Blinded by Brightness


Last week we analysed how some carmakers are throttling back on their India plans, cutting down their expectations of (and from) the market, and generally behaving with sanity cautiousness.

This week we look at how wrong they are in their assumptions about India and by cutting down on their aspirations, they are set to lose the biggest opportunity in the Indian car market.

The image on top is a good representation of what is happening with many manufacturers in the Indian automotive market. They have been slogging away for years trying to score a breakthrough in the Indian market. For many, these years have been frustrating, with little to show, except learning, for all the hard work.

And when they were just inches one product generation away from finding success, some of them have started throttling back and have cut down their original plans. India, they reason, is a difficult market going through difficult times, and this is not the best time to fight for market share.


Middle Class….Vapourware?

Like many interesting failure stories, the multinational car manufacturer started off by imagining the Indian middle class. In a newly liberalised country of 90 billion (in 1991), convenient multi-national executive logic said that even if 10% comprised the middle-class, this opportunity size was still a few billion households.

This middle class opportunity was promptly created on Excel sheets and sold upwards in the management chain. In estimating and analysing the Indian middle class, executives did not use universally acclaimed references like the World Bank and IMF check data points corresponding to Per Capita Income.

This skewed analysis further percolated down to the product planning departments. The typical conversation inside product planning departments at multinational carmakers went something like:

Executive 1: “We have a middle class population the size of Europe. What can we launch there to make loads of money?”

Executive 2: “Don’t worry, we have just the product for typical middle class. This works everywhere and prints us money like there’s no tomorrow.”

Cue the Opel Astra!

Debacle Follows

The rest, as they say, is history. Most global car manufacturers got India terribly wrong to the point that the first two generation of products were charitably written off as brand building exercises.

The below graphic, first published on 20th March as part of an email subscribers exclusive presentation (Now you know why it makes sense to subscribe to our weekly email updates) is a slightly mischievous completely apt description of how most global car manufacturers have fared in India.

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No wonder some of them find it prudent to cut down on their original plans for India and be more realistic about the market.

Except, in doing so they are set to lose the biggest opportunity in the Indian passenger vehicle market. After years of strong growth, the Indian economy and passenger vehicle market have reached a point that future growth would be nothing short of a small explosion.

Per Capita Income makes the difference

The key differentiating factor between 1991 and today is Per Capita Income. In 1991, the Per Capita Income, on a Purchasing Power Parity (PPP) basis, was USD 1202. In 2013, the same has inflated to USD 5410. That is a CAGR of 7.08%, impressive even for a developing economy.

However, strange things happen in the vehicle market with an increase in Per Capita Income. Typically vehicle sales rise at a much faster pace than the increase in Per Capita Income. During the same 22 years (1991-2013), passenger vehicle sales have grown at a CAGR of 12.13%, much faster than the growth in Per Capita Income.

Stretching this relationship further the other side, as the Per Capita Income continues to grow further, vehicle sales should accelerate.

Vehicle Ownership and Income Growth Worldwide

As strong as the growth in the automotive market has been, many analysts opine that the best is yet to come. The next decade and beyond is expected to see the automotive market scale greater highs. The key driver would be the increase in PCI and its impact on automotive sales.

In their paper “Vehicle Ownership and Income Growth, Worldwide: 1960-2030”, Joyce Dargay (Institute for Transport Studies, University of Leeds); Dermot Gately (Dept. of Economics, New York University) and Martin Sommer (International Monetary Fund) argue that most economies see an S-shaped curve co-relation between PCI and vehicle sales.

Vehicle Sales vs Per Capita Income

As per their model, vehicle sales first grow at a slower pace than the PCI at low PCI levels. Once the PCI levels cross USD 5,000 per annum (not absolute, PPP basis), the vehicle sales accelerate quite rapidly and grow at nearly twice the speed of the PCI growth. However, once the PCI reaches high levels (beyond USD10, 000), the growth of vehicle sales comes down and is roughly at the same pace as the PCI growth.

For the model, the authors have considered PCI as per-capita GDP based on Purchasing Power Parity (PPP).

As per World Bank forecast, India’s PCI on PPP basis is estimated at over US$3800 per annum in 2012. The same is expected to cross US$4,000 in 2013 and US$5,000 in 2016-17. This rapid increase in PCI will provide a substantial momentum to vehicle sales in the next decade, up to 2024.

Macroeconomics – The only thing true in the long run

Macroeconomists are often in the business of making long-term forecasts. The idea is that by the time the forecast is tested, no one remembers it.

That’s the inside joke anyways.

In reality, most macroeconomic forecasts, especially those made without the aid of alcohol usually turn out to be true over the long period of time. At times, the forecasts are tested on time, that is something that is forecasted to happen in ten years may end up happening in twelve. However, the overall trend is mostly rock solid.

Bad times are the best test of forecasts and often the strong changes after the lean period are the key correction drivers that bring the trend back in-line.

Take the deterioration in passenger vehicle sales over the last six quarters for instance. The decline in sales was not in-line with the long-term trend. However, the slowdown was punctuated by an unexpected outcome – a clear victory for a single political party at the Centre, leading to stable governance.

Such a clear political outcome provides huge political stability to the country and improves the probability of passenger vehicle sales rebounding strongly.

And that won’t be unexpected. It would be perfectly in-line with the long-term trend.

It should also mean that the next few years would see an unexpectedly strong growth in the passenger vehicle market.

Interestingly, some global carmakers would sit it out.



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