P 110156Z FEB 09
FM AMEMBASSY NEW DELHI
TO SECSTATE WASHDC PRIORITY 5335
INFO AMCONSUL MUMBAI PRIORITY 
AMCONSUL KOLKATA PRIORITY 
AMCONSUL CHENNAI PRIORITY 
AMCONSUL HYDERABAD PRIORITY

UNCLAS NEW DELHI 000252 
 
 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PREL WTO
SUBJECT: INDIAN AUTO INDUSTRY IN FOR A BUMPY RIDE 
 
REF:  STATE 04753 
 
1.(U) Summary: The Indian auto industry is considered symbolic of 
the greater India Inc. success story.  Over the past five years, the 
sector has registered an average 17 percent growth rate annually. 
Despite hopes that the industry would not be affected by the 
economic slowdown, vehicle sales have plummeted due to limited 
availability of credit and weakened consumer sentiment.  Auto 
component manufacturers are taking a hit from decreasing domestic 
sales combined with recession-hit export markets.  As a result, car 
plants are closing and temporary workers are losing their jobs, 
especially within the largely unorganized auto component sector.  In 
response, the government has included measures to assist the ailing 
sector in its two stimulus packages, announced in Dec 08 and January 
¶09.  The degree to which these measures have helped are yet to be 
determined.  Even as auto companies remain optimistic, launching 
over 50 new models this year, industry experts anticipate less than 
one percent growth for this fiscal year. END SUMMARY 
 
 
Background 
------------------ 
2.(U) The Indian auto industry is widely considered a national 
success story.  Dominated through the 1980s by a few manufacturers, 
economic liberalization and removal of licensing requirements in 
1991 allowed for the emergence of new domestic players as well as 
entry of several foreign companies.  According to the Society of 
Indian Automobile Manufacturers (SIAM), the automotive industry has 
enjoyed strong growth at an average rate of 17 percent annually for 
the past five years.  Exports in the automotive sector have grown at 
an average compounded annual growth rate (CAGR) of 30 percent. 
During the same time period, sales in various segments of the 
vehicle market have grown at healthy rates ranging from 15 to 27 
percent annually. 
 
3.(U) India is the fastest growing automobile market in the world. 
By 2030, the country is expected to become the world's third largest 
automobile market behind only China and the U.S.  As the Indian auto 
industry responds to its own growing market, it has become more 
efficient in the development of low-cost vehicles, which it also 
markets to Asia, Africa and South America.  Tata Motor's Nano, 
unveiled in January 2008, is being touted as the cheapest car in the 
world and has become a symbol of national pride.  The purchase of 
Jaguar and Land Rover (JLR) by Tata Motors has similarly been 
heralded as symbolic of India's emerging role as an economic leader 
in the auto market.  Despite the strong growth, India's contribution 
in global terms is still relatively low, producing only 2.37 percent 
of the world's vehicles.  Industry insiders anticipate this to 
change: according to a recent report by KPMG on the future of the 
auto industry, auto executives world-wide expect India's auto-makers 
to increase their share of the global market more than any others 
over the next decade. 
 
4.(SBU) In part due to the thriving domestic auto sector, the 
auto-component industry has developed into an outsourcing spot for 
auto-makers around the globe.  Nearly all large auto-makers, or 
original equipment manufacturers (OEMs), have outsourcing operations 
in India.  As recently as November, Ajay Shankar, Secretary at the 
Department of Industrial Policy and Promotion within the Ministry of 
Commerce, noted the strength of the auto-component sector and its 
immunity to the economic crisis. 
 
 
Slowdown in Sales 
------------------- 
5.(U) The financial crisis and global economic slump has resulted in 
a sharp decline in car sales in India.  In December, total domestic 
vehicle sales, including all segments, declined by 18.2 percent over 
December 2007.  Only 597,000 vehicles were sold in December 2008 as 
compared to 730,000 vehicles in December 2007. According to figures 
released by SIAM, passenger car sales in December declined for the 
fourth consecutive month.  Tata Motors reported a 25 percent 
decrease in sales for December while Maruti Suzuki India, the 
domestic passenger car leader, saw a ten percent decrease.  Maruti 
Suzuki also anticipates a 14 percent year-on-year decline in volumes 
and a four percent decline in revenue growth for year-over-year 
sales.  Initial estimates for January 2009 indicate further 
decreases. 
 
6.(U) Commercial vehicles, often considered a bellwether for the 
industry, posted their sharpest decrease in 11 years as sales 
declined 58.2 percent in December compared to December 2007.  In 
December 2007, commercial vehicle makers sold 42,961 units.  In Dec 
2008, only 17,920 units were sold.  Initial estimates for January 
sales of commercial vehicles are dismal.  SIAM estimates that sales 
in the segment dropped 51 percent in January 2009 over the same 
month in 2008. 
 
 
Industry Leader Struggles 
------------------------------- 
 
7.(SBU) In a Jan.14 meeting with the DCM, Tata North America 
representative David Good reported that almost every market segment 
in which the conglomerate operates has been impacted by the slowing 
global economy, including the auto sector.  In addition, financial 
markets continue to be difficult to access.  Chairman Ratan Tata 
sent out a memo to all company executives advising them that their 
focus in the near term should be on preserving cash and capital in 
their business unit.  Good noted that Tata was contributing some 
additional capital to Jaguar Land Rover (JLR) but it would likely 
need more funds, including hopefully from the UK govt.  Tata Motors 
originally planned to finance the $3 billion loan used to acquire 
the company from investors abroad, but now is offering up to 11 
percent interest for three-year deposits.  Tata Auto Components 
(TACO), which is oriented towards the domestic Indian auto market, 
had seen sales decline 25% or more and was in a difficult capital 
situation - possibly requiring additional funding or some sort of 
restructuring. 
 
8.(U) Local media further report that Tata Motors has struggled to 
pay vendors and suppliers over the past several months.  The 
Delhi-based Automotive Component Manufacturers Association (ACMA) 
estimates that Tata Motors owes suppliers within the Association 
about Rs.450 crore (approximately USD $92.5 million). 
 
 
Factories Put the Brakes on Production 
--------------------------------------- 
9.(U) The drop in sales has resulted in over-stocked inventories and 
dealers unable to pay off vendors, leading manufacturers to cut 
production by as much as 74 percent, according to SIAM figures. 
Great concern has spread across the sector as auto-manufacturers 
have temporarily shut down plants and implemented lay-offs of nearly 
150,000 contractual employees.  According to local media, the 
largest commercial vehicle company, Ashok Leyland Ltd., has cut the 
number of days its factories work to three days a week.  Tata Motors 
shut down production at its commercial vehicle plant in Jamshedpur 
several times since November 2008, while Mahindra & Mahindra closed 
five of its plants for a few days in December.  Similarly, General 
Motors (GM) cut production in India by 10 percent, closing its 
plants briefly at the end of the year and scaling back its set 
target of 85,000 units from one plant to 70,000.  Auto-makers 
located near Pune, which include Tata Motors, Bajaj Auto Ltd., Force 
Motors Ltd. and General Motors, have reportedly reduced production 
by 50-60 percent, in some cases closing plants for up to 15 days. 
 
 
Small Component Manufacturers Hang On 
-------------------------------------- 
10.(U) As Indian auto-makers, which account for 80 percent of the 
business to the Indian auto component sector, slow production, 
auto-component makers, especially small ancillary units, are being 
hit hard.  Troubles abroad have compounded the problem: 
approximately 50 component makers in India export directly to the 
Big Three (General Motors, Ford Motors, and Chrysler) in the U.S. 
with annual exports totaling close to $1 billion.  The U.S. auto 
industry purchases about 27 percent of India's total component 
exports, with the Big Three taking a significant combined share. For 
example, 10 percent of the exports of India's largest auto component 
exporter, Bharat Forge, goes to the US auto sector. European 
auto-makers make up approximately 38 percent of the export market. 
As the U.S. and European auto industries struggle, export earnings 
have dropped. 
 
11.(U) Local media reports that several thousand ancillary component 
makers, which are classified as small enterprises, closed for 
several days at the end of 2008.  Several of the units that closed 
are considered Tier III suppliers, which survive on contracts from 
finished component makers (Tier II) or automobile manufacturers 
(Tier I).  For example, when Tata Motors closed its commercial 
vehicle plant in Jamshedpur for 17 days during November and 
December, 157 auto component vendors that supply the Tata Motors 
plant were affected.  Most Tier II and Tier III component makers are 
based near cities that are considered developed "auto clusters," 
including Pune, Chennai, Gurgaon and Uttarakhand.  One report 
suggests that as many as 3,500 of the 7,000 small-scale units 
located in the industrial belt of Pimpri-Chinchwad (near Pune) 
closed operations at the end of the year.  The closures and reduced 
production have caused 50,000-60,000 temporary contract workers to 
lose their jobs at the surrounding auto-component plants. 
 
12.(SBU) EconOff in Chennai met with a representative of Ford India, 
who noted that while the company's component suppliers are managing 
to stay afloat, they are struggling with lower volumes.  The Ford 
contact also commented that component suppliers would be able to 
make it for at least another six months of downturn. 
 
 
Credit Crunch Drives Down Consumer Confidence 
--------------------------------------------- - 
13.(SBU) Embassy ECONoff met with Gaurav Saxena, General Manager of 
Mahindra and Mahindra; Dilip Chenoy, Director General and Sugato 
Sen, Senior Director of SIAM; and Jalaj Gupta, Regional Manager of 
Passenger Car Business at Tata Motors.  In each meeting, contacts 
blamed the drop in sales on two factors: the unavailability of 
finance and weakened consumer sentiment.  According to Chenoy and 
Saxena, 75-80 percent of passenger cars and 50 percent of 
two-wheelers sold in India are financed by loans.  Due to the 
liquidity crunch, banks have been unable to provide loans and buyers 
are discouraged by high interest rates at 14-15 percent.  Saxena 
described sales in two segments for Mahindra and Mahindra-the 
personal and the commercial segments.  In the personal segment, 
consumers have postponed purchases due to high interest rates, which 
lead to high equated monthly installments (EMI).  According to 
Saxena and Gupta, EMI is the main thing consumers consider when 
purchasing a vehicle.  Saxena also noted that banks are currently 
more reluctant than usual to lend to those employed in the 
unorganized or informal sector, further restricting sales.  In the 
commercial vehicle segment, high interest rates have discouraged 
vehicle purchases as unprofitable. 
 
14.(U) Auto-component makers have also been hit by the credit 
crunch.  Commercial banks have reportedly been reluctant to provide 
credit to auto component exporters, and credit risk insurance 
companies, including the Export Credit Guarantee Corporation of 
India (ECGC), have refused to give packing credit cover to auto 
component suppliers due to fears of default from struggling US auto 
makers.  Industry insiders report that banks and credit risk 
insurance companies are reviewing applications on a case-by-case 
basis.  The lack of available credit is delaying fulfillment of 
orders, leading to penalties and a loss of business for component 
makers.  As a result, companies are reportedly worried they will 
loose their competitive edge with US car companies, which account 
for nearly 30 percent of their export business and are some of the 
biggest buyers in the industry. 
 
15.(SBU) Industry contacts indicate that sales continue to suffer 
not only due to the liquidity crunch, but from weakened consumer 
sentiment caused by the economic slowdown, and, to a lesser extent, 
the Mumbai attacks in November.  As a result, the companies are 
turning towards rural and semi-urban environments, viewing the 
economic crisis as more of an "urban phenomenon."  Saxena of 
Mahindra believes rural populations maintain higher savings rates 
and are not as affected by other economic issues, such as rising 
real estate prices, and are therefore better able to purchase 
vehicles. 
 
No Subsidies, But Government Stimulus Packages Help 
--------------------------------------------- ------- 
16.(SBU) While there have been no direct subsidies to the auto 
industry, within the two government stimulus packages announced in 
December 2008 and January 2009 several measures were introduced to 
assist the ailing sector.  Auto industry representatives in general 
report that it is too soon to tell how effective the stimulus 
packages are; however, certain elements seem more helpful than 
others.  Post is unaware of any subsidies or provisions linked to 
export or local content requirements. 
 
17.(SBU) In December, the government reduced the excise tax by four 
percent.  Both Jalal Gupta from Tata Motors and Chenoy at SIAM said 
that it is still too soon to know whether or not the reduction in 
excise tax would help sales.  SIAM and Mahindra both noted that even 
if the reduction has stimulated demand, the inventories stocked were 
purchased prior to the excise tax reduction, and the cost of the 
excise tax had already been passed down to dealerships.  As a 
result, consumers demanded the reduction in the cost of the vehicle, 
and dealers had to provide it even though they were not receiving 
the same discount from auto-makers.  Dealerships are now requesting 
reimbursements from auto-makers for cars purchased with the higher 
excise tax and sold at the lower excise tax rate.  When asked about 
reimbursements, Saxena at Mahindra remarked that a 100 percent 
reimbursement to dealerships would not be possible, but the company 
is looking to reimburse dealerships by an amount yet to be 
determined. 
 
18.(SBU)  Elements of the second stimulus package that auto-makers 
believe will be most valuable are those that increase liquidity. 
Hence, the reduction of the cash reserve ratio (CRR) for banks from 
5.5 to 5 percent and a line of credit in the amount of Rs 25,000 
crore to NBFCs (non-bank financial institutions), which are 
generally active in funding commercial vehicles, are viewed by 
auto-makers as the most helpful.  In addition, commercial vehicle 
manufacturers expect demand to increase with accelerated 
depreciation of 50 percent on vehicles purchased between January - 
March this year.  Funding provided for highways and port projects by 
the stimulus package (Rs 250 billion) as well as to the India 
Infrastructure Finance Company (about Rs 300 billion) is also hoped 
to revive the commercial vehicle sector. 
 
19.(SBU) According to SIAM, the reduction in prices of raw materials 
should also help the sector.  Over the past two years, the increases 
in the prices of steel and rubber have raised the costs of 
manufacturing.  As steel and other commodity prices drop, contracts 
will be renegotiated, and profit margins may look better.  Steel 
accounts for almost half of total costs and is supplied on fixed 
terms of three, six, or 12 months. 
 
20.(U) FICCI (Federation of Indian Chambers of Commerce and 
Industry) has recently requested an income tax holiday for 
manufacturers, import duty concessions on machinery and incentives 
for eco-cars to further assist the auto industry.  Citing assistance 
given by China, Brazil, Thailand and Malaysia, FICCI claims the 
assistance is necessary for the sector to remain competitive. 
 
21.(SBU) When ECONoff asked Sen at SIAM if the auto industry group 
planned to request additional assistance, Sen said that auto-makers 
fear that they now face a climate in which  consumers are waiting 
for the next round of lower prices resulting from government 
assistance to the industry, and that the government and industry 
need to signal that prices have now reached a floor and will not 
continue to drop. 
 
 
Experts Forecast Slow Growth for Next Year 
------------------------------------------- 
22.(SBU) Industry experts forecast the slowdown to last for another 
six to eight months and predict the industry will struggle to 
maintain single digit growth (perhaps as low as one percent) for the 
next fiscal year.  The National Council of Applied Economic Research 
(NCAER) predicts demand for passenger cars and two-wheelers to 
continue to contract through the end of the next fiscal year in 
March 2010.  Sen at SIAM predicted that the industry will post 
positive growth of just under one percent, with most growth coming 
from sales in the motorcycle and two wheeler segments, and not in 
the commercial or passenger vehicle segments.  Dilip Chenoy at SIAM 
predicts growth will rebound when lower interest rates are 
implemented by banks and credit for commercial vehicle purchases 
becomes available. 
 
23.(U) While auto-makers acknowledge 2009 will be a tough year, they 
remain hopeful that with likely cuts in interest rates sales will 
bounce back and plan to launch 50 new models this year.  In January, 
Mahindra launched the Xylo, a multi-purpose vehicle set to compete 
with Toyota's minivan and is working on a new premium SUV.  Tata 
Motors still anticipates a highly successful launch of the Nano. 
 
¶24. Comment:(U) While the auto sector is currently experiencing a 
dramatic fall in sales, government stimulus packages aimed at 
increasing liquidity may prove helpful over the course of the next 
several months, allowing the struggling industry to rebound back to 
strong growth rates in 2010. END COMMENT. 
 
MULFORD