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Why car makers love India Add to ...

From the FT's Lex blog

When is a small passenger vehicle with four wheels not a car? In India’s fast-growing market, where positioning is critical.



Since Tata Motor’s much trumpeted Nano flopped, car makers have focused successfully on flashy rather than frugal models. But Bajaj Auto’s insistence that its four-wheeled RE60, unveiled this week, is not in fact a car speaks volumes: stunning growth prospects mean little if competitive strategies go awry.



Small wonder that car makers love India. Passenger vehicle sales have grown at a compound annual growth rate of 16 per cent for the past five years. Analysts at Citigroup expect sales will grow at a compound rate of between 13 and 15 per cent for the next five. Car penetration - still very low; at 15 per 1,000 people it is half that of China - is rising steadily.



Bajaj Auto’s repositioning of the RE60, which was originally intended to rival the Nano, is an acknowledgement of Tata’s misstep and the fierce competition in the car market. Bajaj’s own expertise - two- and three-wheelers, the market it is targeting with the RE60 - is still a tempting market to settle for; growth in two-wheelers is expected to remain above 10 per cent annually. If only carmakers could coexist so neatly. This is unlikely given that relative upstarts such as Ford and Volkswagen (with 4.8 and 2.8 per cent of the Indian market, respectively) are battling entrenched players including Suzuki Maruti and Hyundai (49 and 18 per cent).



Car makers know their individual paths to capturing India’s 15 per cent growth will not be that smooth. Potential potholes this year include high fuel prices, slowing growth, and India’s high interest rates. Investors prepared to take the risk should focus on the well-established players; they have the dealer networks necessary to defend their share, and the ability to expand if the road in 2012 is less bumpy than feared.



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