
Commercial Vehicles
8.5%
Two-Wheelers
23.6%
Two-Wheelers
3.4%
Two-Wheelers
57.8%
33.6%
Source: Marketline reports, KPMG in India analysis

Note: For the purpose of this report, Americas consists of North America (Canada, Mexico, and the US) and South America (Argentina, Brazil, Chile,
Colombia, and Venezuela); Europe consists of Western Europe (Belgium, Denmark, France, Germany, Greece, Italy, the Netherlands, Norway, Spain,
Sweden, Switzerland, Turkey, and the UK) and Eastern Europe (Czech Republic, Hungary, Poland, Romania, Russia and Ukraine; Asia-Pacific comprises of
Australia, China, India, Indonesia, Japan, New Zealand, Singapore, South Korea, Taiwan, and Thailand.)
Indian automotive landscape
Exhibit 2: Indian automotive sales and production volumes

Domestic Sales, million units
30.4
5.3
1.6
14.8
7.5
0.3
1.0
6.2
2.5
11.7
FY05
0.6
FY11
23.5
FY20*
Domestic Production, million units

36.9
6.7
1.2
8.0
FY05
Two & Three

Wheelers
Robust domestic market

The domestic market has witnessed significant growth in
all the three key segments of the sector, namely
Passenger, Commercial, and Two wheelers. Two
wheelers dominate the market with sales of 11.7 million
units and a volume market share of 79 percent in FY11.
Passenger vehicles have grown at a CAGR of 14.6
percent in the last six years to 2.5 million units in FY11.
2.9
1.8
16.9
0.7
13.3
0.3
6.5
FY11
Commercial
Vehicles
28.4
FY20*
Passenger
Vehicles
Commercial vehicles have been the fastest growing with a

CAGR of 15.1 percent in the last six years, though this segment
4
is yet to achieve global scale (Exhibit 2).
On the back of growing middle class, standard of living and
improving infrastructure, the overall domestic automotive
market is estimated to grow at a CAGR of 9 percent to 30
5
million units by Fy20. As the market grows, we KPMG in India,
foresee a number of opportunities emerging for auto Original
Equipment Manufacturers (OEMs) (Exhibit 3):
3 SIAM industry statistics

4 BMI, KPMG in India analysis
Exhibit 3: Opportunities for auto OEMs

Passenger Vehicles
Commercial Vehicles
Two Wheelers
Opportunity at both ends of the pyramid

(small & luxury cars)
Products with high-end features at

affordable premium
Increasing demand for high

performance bikes
Significant rural demand
Value added service offerings to

minimise vehicle downtime
Gaining prominence of certain product

segments (e.g. scooters) and certain
customer segments (e.g. women)
Demand for products suitable for niche

applications
Potential demand for electric 2

wheelers
Evolving preferences of Sports Utility

Vehicles (SUV), Multi-Purpose Vehicles
(MPV)
Increasing interest in electric
vehicles/hybrids
Strong manufacturing capabilities

India continues to emerge as a manufacturing powerhouse for automotive players. The
production capacity has grown from 8.0 million units in FY05 to 16.9 million units in FY11,
with a CAGR of 12.3 percent (Exhibit 2). Exports account for 13.6 percent of total
6
production. Multinational players have responded by increasing their investment in the
Indian market. FDI has increased from USD 143 million in FY06 to USD 1.3 billion in FY11, a
7
jump of 831 percent.
India is poised to be the 3rd largest producer of automobiles by FY20 with ~37 million units
8
(Exhibit 2). Accordingly, we KPMG in India, see select opportunities emerging for industry
participants in this sector:
Global scale manufacturing opportunities to cater to both domestic & global markets
?
Contract manufacturing opportunities
?
Flexible assembly line operations to cater to unique requirement of high-end and
?
relatively low volume products.
Select areas of future Indian influence in the global market

While there are numerous opportunities for the Indian Auto sector, both on the domestic
market front as well as a manufacturing base, we KPMG in India, believe the following five
areas will emerge as the ones in which India can strongly influence the global automotive
market, on account of India having developed/or planning to develop global scale
competencies:
A) Leader in small cars
B) Leader in light commercial vehicles
C) Global auto component sourcing hub with select competencies
D) Electric two wheelers to be a potential game changer
E) Automotive Engineering Services
These opportunities are therefore explored in greater detail in the next few sections.

7 Indian auto manufacturing sector report by ARC financial services dated May 2012
8 BMI, KPMG in India analysis
A) Leader in small cars

The growing middle class in emerging markets favour a middle product segment, that of
small cars. These cars typically have limited luxury features and are more functional, offering
customers basic mobility and value for money. India is primarily a small car market and this
has forced OEMs to develop and offer appropriate products at a relatively large scale of
operation. This has also resulted in India emerging as an attractive exports source for small
cars globally. India is currently the 4th largest exporter of cars with engine capacity less than
1000 cc and the 9th largest exporter of cars with engine capacities between 1000 cc to
1500 cc.9
Market scenario:
India currently manufactures about 75 percent of small cars of South Asia and about 10
percent of the worlds.10 Within India ~ 80 percent of the passenger cars manufactured are
small cars (Exhibit 4).11
Exhibit 4: Production of small cars in BRIC, million units#
CAGR
Segment
Share in
2011
10.8%
7.2%
13.5%
5.5%
11.5%
16%
23%
80%
88%
30%
26.6
2011
2020*
10.5
7.8
5.2
2.8
World
2.5
Chine
2.2
India
3.5
Brazil
0.5 1.3
Russia
Source: LMC global automotive, KPMG in India analysis; #Production volume for calendar year 2011 & 2020, *Projected data
We KPMG in India, expect the following drivers to

further influence the growth of small cars:
?
Continuing robust demand for small cars from the large
middle class population of India
?
Continued government policy support of providing supply
side enablers to small car manufacturers
?
Evolving new product development capabilities of Indian
automotive ecosystem using the frugal engineering
approach
Market response:
?
Continued government policy support of providing supply
side enablers to small car manufacturers
?
Global OEMs are increasingly looking at their Indian
operations to develop emerging market specific products
?
Global OEMs are rapidly ramping their production
capacities in India to improve their local play and to
leverage low cost manufacturing base of India.
?
Evolving consumer behaviour of moving from gas
guzzlers to fuel-efficient small cars.
9 International trade center statistics
10 IHS global automotive insight
11 SIAM industry statistics, KPMG in India analysis
B) Leader in light commercial vehicles

India is currently the 6th largest producer of commercial vehicles with approximately 50:50
share of Medium & Heavy Commercial Vehicles (MHCV) and Light commercial vehicles
12
(LCV). But we KPMG in India, estimate the Indian light commercial vehicle industry to gain
momentum and emerge as a major contributor in the global commercial vehicle landscape.
Market scenario:
India manufactured 0.46 million LCV in FY11. It is estimated to grow at a CAGR of 14.8
percent by FY20 to reach an annual volume of about 1.6 million LCV. This will ensure that
India moves from the current ranking of 5th largest LCV manufacturing country in FY12 to
2nd largest by FY17/18 (Exhibit 5).13
Exhibit 5: Production of light commercial vehicles (000 units) #

CAGR
2.7%
CAGR
-0.3%
CAGR
14.8%
CAGR
5.1%
CAGR
12.3%
9518
4853
2011
2020*
961 1232
Chine
USA
1624
880 856
Japan
467
India
629
991
Brazil
145 413
Russia
Source: LMC automotive statistics. KPMG in India analysis; #Production volume for calendar year 2011 and 2020, *Projected value
We KPMG in India, expect the following drivers to further influence the growth of
light commercial vehicles:
Increasing proliferation of hub-and-spoke based distribution supply chains prompting
?
need for last-mile connectivity through light commercial vehicles
Growing demand for intra-city transportation
?
Reducing volume cyclicality due to increasing focus in this segment is likely to bring in
?
more investment in this market
Improving infrastructure to aid penetration in rural markets.
?
Market response:
New players to further augment their presence with new products and wider market
?
presence
New players likely to enter this market through JVs with the incumbents.
?
12 OICA production statistics, SIAM industry statistics
13 LMC automotive statistics, KPMG in India analysis
C) Global auto component sourcing hub with select

competencies
The automotive component industry in India is quietly
transforming itself from one which is involved primarily in
servicing the local market to one which selectively supplies
to the global auto industry.
Market scenario:
The Indian auto component industry turnover in FY11 was
estimated to be USD 30 billion. The turnover of the industry
is estimated to grow to around USD 110 billion by FY20.
India is currently importing a significant value of auto
components. While exports stood at USD 5 billion, imports
were pegged at USD 10 billion in FY11. However going
forward, this gap between exports and imports is expected
to gradually decrease (Exhibit 6).14
Exhibit 6: Export import value gap of Indian auto
components industry
As India-based auto component manufacturers ramp-up their

production capability to cater to the domestic/global demand,
specific component category-based competencies are also
expected to emerge. Auto Component Manufacturing
Associations (ACMA) exports projection in FY20 indicate Engine
& Exhaust and Transmission & Steering as the key component
segments that will contribute to ~ 60 percent of overall exports
value (Exhibit 7).15
The largest export destination is Europe accounting for 36
percent of total exports, followed by North America accounting
for 23 percent of total exports.
Exhibit 7: Projected segmental share of Indian auto

component exports
30.9
CAGR
FY20* ~Total USD 25 billion

Transmission
& Steering
~13%
USD Billion
24.3
1.7
10
1.9
FY 05
FY 11
Exports
~19%
Body & Structural

19%
Suspension &
Braking
0%
Interior
10%
8%
18%
45%
FY 20(E)
Imports
Source: ACMA, KPMG in India analysis

further influence the growth of the Indian auto
component industry:
Global scale component production capability of
?
small car, two wheeler, light commercial vehicle
suppliers
Increasing reliance on India-based component
?
vendors for emerging market focussed product
development activities in India
Electronics &
Electrical
Engine &
Exhaust
Source: ACMA, KPMG in India analysis; *Projected value
Increasing manpower productivity in component

?
manufacturing
Continuing Government support in developing component
?
manufacturing ecosystem in India.
Market response:
?
OEMs/suppliers committing significant engine/transmission
manufacturing capacity in India for their global operations
?
OEMs/suppliers setting up international procurement offices
in India with focus on procurement of select components for
their global operations.
14 ACMA industry statistics

15 ACMA industry statistics
D) Electric Two Wheelers

Market scenario:
Two wheelers dominate the Indian market with domestic sales of 11.7 million units and a
volume market share of 79 percent in FY11. Currently, sale of Electric two wheelers (E2W) is
merely ~ 0.5 percent of the total sales. But it is pegged to grow at a CAGR of ~ 50 percent
to ~3.5 million units by 2020. Achieving this potential can result in annual liquid fuel savings
of 1.1-1.3 million tonnes annually by 2020, which translates to crude oil savings of about USD
1200-1300 million annually by 2020(Exhibit 8).16
Exhibit 8: Domestic market potential of
two-wheelers in India, million units
Exhibit 9: Worldwide market share of

electric two wheeler (PARC)
China also accounts for over 95% of the
annual sales volume
23.5
1.10%
0.60%
0.03%
0.80%
2.60%
11.7
94.88%
3.5
0.07
FY11
Two Wheelers
FY20*
Electric Two Wheelers
We KPMG in India, expect the following drivers to further

influence the growth of the electric two wheelers:
Cost of ownership (COO) advantage of E2W over Petrol
?
2W will continue to improve
owing to
Frequent and significant rise of petrol price as compared
to electricity prices
Expected decline is battery prices (primarily LI-based
batteries)
China
US
Europe
India
Japan
Others
Market response:
While the current Indian market comprises four key
?
players, many domestic and international players are
planning to enter this segment
If OEMs are to succeed, they have to develop appropriate
?
offerings for Indian consumers who are extremely
demanding.
Technology improvement (battery/motor /battery

?
management system) will allow development of better
E2W products without cost compromise
The government is expected to intervene in both demand
?
and supply side of the industry
Large Indian & global OEMs join the E2W bandwagon &
?
invest in the category to ensure s growth.
E) Automotive engineering services outsourcing
Market scenario:
Engineering service providers solely focus on the services

for engineering and rarely work on the engineering
processes they establish, consult, and/or manage. An
increasing number of companies worldwide are looking at
Engineering Service Outsourcing (ESO) options to cope with
the changing market demands comprising faster time-tomarket for products, lower design engineering costs and
higher product quality. Services are rendered via captive
engineering hubs, conventional outsourcing alliances or joint
ventures with enterprises of local prominence.
India is emerging as a key hub for off-shoring of engineering

services for automotive clients globally as they seek faster
Product Development cycles & Engineering capabilities at
lower cost. It is estimated that global automotive industry
accounted for ~ USD 400 million off-shored services from
India. While the world market for ESO is expected to grow at
~ 25 percent, India is expected to increase its share of the
global pie as it grows at a higher pace of ~ 35 percent over
17
the next three years (Exhibit 10). India faces competition
from other locations including places such as Mexico,
Eastern Europe and China.
Exhibit 10: Engineering service outsourcing market 2010-14

(USD billion)
Exhibit 11: Global ESO market by end-user segmentation, 2010

FY 10: USD 15.2 billion
38.4
17%
30.1
18.9
15.2
1.8
FY10
22%
23.8
8%
4.4
3.3
2.4
FY11
FY13
FY12
World
6.1
9%
FY14
12%
14%
India
Source: Technavio Insights, published in 2011 / 12 & downloaded by KPMG in India in 2012

further influence the growth of the automotive
engineering services outsourcing:
Because of the weak economic climate, companies in the
?
developed world are increasingly off-shoring their inhouse engineering services to the developing countries
like India to save their costs
Growing demand for faster delivery of products and
?
services likely to give competitive edge to established
vendors of India
18%
Technology /
Telecom
Aerospace
Automotive
Consumer
Electronics
Pharmaceutical
Others
Construction
Source: Technavio insights, published in 2011/12 & downloaded by KPMG in India in 2012
Market response:
Global OEMs are opening their technology centres in India
as it is believed that the BRIC countries are expected to
contribute almost 41 percent of automotive growth globally
18
by 2020 from the current 30 percent. These design centers
are expected to contribute to:
Supporting regional product development
?
Providing global engineering services
?
Facilitating component sourcing for their parent company.
?
Since India has the largest amount of engineering

?
graduates with the appropriate skill sets, it would have an
upper hand over other emerging, low-cost counties for
ESO.
17 Technavio insights
18 Technavio insights, published in 2011/12 & downloaded by KPMG in India in 2012
10
Key challenges
India continues to face challenges that can potentially come in the way of its global march.19
Land acquisition norms, processes, and timelines
Due to lack of proper implementation of standardized
processes relating to land acquisition as well as difficulty in
approaching the concerned department/ministry/organisation
at the right time, it becomes difficult to acquire required land
in a number of locations. This leads to delays in setting up a
plant and initiating the manufacturing processes in a timely
manner.
Taxation complexity
Tax laws in India are believed to be one of the most complex
laws across the globe. The complexity is due to a plethora of
laws and large number of associated processes. The new
proposed GST norms are likely to simplify the processes and
bring uniformity in the system.
Policy skew shaping consumer preferences
Key changes in policies can upturn market dynamics. When
the government deregulated petrol prices, demand for petrol
cars suddenly slumped. Consumers started buying more of
diesel-based cars. The automobile players are increasingly
adapting to this changed landscape and launching diesel
variants of their existing products.
Infrastructural constraints
The inadequacy of road infrastructure in India is a big
bottleneck in the Indian automotive sector. This is
compounded by the fact that traffic management is very poor
or non-existent. Also, port capacity is not adequate to ship
exports from India.
Fierce competition - increasing cost pressure
There is fierce competition among the automobile players in
India. Everyone wants to have a share in the domestic
market. Manufacturers' margins have been squeezed
severely and they are all under pressure to cut costs to be
profitable and competitive.
Skilled manpower
Auto industry, like many other industries is facing severe
shortage of skilled technical as well as managerial manpower.
This challenge becomes all the more daunting because of
lack of adequate training infrastructure. There is also an
urgent need to improve the quality of skilled and semi skilled
manpower working in the auto industry. To do this, the
existing vocational educational institutions have to be
upgraded and additional ones should be started.
19 KPMG in India assessment
11
Conclusion
The Indian Automotive Industry is expected to be among the top three globally sometime
after 2020; it is expected to provide significant opportunities to industry participants,
provided they are able to manage the challenges this industry poses. While India provides
unique opportunities to industry participants, it calls for a tailored approach to doing
business here. Companies will have to adapt existing product portfolio/design products
ground-up to make them relevant for Indian customers. Companies need to commit
themselves fully to the Indian market and be prepared to be here for the long haul. In the
short term, global players will have to closely integrate India operations with their overall
global operations to derive maximum advantage. Thrust needs to be given to original
research that will yield breakthrough results.
These results could help in addressing global concerns such as environment, fuel efficiency,
need for alternate and renewable fuels and materials etc. The government should act as a
facilitator by bringing about necessary changes in the current regulatory landscape, which
will encourage private participation.
KPMG Contacts
Rajesh Jain
Partner and Head
Markets
T: +91 22 3090 2370
E: rcjain@kpmg.com
Yezdi Nagporewalla
Partner
T: +91 22 3090 2488
E: ynagporewalla@kpmg.com
Ashwin Jacob
Director
T: +91 22 3090 1671
E: atjacob@kpmg.com
Deepak Nayak
Manager
T: +91 22 3090 2460
E: deepakn@kpmg.com
kpmg.com/in
This article was authored by KPMG in India on the request of Society of Indian Automobile Manufacturers (SIAM)
for the background note for its 52nd annual convention held on 6th Sep 2012 in New Delhi.
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed
herein as a part of the Survey are those of the survey respondents and do not necessarily represent the views and opinions of
KPMG in India.
2011 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with
KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.
The KPMG name, logo and cutting through complexityare registered trademarks or trademarks of KPMG International.
Printed in India.

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Auto Industry:

Indian automotive landscape

Select areas of future Indian

Global automotive landscape

1 Automotive industry production statistics, OICA

Exhibit 1: Automotive production volumes Americas, Europe and Asia-Pacific

Source: Marketline reports, KPMG in India analysis

Indian automotive landscape

Exhibit 2: Indian automotive sales and production volumes

Domestic Production, million units

Two & Three

Robust domestic market

Commercial vehicles have been the fastest growing with a

3 SIAM industry statistics

Exhibit 3: Opportunities for auto OEMs

Opportunity at both ends of the pyramid

Products with high-end features at

Increasing demand for high

Significant rural demand

Value added service offerings to

Gaining prominence of certain product

Demand for products suitable for niche

Potential demand for electric 2

Evolving preferences of Sports Utility

Strong manufacturing capabilities

Select areas of future Indian influence in the global market

6 SIAM industry statistics

A) Leader in small cars

We KPMG in India, expect the following drivers to

B) Leader in light commercial vehicles

Exhibit 5: Production of light commercial vehicles (000 units) #

C) Global auto component sourcing hub with select

As India-based auto component manufacturers ramp-up their

Exhibit 7: Projected segmental share of Indian auto

FY20* ~Total USD 25 billion

Body & Structural

Source: ACMA, KPMG in India analysis

We KPMG in India, expect the following drivers to

Source: ACMA, KPMG in India analysis; *Projected value

Increasing manpower productivity in component

14 ACMA industry statistics

D) Electric Two Wheelers

Exhibit 9: Worldwide market share of

We KPMG in India, expect the following drivers to further

Technology improvement (battery/motor /battery

16 SIAM industry statistics

E) Automotive engineering services outsourcing

Engineering service providers solely focus on the services

India is emerging as a key hub for off-shoring of engineering

Exhibit 10: Engineering service outsourcing market 2010-14

Exhibit 11: Global ESO market by end-user segmentation, 2010

We KPMG in India, expect the following drivers to

Since India has the largest amount of engineering

19 KPMG in India assessment

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