Indian small car market overtakes Japan

MUMBAI: India is emerging a leader in small cars as declining sales in Western markets coupled with robust growth in Asia redraws the global map of the auto industry faster than many expected.

It's well known that China will overtake the U.S. as the world's largest car market this year. Less noticed is the fact that India will top Japan for the first time in sales of super-compact cars. It overtook Japan as the world's number one producer of basic cars in 2007.

Automakers like Ford, Nissan, Volkswagen, General Motors, and China's Shanghai Automotive Industries Corp. are pouring hundreds of millions of dollars into the country, hoping to capture a piece of the growing market for tiny, inexpensive passenger vehicles. As they do so, they are quietly transforming India into an export hub for small car manufacturing.

"From a small car production hub perspective, India is right in the center of the radar," said Michael Boneham, head of Ford India, which plans to roll out its first India-made compact, the Figo, in the first quarter of next year.

More than 892,000 basic cars — the smallest category of passenger vehicle — will be sold in India this year, up 14 percent from last year and surpassing the 708,034 forecast for Japan, according to J.D. Power and Associates.

Unlike China, Russia and Brazil, where consumers buy a range of cars, from basic to luxury, Indians overwhelmingly prefer small, affordable cars.

Nearly half of all cars sold in India — like Maruti Suzuki's Swift, GM's Spark and Hyundai's Santro — fall into the basic category. These are cars so small they're almost nonexistent in the U.S. market. Think of them as sub-sub-compacts.

And price matters. Executives say most Indians won't spend more than $8,000 on a car.

To manufacture these low-margin vehicles profitably, carmakers must localize production to cut costs and ramp up volumes.

For now, they can't sell enough cars in India alone to make the numbers work. The market is too consolidated — Maruti Suzuki sells half of all cars in India — and too small. India ranks 10th globally for total car and truck sales. J.D. Power expects Indian car and truck sales to hit 1.9 million this year, a far cry from China's 12.3 million.

Ford Motor Co. has invested $500 million in India and its factory in the south Indian city of Chennai can make up to 200,000 cars a year. Even if sales more than double, to 60,000 vehicles next year as executives hope, they've got capacity to spare.

Nissan Motor Co. plans to shift production of its Micra cars for the European market from the U.K. to Chennai, which it also aims to use as an export hub for Africa and the Middle East. The company plans to roll out its first made-in-India compact in May, part of a seven-year, $920 million India investment it made with partner Renault.

Volkswagen AG has invested Euro 580 million ($847 million) in India, and this month started production of its first India compact at a factory that can make up to 110,000 cars a year.

General Motors Co. opened a second, $300 million factory in India in September 2008, boosting annual capacity to 225,000 vehicles. This month, it teamed up with China's SAIC to launch an India joint venture, with fresh investment of up to $350 million.