AUTOMOBILE INDUSTRY IN

INDIA
FRA PROJECT
 AUTOMOBILE INDUSTRY IN INDIA

INTRODUCTION:
The Indian auto industry is one of the largest in the world. The industry accounts for
7.1 per cent of the country's Gross Domestic Product (GDP). As of FY 2014-15,
almost 31 per cent of small cars sold globally are manufactured in India.
The Two Wheelers segment accounts for 81 per cent market share and is the largest
contributor to the Indian Automobile sector. This large market share is primarily
fuelled by the growing interest of companies in exploring rural markets. The overall
Passenger Vehicle (PV) segment has 13 per cent market share.

India figures in the list of prominent auto exporters to the world which enhances its
growth expectations for the near future. In April-January 2016, exports of
Commercial Vehicles grew by 18.36 per cent over April-January 2015. The
Government of India is spearheading its policies and taking several initiatives to
register further growth in this segment. It is expected that India will lead the Two
Wheeler (2W) and Four Wheeler (4W) market in the world by 2020.

In this report, we have focussed on the passenger cars segment of the Indian
Automobile Industry.

Market Size
Sales of passenger vehicles increased by 11.04 per cent to 242,060 units in April
2016 driven by demand for utility vehicles. While sales of passenger cars went up by
1.87 per cent to 162,566 units in April 2016, those of utility vehicles grew by 43 per
cent to 62,170 units. Sales of commercial vehicles maintained its momentum on
back of replacement demand and grew by 17.36 per cent to 53,835 units.

GOVERNMENT INITIATIVES TO PROMOTE THE SECTOR:

The Government of India promotes foreign investment in the automobile sector and
allows 100 per cent FDI under the automatic route.

Some of the major initiatives taken by the Government of India are:

 Mr Nitin Gadkari, Minister of Road Transport, Highways & Shipping has announced
plans to set up a separate independent Department for Transport, comprising of
experts from the automobile sector to resolve issues such as those related to fuel
 technology, motor body specifications and fuel emissions, apart from exports.

 Government of India aims to make automobiles manufacturing the main driver of

‘Make in India’ initiative, as it expects passenger vehicles market to triple to 9.4
million units by 2026, as highlighted in the Auto Mission Plan (AMP) 2016-26.

The Government plans to promote eco-friendly cars in the country i.e. CNG based
vehicle, hybrid vehicle, and electric vehicle and also made compulsory 5 per cent
ethanol blending in petrol.
 The government has formulated a Scheme for Faster Adoption and Manufacturing of
Electric and Hybrid Vehicles in India, under the National Electric Mobility Mission
2020 to encourage the progressive induction of reliable, affordable and efficient
electric and hybrid vehicles in the country.

 The Automobile Mission Plan (AMP) for the period 2006–2016, designed by the
government is aimed at accelerating and sustaining growth in this sector. Also, the
well-established Regulatory Framework under the Ministry of Shipping, Road
Transport and Highways, plays a part in providing a boost to this sector.

AUTOMOTIVE MISSION PLAN(AMP)

The Automotive Mission Plan (AMP), established in 2006 was aimed at fulfilling the
aspirations of the auto and auto component industry and to promote India as a preferred
manufacturing destination and introduce ways to promote the industry in the country as
an attractive investment segment.

The first phase of the plan was called Automotive Mission Plan 2006-16 and focussed
broadly on five aspects: Economic growth, passenger comfort, sustainability, quality, and
cost competitiveness.

AMP 2016-26 is likely to be formally announced by the end of this year and is expected
to provide a ten-year road map.

Background of AMP 2006-16:

As per the ministry of heavy industries and public enterprises, for FY 2014, automotive
industry formed 7.1 percent of the GDP, 45 percent of the manufacturing GDP,
contributed 4.3 percent to exports, and 13 percent to excise revenues. During 2006-16,
the industry created 19 million additional jobs and saved 8.6 billion litres of fuel.

AMP 2016-26:
 AMP 2016-26 envisions at developing India as one of the top three automotive
manufacturing hubs in the world. An optimistic revenue target of $300 billion for FY 2026
has been set.

Some of the salient features of AMP 2016-26 are as below:

1. Auto industry is expected to contribute 13 percent to the GDP – the present contribution
is lower than 10 percent
2. Creation of additional 100 million jobs
3. Proposed $80 billion in capex investments
4. BS V emission norms to be adopted by 2019; BS VI emission norms to be implemented
by 2023 for passenger vehicle
5. AMP envisages to implement ‘end of life policy’ for old vehicles in order to cut down on
fuel induced pollution.

National Automotive Testing and R&D Infrastructure Project

The government of India has already spent $280 million on establishing centres of
excellence and crash test centres. These centres would help the industry in achieving
compliance with advanced norms and in implementing AMP.

The National Electric Mobility Mission (NEMM) Plan 2020

The National Electric Mobility Mission Plan 2020 aims at Manufacturing of (Hybrid &)
Electric Vehicles in India and establishing a consumption base of ~7 million electric cars
by 2020. The policy aims to incentivize buyers as well as suppliers for undertaking R&D
initiatives, creating public charging infrastructure, encouraging retrofitting of vehicles.
National Automotive Board (NAB) under the supervision of the department of heavy
industries has been constituted for implementation of the plan.

Other policy initiatives

The government of India has extended support to the industry by increasing customs
duty on CBUs of commercial vehicles from 10 percent to 40 percent, reduction in duty on
chassis for ambulance manufacturing from 24 percent to 12.5 percent, extension in
concession on select parts used in the manufacture of electric & hybrid vehicles and
weighted deduction up to 200 percent of expenditure on R&D for computation of
expenses under Corporate Tax.

INVESTMENTS
Recent developments in the automobile industry
 In order to sustain the growing demand, several auto makers have started investing
heavily in various segments of the industry during the last few months. The industry
has amassed Foreign Direct Investment (FDI) worth US$ 14.32 billion during the
period April 2000 to December 2015, according to data released by Department of
Industrial Policy and Promotion (DIPP).

Some of the major investments and developments in the automobile sector in India
are as follows:

 Isuzu Motors, the Japan-based utility vehicle manufacturer, has started its greenfield
manufacturing unit in SriCity, Andhra Pradesh, at a cost of Rs 3,000 crore
(US$ 450.94 million).

 Japanese two-wheeler manufacturer Honda Motorcycle and Scooter India (HMSI)

has established its fourth and world’s largest scooter plant in Gujarat, set up to
produce 600,000 scooters per annum initially which will be scaled up to 1.2 million
scooters per annum by mid-2016.

 American car maker Ford introduced its iconic Ford Mustang in India in the second
quarter of FY2016 within the price band of Rs 45 lakh (US$ 66,146) and Rs 50 lakh
(US$ 73,496).

 Nissan Motor Co. Ltd has planned and is currently in discussion with Government of
India to bring electric and hybrid technologies to India as part of the government’s
initiative to reduce air pollution caused by vehicles.

 Global auto major Ford plans to manufacture two types of engines by 2017, a 2.2
litre diesel engine (presently named, Panther) and a 1.2 litre petrol engine (presently
named, Dragon) which are expected to power 270,000 Ford vehicles globally.

 The world’s largest air bag suppliers Autoliv Inc, Takata Corp, TRW Automotive Inc
and Toyota Gosei Co are setting up plants to increase production capacity in India.

 General Motors has announced an investment of US$ 1 billion in India by 2020, to

increase the production capacity at the Talegaon plant in Maharashtra from 130,000
units a year to 220,000 by 2025.

 US-based car maker Chrysler has planned an investment of Rs 3,500 crore

(US$ 513.5 million) in Maharashtra, to kickstart production of Jeep Grand Cherokee
model.

 Mercedes Benz has proposed to manufacture its SUV’s in India. The company has
doubled its India assembly capacity to 20,000 units per annum.
 Germany-based luxury car maker Bayerische Motoren Werke AG’s (BMW) local unit
has announced procurement plans to buy components from seven India-based auto
parts makers.

MACROECONOMICS FACTORS AFFECTING

AUTOMOTIVE INDUSTRY
Pricing Pressure. Excess capacity, coupled with a proliferation of new products
being introduced in key segments by the industry, puts pressure on manufacturers’
ability to increase prices on their products. In addition, the incremental new capacity in
the India by foreign manufacturers in recent years has contributed, and is likely to
continue to contribute, to the severe pricing pressure in that market. In India, the
reduction of real prices for similarly contented vehicles has become more pronounced
since the late 1990s, and we expect that a challenging pricing environment will continue
for some time to come.
Consumer Spending Trends. A decline in, or the inability to increase, vehicle
prices could be offset by the spending habits of consumers and their propensity to
purchase over time higher-end, more expensive vehicles and/or vehicles with more
features. Over the next decade,in India and in other mature markets, it is expected that
growth in spending on vehicle mix and content will grow at least as fast as real GDP per
capita. The benefits of this to revenue growth in the automotive industry are significant.
In the India, for example, consumers in the highest income bracket are buying more
often and are more frequently buying upscale.
Although growth in vehicle unit sales (i.e., volume) will be greatest in emerging
markets in the next decade, we expect that the mature automotive markets (e.g., India,
North America, Western Europe and Japan) will continue to be the source of a
substantial majority of global industry revenues over the next decade. We also expect
that the Indian market will continue as the single largest source of revenue for the
automotive industry in the world in the next decade.
Commodity Price Increases. Commodity price increases, particularly for steel and
resins (which are used extensively in the automotive industry), have occurred recently
and are continuing during a period of strong global demand for these materials.
Manufacturers in China and other global steelmakers have responded through
increases in capacity and production of steel. We expect this, coupled with an easing in
global demand pressures, to result in pricing trends beginning to moderate in the
intermediate term.
Currency Exchange Rate Volatility. The U.S. dollar depreciated against most
major currencies in 2004. This created downward margin pressure on auto
manufacturers that have U.S. dollar revenue with foreign currency cost. Because we
produce vehicles in Europe (e.g., Jaguar, Land Rover and Volvo models) for sale in the
United States and produce components in Europe (e.g., engines) for use in some of our
North American vehicles, Ford experienced margin pressure, although this was partially
offset by gains on foreign exchange derivatives. Ford, like most other automotive
manufacturers with sales in the United States, is not always able to price for
depreciation of the U.S. dollar due to the extremely competitive pricing environment in
the United States.

GST Impact on Automotive

GST will be positive for the automotive sector primarily because of the efficiency and
the removal of cascading that is expected with GST. For example, in an automobile
sector, a car is manufactured in a particular state and generally, 80 percent of these
cars are sold to states outside the state of manufactures to dealers outside the state.
So, the two percent Central Sales Tax (CST) that they pay will not be there.

Even the two percent CST will be an integrated GST (IGST) which will be fully creditable
by the dealer when he sells the car in the other state. And even from a procurement
point of view, if there are interstate procurement earlier the company would pay at 2
percent CST which is a cost to the manufacturer, that also will not happen because
those interstate procurements will have an IGST in it which is again available as a full
credit to the manufacturer if the credit rules are simple and easy.

The second efficiency could be also on the input side. A bigger, more easy credit
mechanism so that all the taxes on the input side, whether it is input services, whether
it is capital goods, whether it is manufactured products, are set off against the output
liability of GST.

Interest Rate Impact on Automotive Sector

High interest rates tend to depreciate the value of money, giving consumers reduced
purchasing power. This simply means consumers have to shell out extra bucks for the
same car that would be comparatively cheaper when interest rates are low. This
diminution of purchasing power often leads to decrease in consumer demand. This
makes automakers to cut the production to reduce supply of the vehicles.

PERFORMANCE OF AUTO INDUSTRY DURING 2015-16

Production

The industry produced a total 23,960,940 vehicles including passenger vehicles,

commercial vehicles, three wheelers, two wheelers and quadricycle in April-March
2016 as against 23,358,047 in April-March 2015, registering a marginal growth of
2.58 percent over the same period last year.
Domestic Sales

The sales of Passenger Vehicles grew by 7.24 percent in April-March 2016 over the
same period last year. Within the Passenger Vehicles, Passenger Cars, Utility
Vehicles and Vans grew by 7.87 percent, 6.25 percent and 3.58 percent respectively
during April-March 2016 over the same period last year.
Passenger Carrier sales grew by 2.11 per cent & Goods Carrier sales declined by (-)
3.62 percent respectively in April-March 2016 over April-March 2015.

Exports

In April-March 2016, overall automobile exports grew by 1.91 percent. Passenger

Vehicles, Commercial Vehicles, Three Wheelers and Two Wheelers registered a
growth of 5.24 percent, 16.97 percent (-) 0.78 percent and 0.97 percent respectively
in April-March 2016 over April-March 2015.

PORTER'S 5 FORCES IN THE AUTOMOBILE INDUSTRY:

Porter's Five Forces, also known as P5F, is a way of examining the attractiveness of
an industry. It does so by looking at five forces which act on that industry. These
forces are determinants of that industry's profitability. The Porter analysis examines
three horizontal forces, or competition in the same industry: Threat of new entrants,
threat of substitute products and threat of established rivals. Two forces are from
vertical competition, or those from the supply-chain: Bargaining power of customers
and bargaining power of suppliers.

The five forces are:

1. The threat of new entrants:

In the auto manufacturing industry, this is generally a very low threat. Factors to
examine for this threat include all barriers to entry such as upfront capital
requirements (it costs a lot to set up a car manufacturing facility), brand equity (a
new firm may have none), legislation and government policy.

2. The bargaining power of buyers/customers:

Indian dealers give great deals to buyers to get the industry moving. Coupled with
attractive discounts, EMI schemes, market competition and price sensitivity even
when buyers only usually purchase one car at a time, they still wield considerable
power.

3. The threat of substitute products:

If buyers can look to the competition or other comparable products, and switch
easily (they have low switching costs) there may be a high threat of this force. With
new cars, the switching cost is high because you can't sell a brand new car for the
same price you paid for it. A P5F analysis of the car industry covers the new market,
not used or second-hand.

Product differentiation is important too. In the car industry, typically there are many
cars that are similar.

4. Bargaining power of suppliers:

The amount of bargaining power suppliers have in the car industry this refers to all
the suppliers of parts, tires, components, electronics, and even the assembly line
workers (auto unions). Some suppliers are small firms who rely on the carmakers,
and may only have one carmaker as a client. So this force can be tricky to evaluate.

5. Threat of competitors

The intensity of the competitive rivalry (which is in part determined by 1-4)

Automobile market the world over is fiercely competitive. Price slashes, ad
campaigns, and product developments keep them on the edge of innovation and
profitability. Margins are low and pressure between rivals is high.
All major car-producing nations experience this intense rivalry. This obviously
includes the US, Japan, Italy, France, the UK, Germany, China, India, and more.

While a P5F analysis applies to all companies competing in one industry (and market)
the same, what differs is that those firms' profitability will vary between them. This is
because of their own competitive advantages and varying business models. So just
because all firms in one industry and market are subject to the same forces doesn't
mean they perform equally.

A P5F analysis should always be done in conjunction with other assessments, and
should not be regarded as being absolute. It should only serve as an indicator, not
absolute fact or even necessarily accurate.

The Porter’s Five Forces analysis is designed to evaluate the competitive forces in
the industry the firm operates. If it determines that the combination of forces in the
industry act to reduce profitability, it is saying the industry is unattractive. Even
worse is an industry close to total competition.

A summary of the findings is below:

1. There is low threat of new entrants

2. The bargaining power of buyers/customers is low
3. There is a huge threat of substitute products
4. Suppliers do not have much bargaining power
5. There is a significant amount of rivalry among competitors

ACCOUNTING POLICY IN THE AUTOMOBILE INDUSTRY

We have compared three automobile companies, Maruti Suzuki, Mahindra &

Mahindra and Tata Motors in order to analyse the accounting policies in Indian
automobile industry.
The aforementioned companies have prepared their financial statements in
accordance with the generally accepted accounting principles in India
(Indian GAAP) and comply with the Accounting Standards prescribed under
Section 133 of the Companies Act, 2013.

Maruti Suzuki and Mahindra & Mahindra belong to the passenger cars segment of
the Indian automobile industry while Tata Motors is part of the LCV/HCV segment of
the industry.
 The preparation of financial statements involves making estimates based on certain
assumptions on part of the management that affect the application of the
accounting policies and the reported amounts of assets, liabilities, income, expenses
and disclosures of contingent liabilities at the date of these financial statements.
Actual results may differ from these estimates. Revisions to accounting estimates
are recognized in the period in which the estimate is revised and future periods
affected.

REVENUE RECOGNITION

MARUTI SUZUKI
Revenue is recognized as follows:
(a) Domestic and export sales are recorded on transfer of significant risks and
rewards to the customer which takes place on dispatch of goods from the factory
and port respectively.
(b) Income from services is recognized on completion of rendering of services.

TATA MOTORS
 The Company recognizes revenues on the sale of products, net of discounts and
sales incentives, when the products are delivered to the dealer / customer or when
delivered to the carrier for export sales, which is when risks and rewards of
ownership pass to the dealer/customer.

 Sales include income from services, and exchange fluctuations relating to export
receivables. Sales include export and other recurring and non-recurring incentives
from the Government at the national and state levels. Sale of products is presented
gross of excise duty where applicable, and net of other indirect taxes.

 Revenue are recognized only when the collectability of the resulting receivables is
reasonably assured.

 Dividend from investments is recognized when the right to receive the payment is
established and when no significant uncertainty as to measurability or collectability
exists.
 Interest income is recognized on the time basis determined by the amount
outstanding and the rate applicable and where no significant uncertainty as to
measurability or collectability exists.

Mahindra & Mahindra

Sale of products and services including export benefits thereon are recognized when
 the products are shipped or services rendered.

Excise duty recovered on sales is included in Revenue from operations.

Dividend from investments are recognized in the Statement of Profit and Loss when
the right to receive payment is established.

DEPRECIATION

Maruti Suzuki
Depreciation / Amortisation

a) Tangible fixed assets except leasehold land are depreciated on the straight line
method on a pro-rata basis from the month in which each asset is put to use.
Depreciation has been provided in accordance with useful lives prescribed in the
Companies Act, 2013 except for certain fixed assets where, based on technical
evaluation of the useful lives of the assets, higher depreciation has been
provided on the straight line method over the following useful lives:
In respect of assets whose useful lives has been revised, the unamortized
depreciable amount is charged over the revised remaining useful lives of the assets.
b) Leasehold land is amortised over the period of lease.
c) All assets, the individual written down value of which at the beginning of the year
is Rs. 5,000 or less, are depreciated at the rate of 100%. Assets purchased during the
year costing Rs. 5,000 or less are depreciated at the rate of 100%.
d) Lump sum royalty is amortised on a straight line basis over its estimated useful
life i.e. 4 years from the start of production of the related model.

Tata Motors
Depreciation is provided on the Straight Line Method (SLM) over the estimated
useful lives of the assets considering the nature, estimated usage, operating
conditions, past history of replacement, anticipated technological changes,
manufacturers warranties and maintenance support. Taking into account these
factors, the Company has decided to retain the useful life hitherto adopted for
various categories of fixed
assets, which are different from those prescribed in Schedule II of the Act.
Estimated useful lives of assets are as follows :

TYPE OF ASSET ESTIMATED USEFUL LIFE

Leasehold Land Amortized over the period of the lease
Buildings, bridges, roads and culverts 4-60 years
Plant, machinery and equipment 8-20 years
Computer and other IT assets 4-6 years
Vehicles 4-10 years
Furniture, fixture and office appliances 5-15 years
Technical know-how 5-6 years
Computer Software 4 years
Water System and sanitation 20 years
Assets taken on lease are amortized 10 years
over the period of lease

Mahindra & Mahindra

Depreciation is calculated on Straight Line method over the estimated useful life of
all assets. These lives are in accordance with Schedule II to the Companies Act,
2013, other than the following asset classes based on the Company''s expected
usage pattern supported by technical assessment:

(a) Certain items of Plant and Equipment - 2 years, 3 years, 5 years, 7

years, 10 years, 20 years and 25 years as the case may be.
(b) Buildings (Roads) - 15 years.
(c) Vehicles - 5 years.