Carmakers bet Rs 25,000 cr on demand overdrive

Sector seen pumping in Rs 25,000 crore in next 3-4 years.

With investments totalling Rs 2,600 crore in the last two years, business is vrooming in the Indian automobile industry. And that's just at the kickoff.

The next three to four years, says the Society of Indian Automobile Manufacturers, could see the industry pump in as much as Rs 25,000 crore, including Rs 10,000 crore in research and development.

There's more. A recent study done by Mckinsey for the Automobile Component Manufacturers Association says the sector has the potential to grow to $33-40 billion by 2015 including $20-25 billion of exports.

The investments, meanwhile, are turning into a torrent. Suzuki Motor Corporation announced last month that it would invest Rs 6,000 crore in India in a 250,000 cars a year production line, to make 300,000 diesel engines a year and in refurbishing the existing Maruti Udyog plant.

Tata Motors, too, has announced an investment of Rs 5,300 crore investment to augment capacity. Hyundai is ramping up capacity at its car plant near Chennai with an investment of Rs 1,000 crore over the next two years.

Two-wheeler companies are not lagging. Hero Honda has announced a Rs 500 crore greenfield project in Uttaranchal. Suzuki too is expected to bring in substantial investment into its two-wheeler unit in Haryana.

The investments are inspired by the scorching pace at which the Indian automobile market has grown in the last year-and-a-half.

Passenger vehicle sales grew by 27 per cent in 2003-04 and 25 per cent in the first five months of the current financial year.

Two-wheeler sales grew by 11.49 per cent in 2003-04 and 8.3 per cent in the first five months of this year. Commercial vehicle sales grew by 36.53 per cent last year and 29 per cent in April-August this year.

The growth is projected to continue. A Booze, Allen Hamilton study says the market for cars could grow from 1 million in 2003-04 to 3.5 million in 2015. Since most automobile companies are functioning at full capacity, they need to expand to meet new demand.

"Many of these companies have also realised that the margins on their exports from India are very good. There is going to be a sharp jump in exports from the country," an industry analyst said.

"I see no reason why India can't become a production hub for small cars in the world market," says Maruti Udyog Managing Director Jagdish Khattar. Exports, too, are expected to fuel investments in additional production capacity.

Of course, downstream investments in the automobile components industry are going to be much higher. As a general rule, every rupee spent in carmaking results in downstream investments of Rs 3.

For instance, the new assembly plant announced by Suzuki, expected to be put up at a cost of Rs 2,500 crore, is projected to result in fresh investments of Rs 7,500 crore by the component manufacturers.

The makeover to Bharat Stage III standards from April 1, 2005, will also bring more investments in the components sector with each carmaker bringing new models in the shortest possible cycle time.