India’s Automotive Industry is one of the largest in the world, currently contributing 7.1% to the country’s GDP. Due to growing demand and production, investments are desperately needed. During the last few months, several companies have started investing heavily in various segments of the industry. Most notably, private equity investment in automobile component sector rose by an astonishing 607% to $90.2 million during January-May this year compared to the same period last year. Merger and acquisition (M&A) deals in the auto-components sector increased by 170% to $254.8 million. The Indian government through its various decisions have made their intentions clear to profoundly promote cleaner and sustainable automobiles. The market is expected to continue its healthy growth during the financial year 2017-18, despite heavy regulatory changes that have been levied on the industry.
One of these changes is the new “Goods and Services Tax (GST)” that was implemented from 1st July. As an immediate reaction, many automakers like Maruti, Toyota, JLR and BMW have passed on the tax savings from GST and cut their car prices. The reform could help to boost sales of mid-sized sedans and sports utility vehicles (SUVs), especially in the higher priced segment, where the difference between GST rate (plus cess) and previous tax regime is almost 10%. However, the government has shown its inclination to subsequently raise the applicable cess which might make automobiles expensive again. CEOs of carmakers urged the government to reconsider this proposal and added that frequent changes impact investment plans in the country. Surprisingly, the only four-wheeler automobile segment that became more expensive post GST was hybrid cars and SUVs that had a tax increase of 13.3%. Hybrid vehicles are considered to be a bridge towards fully electrified vehicles by the industry. On the other hand, the government is keen to promote electric vehicles as while hybrid vehicles conserve only small portion of the fuel, electric vehicles are the future.
The second big change for the industry is the government’s goal to switch to far stricter emission standards in line with those in the US, Japan and the European Union. By 2020, manufacturers will have to meet Bharat Stage VI, a norm equal to European emission standard Euro VI. India is catching up with European emission standards, which are currently five years ahead, by skipping Stage V and directly implementing BS VI. This marks a major challenge for India’s automotive industry. Despite all the inconveniences, this development leap in emission reduction offers great entry options into a fast-growing market. As automakers are already exporting Euro VI vehicles around the world, technical know-how is not the limiting factor in this undertaking. Foreign companies that got ahead of the advanced technologies can expect to make record profits.
Further, India is set to ban sales of non-electric vehicles by 2030. This will make the country the second earliest adopter of such restrictions, after Norway. Given the fact that India’s streets are among the most polluted worldwide, this is a very ambitious goal set by the government. The government realizes that phasing our existing petrol and diesel vehicles might take time. But the government is working on a road map to promote electric vehicles and ensure all-electric cars by 2030. Battery-powered vehicles have very different engines and powertrains compared to combustion engines used in petrol and diesel cars. “Changes should be evolutionary, not disruptive,” says Vinnie Mehta, director general, Auto Component Manufacturers Association. Mahindra Group’s Chairman Anand Mahindra believes the transition to be feasible and sees plenty of opportunity for the Indian automotive industry, especially for investments in the electrification of the powertrain. Thus, the opportunity for foreign auto-parts companies to enter India using their technological advance seems more than lucrative.
Currently, two-wheelers take up the biggest market share domestically with 81% and recently overtook Chine to become the biggest two-wheeler market in the world. Furthermore, India is a prominent automotive exporter and is expected to grow strongly in the future. During the period April-January 2017, sales of passenger vehicles, commercial vehicles and two-wheelers grew by 9.17%, 3.03% and 8.29%. According to Heavy Industries and Public Enterprises Minister Anant Geete, “the share of India’s automobile industry to the GDP is expected to grow to 12% over the next decade”. This indicates a remarkable growth and therefore vast investment opportunities. Especially in the sector of the electrification of vehicles, foreign technology pioneers should enter the market and contribute to India’s transition. Governmental initiatives, such as the “Make in India” campaign further support the industry to develop at a fast pace.
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