Indian car companies seen cruising

India is expected to be one of the fastest growing equity markets besides China in the coming financial year and in all likelihood, both the countries will supplement each other's efforts instead of competing.

According to analysts at foreign broking houses, India is likely to export nearly 120,000 cars or 15 per cent of its production in 2004-05, while China is expected to export less than 1 per cent of its total car production.

According to a report by a foreign broking house, car production costs in China are higher compared with prices in mature markets due to a high level of import content and smaller scale.

Extraordinary domestic profit also provides little encouragement for Chinese original equipment makers (OEMs) to enter export business.

However, as local manufacturing gains momentum and scale, China's competitiveness should increase it may eventually become an outsourcing location for larger cars, probably 2-3 years down the line.

That is once domestic demand cools and margins normalise. OEMs will keep selling domestically as long as the domestic price is higher than the export price.

Analysts expect India to consolidate its position as a manufacturing base for small cars for export markets. It is unlikely that India and China would compete with each other fiercely in the export markets in the near term, as each would specialise in manufacturing different size of cars.

In the future, there could be opportunities for the cross-supply of parts, the brokerage report says. China could supply components for larger cars in India and India could supply components for smaller cars to China.

In fact, GM is already sourcing some small car components from India for its China plant. Though labour costs and productivity levels are similar in both the countries, automobile prices and manufacturing costs in China are among the highest in the world.

A high level of import content which is 30-40 per cent in China, versus 10- 20 per cent for Indian small cars gives a perspective on the issue.

Power cost in China is 60-70 per cent of those in India, but that is not a major factor as power accounts for less than 5 per cent of total costs.

Analysts believe that as China builds scale and local content increases, it has the potential to become one of the lowest cost producer of sedans in the world.

Prices of larger sedans in India are also very high, similar to those in China, due to very low volumes and high import content.

However, prices of compact cars in India are among the lowest in the world due to a large domestic market for such cars, use of low cost automation to manufacture them, and low labour costs.

Analysts do not expect a significant pressure on margins here as domestic compact car prices are already at five year lows.

Besides, a further reduction in taxes should support volume growth and ease pricing pressure on OEMs. Excise duty is expected to be reduced to 8 per cent in 2005.

China OEMs' high profit margin should eventually normalise when prices fall to global levels in the next 2-3 years.

Analysts are of the view that India could face capacity shortages in small cars if the market grows at 20 per cent in 2004, even as large car manufacturers grapple with excess capacity.