A Chinese invasion of the auto landscape

As seen in Australia, tariff cuts may have an unwelcome outcome for domestic car makers

The Indian automobile industry is poised for disruption with the large-scale entry of Chinese auto firms, especially in the electric mobility sector. These changes will affect the fortunes of existing automakers, as well as jobs and imports.

In the next few years, Chinese companies could make one in every three electric vehicles (EVs), along with numerous passenger and commercial vehicles on Indian roads, either directly or through joint ventures (JVs) with Indian firms. Just one JV between SAIC Motors (owner of the MG brand) and India’s JSW Group aims to sell over 1 million new energy vehicles by 2030. The JV wants to recreate the “Maruti Suzuki moment”  of the 1980s that revolutionised the Indian auto sector.

SAIC Motors is one of the “Big Four” state-owned Chinese automakers. In 2007, SAIC Motors acquired British car maker MG Rover’s assets after it went bankrupt. It uses a plant in Halol, Gujarat, previously owned by General Motors, to produce vehicles like the Hector and the ZS EV for the Indian market.

SAIC Motors is not alone. Chinese car company BYD (Build Your Dreams) Auto sells a range of electric vehicles in India, as well as buses, trucks, cars, and sports utility vehicles (SUVs). BYD entered the commercial vehicle sector independently and through a partnership with Megha Engineering under the Olectra brand. Recently, BYD has also started importing ready-to-drive cars in completely-built-unit (CBU) form. Similarly, Volvo cars are also being imported from China in completely-knocked-down (CKD) kits.

Chinese companies like Changan Automobile, JinkoSolar, and several bus and truck manufacturers, including Zhongtong Bus and Foton Motor, contribute to China’s automotive presence in India. Additionally, several others like Great Wall Motors and Haima Automobile are looking to enter the Indian market. Moreover, e-rickshaws and two-wheelers on Indian roads are made using Chinese parts.

India provides much-needed relief for Chinese firms. China’s EV exports to the European Union and the United States are declining due to anti-subsidy probes and increased trade restrictions on the export of subsidised cars and EV batteries from China.

Indian auto industry’s impressive credentials: The sector is the largest industrial ecosystem in India, accounting for over one-third of the country’s manufacturing gross domestic product (GDP) and providing 20 million direct and indirect jobs.

India is the fourth-largest car producer in the world, after China, Japan, and the US, having produced 4.6 million cars in 2023. It ranks tenth in car exports with a 2.4 per cent global share. The turnover of India’s auto and auto component industry exceeded  $150 billion in FY23. The export figures were significant, with automobiles at $8.7 billion, two-wheelers at $2.8 billion, and auto components at $7.3 billion.

The Indian auto sector took a leap in the early 1980s with a JV between the Indian Maruti Udyog Limited and the Japanese Suzuki Corporation. Japanese technology and India’s expertise in casting, forging, and fabrication enhanced the domestic auto sector’s productivity by 250 per cent over the next 20 years and set it on a high growth path.

Subsequently, three government decisions shaped the industry: The imposition of high import tariffs ranging from 70-125 per cent on completely built cars and motorcycles, but a low 7.5-10 per cent tariff on parts and components to allow the import of inputs; not cutting tariffs under the free-trade agreements or FTAs; and allowing up to 100 per cent foreign direct investment through the automatic route.

While high import tariffs sheltered firms operating in India from external competition, the presence of many top global firms making cars in India ensured intense internal competition. 

Many experts question the rationale of high tariffs. The example of the Australian auto industry, however, suggests an unwelcome outcome of tariff cuts. In 1987, Australia produced 89 per cent of the cars it used, protected by a high 45 per cent import duty. However, as Australia gradually reduced these tariffs, the proportion of locally produced vehicles decreased. Today, with import tariffs at just 5 per cent, Australia imports nearly all of its cars. Major manufacturers like Nissan, Ford, General Motors, Toyota, and Mitsubishi, which once produced vehicles in Australia, have since closed their operations there.

The growth of the Indian automobile industry is assured due to the low number of cars per person; only 22 out of 1,000 Indians own a car, compared to 980 in the US and 164 in China. Rising purchasing power, increasing urbanisation, and government initiatives also help. These are the key reasons for global automakers' interest in India.

Current industry structure: About 70 per cent of India’s passenger cars are made by companies controlled by foreign firms like Suzuki, Hyundai, Kia, Toyota, Honda, Ford, Skoda, Renault, Nissan, and Mercedes. Key Indian firms are Tata Motors and Mahindra & Mahindra. Emerging players in the EV space, like Ola Electric and Ather Energy, are making their mark.

The entry of top Chinese firms into the Indian market will surely eat into the share of Japanese, Korean, and European firms. They will also impact the domestic auto/EV manufacturers, firms working in the EV value chain space, and battery development.

Nearly a quarter of India’s auto component imports come from China. India’s dependence on China will increase sharply as more Chinese firms making cars in India import most parts and components from China.

The government has reduced the import duty on electric vehicles with a minimum value of $35,000 from 70-100 per cent to 15 per cent. Concessional duty imports can be made only by original equipment manufacturers (OEMs) that commit a minimum investment of $500 million to set up local manufacturing within a three-year period. Such OEMs can import up to 40,000 vehicles over a five-year period.

Such tariff cuts will benefit Chinese manufacturers directly or indirectly, as they are the dominant suppliers of EVs and batteries. Supply chain dependence on China will sharply increase even when non-Chinese companies (Tesla, Vinfast) set shop in India.

Recommendations: The government must promote investments in R&D on the next generation of battery technology instead of subsidising EVs on the road. The import intensity of EVs exceeds 70-90 per cent, and most imports, including batteries, are from China. With over 70 per cent of power being generated from coal, EVs will not be green enough in India.

India needs to think strategically and long-term. Automobile associations, caught between the competing interests of foreign and Indian car makers and import supporters, might not be effective in guiding the industry’s direction.

The writer is the founder of Global Trade Research Initiative (www.gtri.co.in)