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Build, build, build

An estimated Rs 100,000 crore might be invested in the coming five years to expand production capacity in India.

Kushan Mitra | Print Edition: January 24, 2010

At around 1.8 million units a year, India's passenger vehicles market isn't amongst the biggest-of an estimated 80 million vehicles that were sold in 2009, China and the US are the two largest markets, accounting for roughly a fifth of that number. But now let's look at some numbers: Between April and November, India's automakers sold 21 per cent more passenger vehicles than they had done a year ago-the highest growth figure since February 2004-05. The market is expected to grow between two and three times the rate at which the country's economy does.

And Dilip Chenoy, Director-General, The Society of Indian Automobile Manufacturers (SIAM), expects India to be a 4-million units car market by 2015 (excluding exports, which could add up to another million units). Small wonder then that at a press briefing to announce the 10th Auto Expo last fortnight, SIAM executives pointed out that they had actually run out of space for exhibitors-some 2,100 car makers and components makers from all over the globe-from China to Colombia-are expected to showcase their wares at the extravaganza scheduled for January 2010. They add that Delhi's biennial automotive extravaganza has now become the world's second-largest automotive show, after Shanghai's, which is an annual event.

If demand conditions are so good-at a time when the industry globally is still reeling from a severe recession-supply has to follow suit. Chenoy expects close to Rs 80,000 crore to be invested in auto capacities in the next three years or so (including two-wheelers and commercial vehicles). Leading the charge will be the likes of leader Maruti-Suzuki India Ltd (MSIL), no. 2 player Hyundai Motors India Ltd (HMIL), the world's largest car maker Toyota, and a relative new kid on the block, Volkswagen.

Investments totalling Rs 50,000 crore (including ancillary manufacture) will need to be made in the Indian passenger car production industry alone in the next three years just to keep up with demand, estimates Chenoy. And the demand projections do not take into account 'Ultra Low Cost Cars' (ULCCs), though costs for dedicated ULCC plants are around half those of larger multi-vehicle factories.

Total investments can conservatively be estimated at over Rs 70,000 crore for passenger cars alone and Rs 100,000 crore for the entire automotive industry in the next five years. The rule of thumb is that it costs $1.5-2 billion to establish a new automotive line of around 300,000 units. Costs in India are a bit lower than costs in developed countries as the automation levels are lower thanks to cheaper labour costs. And it takes 18-24 months to build a line and another three-four months to have it running at capacity.

Given that most of India's largest automotive factories are running either at capacity, or very close to it, there is little room to expand the existing facilities. Therefore, the additional two million-odd vehicles will mostly be made in new facilities. An estimated Rs 35,000 crore has already been committed towards new plants that will come on stream between 2010 and 2015. These include the investments made by Volkswagen and General Motors in new facilities, but does not include the delayed investments of Renault-Nissan and Honda.

Nor does it include big planned investments by MSIL and HMIL. And they indeed have big plans. Shinzo Nakanishi, Managing Director, MSIL, says the company is on the verge of announcing a new line to be built alongside its existing factory at Manesar in Haryana. "If we want to retain our 50 per cent market share, we have no choice but to expand our production capacity as the market grows. Right now we sell everything we make-a million vehicles-and our lines are running full." He says that his board is on the verge of approving the investment and eventually the company hopes to have as many as four parallel lines at Manesar with a capacity of 1.2 million vehicles. This along with modifications to the older Gurgaon plant will push total capacity of MSIL alone to close to two million units annually by 2015-16.

At HMIL as well there are no immediate plans for a new line; after all the second line in Irungattukottai near Chennai just opened in early 2008 but the total capacity of 600,000 units will need to be augmented soon by at least 50 per cent. A spokesperson says that once some production of select export vehicles made in India currently moves to Europe, that will open up some capacity. "Also, we can easily run our factories at five per cent overcapacity," says Rajiv Mitra, the HMIL spokesperson.

With several global manufacturers- and not just General Motors and Chrysler, which saw bankruptcies -having being hit hard during the global downturn, investments might be hard to come by. But then in such times investing in high-growth markets - like China and India - becomes an imperative. Toyota, which had a torrid year with a top management shake-up and withdrew from Formula 1, is on track with its India expansion plans.

An initial investment of Rs 3,200 crore to produce a new small-car (code-named Eitos) at its factory on the outskirts of Bangalore with an initial capacity of around 65,000 units is expected to come on stream by mid-2010. Honda, which pulled out of the pinnacle motorsports series a year earlier (the ex-Honda team managed to win both the drivers and constructors titles in the 2009 Formula 1 season), delayed its plant opening in Bhiwadi in Rajasthan to make Honda's new small car from 2009 to 2010, citing the downturn. But if demand for the car is robust, capacity could be expanded from 50,000 to 100,000 .

Nissan will start production at its Rs 4,500-crore, 400,000 units-ayear Chennai plant (200,000 units initially, and investments might be ramped up over a seven-year horizon) from the middle of 2010 after some delays (and the pull-out of parent Renault). General Motors India (GMI) is expected to increase production at its Talegaon plant outside Pune from 140,000 units to 300,000 units annually.

What should give GMI a shot in the arm was the sale of 50 per cent of its operations by GM to its Chinese partner SAIC, which will allow the cash-strapped company to make the $650 million investments to ramp up the plant. Ford doesn't want to be left behind and is spending close to $500 million (Rs 2,500 crore) to double production capacity at its facility south of Chennai. Volkswagen Group, which manufactures Skoda and Volkswagen vehicles in India along with the assembly of Audi cars, recently inaugurated its Rs 4,000-crore plant at Chakan near Pune.

THE GREAT RACE

MARUTI:
To add up to 900,000 units additional capacity at Manesar over the next five years, no investment announced as yet.

HYUNDAI: Additional capacity will be added at existing plants, new plant location also a possibility. No firm decision taken until now.

NISSAN: New plant with 200,000 units initial capacity to start by mid-2010. Plant can expand to 400,000 units over the next seven years.

TOYOTA: Additional production capacity of 65,000 units for planned small car which could be scaled up.

VW: New plant with 110,000 capacity just started production, third-shift to be added for additional production with plans to increase later.

GM: Planned expansion of new Talegaon plant from 140,000 to 300,000 units annually plus addition of new engine plant under new joint-venture with Chinese company SAIC.

FORD: Doubling production capacity at existing plant for new small car 'Figo' in 2010.

TATA: Sanand plant for Tata Nano production to come onstream by March 2010. Jointly invested with Fiat in new passenger car facility which is operational.

HONDA: Delayed start-up of new facility to make Honda's planned new small-car to be unveiled in Delhi's Auto Expo with production scheduled to start 2011.

 

These investments into India alone add up to close to Rs 20,000 crore, which has already been invested for production of an additional 500,000 units by 2011. And even though most lines have been built with expansions in mind, the planned expansions will cover only a quarter of the expected demand till 2015.

Let's not forget exports, which are expected to cross 400,000 units this fiscal. HMIL leads the thrust-it has already made its India factory the exclusive maker of the i10 and plans to export 250,000 cars, almost half of its installed capacity. With MSIL also making India the sole maker of the Alto (sold in India as the A-Star) and Nissan also planning exports of its new small car from Chennai, exports by 2015 could add up to a million units annually. With the kind of growth plans and investments being talked about back home, it's difficult to believe that the global auto industry was battered by one of the most brutal recessions in 2009. A recovery for the global majors in 2010 could result in even bigger investments being made in India.

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