Size does matter, after all, if you are an automotive company.
On Monday, Maruti Suzuki India, the country’s largest maker of passenger vehicles, said it would spend Rs 1.25 trillion over the next seven years leading up to FY31. This is just a touch short of five times the capital expenditure in the eight years to FY23.
Of the new capex plan, Rs 45,000 crore is for doubling the production capacity to 4 million a year. The rest will be spent on developing and launching 11 new models with different fuel options, expanding the sales and marketing teams, and on a humongous export push.
Industry observers say Maruti needs this capex push to fortify the position it has held for decades as the runaway market leader at a time new technologies are coming in to make electric vehicles and hybrids a viable alternative to the traditional internal combustion engines (ICE) that use gasoline.
In that, Maruti is not alone. Numbers two, three, and four in the market —Hyundai, Tata Motors, and Mahindra & Mahindra — have lined up capacity expansions of their own for a combined investment of Rs 50,000 crore, taking the total by the top four — which lord over four-fifths of the market — to a humongous Rs 1.75 trillion.
“Between 2020 and 2022 no one made investments due to the pandemic. But demand was back in FY23 and we and others were running out of capacity. So, investment in expansion was clearly needed,” R C Bhargava, Maruti’s chairman, told Business Standard.
Post-pandemic flush
The time is indeed ripe.
Last month, automakers created a new record in monthly sales, hawking 363,733 vehicles, as they accelerated dispatches to ensure sufficient stocks with dealers for the festival season, typically taken to be from Onam to Diwali. Domestic sales in FY23, at 3.8 million, marked 21 per cent growth over the previous year, crossing the previous high of 3.3 million in FY19.
This financial year could end up with 4 million, maybe more.
In the midst of this boom, the pause on capacity expansion during the pandemic is coming back to bite. Maruti, struggling to meet the rising demand, is taking the unutilised capacity available with Toyota, its ally with which it shares models. It is also tweaking its Manesar plant. The two initiatives together will yield an additional 250,000 vehicles this year. It hopes its new plant in Haryana will start producing 250,000 cars from early 2025.
Hyundai’s current India capacity is 820,000 vehicles a year. It has earmarked Rs 20,000 crore for expansion, launching new products, and for manufacturing battery packs for
electric vehicles.
“Currently we are operating at full capacity. We are cumulatively aiming at a capacity of 1 million units annually, which will include expansion of the Sriperumbudur factory near Chennai. We have also signed an asset purchase agreement for General Motors’ Talegoan plant, which has a capacity of 130,000 units,” says Tarun Garg, chief operating officer, Hyundai Motors India.
Tata Motors, like Hyundai, is operating at close to full capacity. It will gain more capacity from its acquisition of Ford’s plant in Sanand, close to its own facility, for Rs 727 crore. It will spend another Rs 1,000 crore to customise the acquired unit. With this, Tata Motors’ capacity will increase from 600,000 vehicles a year to 1 million, bringing it to the same level as Hyundai’s.
“We expect the industry growth to be strong in the festival season. For the financial year, the industry is likely to touch 4 million vehicles,” says Shailesh Chandra, managing director, Tata Motors Passenger Vehicles and Tata Passenger Electric Mobility.
In the midst of the optimism, Maruti’s Bhargava provides a note of caution. There is no guarantee, he says, that the heady double-digit growth will continue because FY23 raised the base and the current financial year will raise it higher. Maruti expects its sales growth to average 6 or 6.5 per cent a year till FY31. This could however rise to 7 or even 8 per cent after FY27 if the small car market revives, says Bhargava.
The small car market is not growing, partly because of the sharp rise in prices necessitated by the upgrade to BSVI emission norms and partly because the purchasing power in that market segment got eroded due to the havoc in the job market caused by the pandemic. Bhargava says consumer incomes will go up in the next few years.
The current boom is driven by new mid-sized and higher-end models of above Rs 7 lakh, whose share in total sales has gone up dramatically. Sports utility vehicles, the flavour of the season, have come to account for nearly half of all passenger vehicle sales.
“This suits auto companies as the margins here are much better than in small cars. Those buying cars now are not entry-level customers and they are buying their second or third car or are multiple-car families,” says BVR Subbu, former president of Hyundai Motors India.
Electric charge
One reason for the rush to increase capacity is that automakers do not want to miss the bus on electric vehicles, a market on which each of them has placed ambitious bets with investments and new models. At present, the penetration of electric cars is merely a shade above 1 per cent, but 20 electric cars that are lined up to be launched in the next two to three years promise to change that dramatically.
Tata Motors expects the share of electric in total passenger vehicle sales to rise from 25 per cent now to 50 per cent in 2030. Putting money where its mouth is, it is investing $2 billion in rolling out 10 electric vehicles by 2026.
“More investments are expected towards creating a robust supply ecosystem for EVs, which will also include a battery giga factory,” says a spokesperson for Tata Motors.
Hyundai, not to be left behind, has announced six electric models by 2028, of which two are already out in the market. There is also the battery making plan mentioned earlier.
“Leveraging the expanded capacity, HMIL will review its plans to launch additional electric vehicle models into the Indian market from the Sriperumbudur plant. Our expectation is that electric vehicles will contribute 20 to 30 per cent of total car sales by 2030,” says Garg.
Maruti got into the electric game later than Tata and Hyundai, but aims to sell 500,000 EVs annually by FY 31, which will be 15 to 20 per cent of its sales. Six of its 11 new models will be electric.
Industry watchers say that with the bigger players investing in expanding their capacities for making both ICE as well as electric vehicles, there could be further consolidation. The first phase has already happened with Ford and General Motors exiting the country and their capacities being taken up by Tata and Hyundai, respectively.
“I don’t see more than seven to eight players left standing three years down the road: Three Indians, two Japanese, two Koreans and one European. The consequence is that the top few players will become bigger and more profitable,” says Subbu.
For now, they are definitely becoming bigger.