Perspective Kevin Dehoff

Vikas Sehgal
John Loehr
Kazutoshi Tominaga

Cars for India,

Cars for the World
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CONTACT INFORMATION
Chicago Florham Park, NJ Tokyo
Vikas Sehgal John Loehr Kevin Dehoff Kazutoshi Tominaga
Executive Director, India Business Principal Partner Principal
+1-312-578-4828 +1-312-578-4552 +1-973-410-7625 +81-3-3436-8598
vikas.sehgal@booz.com john.loehr@booz.com kevin.dehoff@booz.com kazutoshi.tominaga@booz.com
CARS FOR As oil prices rise and concerns
about the environment grow, the
INDIA, CARS small car is becoming the king of
FOR THE the road. Nowhere is this more
evident than in the developing
WORLD world, where increasing prosperity
is bringing millions of first-time
buyers into the market for new
cars. This presents a tremendous
opportunity for India, which
is growing quickly, building a
vast middle class, and gaining
experience in building and selling
cars. We believe India can take
advantage of its experience in this
market to become the world
leader in the fast-growing small-
car segment.
In 2007, for the first time,
India generated more than
$1 trillion in gross domestic
product. This milestone
represents the culmination of
years of extraordinarily rapid
development in the country.
The same could be said of any
number of countries throughout
the developing world. From
South America to South Asia
to the Far East, the world is
changing, as emerging markets
are growing at rates two to four
times faster than the developed
Booz & Company 1
world. While the developed
countries saw GDP growth of
just 2.2 percent in 2007, the
so-called BRIC countries—
Brazil, Russia, India, and
China—achieved an impressive
9.4 percent.
Such rates of growth are bringing
rapid increases in prosperity
throughout the developing
world. Consider India: At the
turn of the millennium, fewer
than 500,000 Indian households
earned more than $15,000 per
year; that number has since
exploded tenfold, to 5.5 million
households. With that rise in
prosperity, consumption patterns
are changing dramatically.
Large swathes of the world are
emerging from poverty and
entering the middle class, and
the increases in income that
are driving that change mean
these newly well-off people
no longer must spend the vast
majority of their income on the
bare necessities—food, clothing,
and shelter. Instead, they find
themselves able to afford such
comparative luxuries as better
healthcare, communications,
and transportation—including
scooters, bikes, and, more and been the top sellers, the trend emerging markets but throughout
more frequently, cars (see is toward smaller, more the world. The cost of the
Exhibit 1). efficient cars. average vehicle sold in the U.S.
fell from more than $28,000 in
Those cars, naturally, are very
The Small-Car Revolution 2006 to a projected $26,400 in
small by American and European
Thus, we are seeing the dawn 2008. In India, the average car
standards, and less expensive
of the age of the small car. costs around $15,000, while
as well. And they are likely
More than 5 million potential the average small car costs
to remain that way. High fuel
new buyers are entering the about $8,000.
and commodities prices are
expected to be around for the market for cars every year in The impact of this shift to
foreseeable future, and those the developing world. The total smaller cars on the worldwide
prices will only make cars more number of cars sold worldwide auto industry will be dramatic.
expensive to build and to run, is expected to increase from 69 As both Europe and the U.S.
thus reinforcing the desire to million in 2007 to 80 million lose production capacity, the
keep cars small. Concerns about units in 2012. Seventy-seven center of gravity of production
the environment and global percent of the additional 11 is moving to the Russia-China-
warming are also promoting the million new cars will be bought India triangle. For every unit of
trend toward smaller cars—not by consumers in emerging production that is being lost in
just in the developing world, but markets (see Exhibit 2). The the U.S., two and a half are being
everywhere. Even in the U.S., global auto market is already added in the BRIC countries.
where gas-guzzling pick- tilting toward small cars, sales Accompanying that shift is the
up trucks and SUVs have long of which are growing not just in rise of a whole host of carmakers

Exhibit 1
Change in Customers’ Consumption Patterns

16
Transport &
Communications
14

12
Growth Relative to that in 1990

10

6 Total Consumption
Housing &
Household Fuels
4
Food, Beverages
& Tobacco

2
Base: 1990

0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Economist Intelligence Unit

2 Booz & Company

Exhibit 2
Global Vehicle Sales Volume Change, 2007–2012

Incremental Growth by Vehicle Class Incremental Growth by Country

Total = 11 K Total = 11 K
Japan Other(2) Mature
2% Markets
South Korea 8%
Other(1) 2%
10%
MPV
10% Small Cars United China
(A&B) States 32%
35% 12%
Van
12% Other(2)
Developing
Markets
Medium 11%
(C) SUV India
Brazil
17% 27% 19%
2%
Thailand
2%
Mexico Russia
2% Indonesia 4%
3%
100
80
80 69
11

Volume 60
(In Millions)
40

20

0
2007 Annual Sales 2007–2012 2012 Annual Sales

1 “Other” Includes Luxury, Pick-up, and Upper Medium car segments

2 Includes countries that contribute less than 2% of the incremental sales from 2007 to 2012
Sources: Global Insight, April 2007 data; Booz & Company

such as Tata and Mahindra, power trains, fuels, propulsion the luxury of highly developed
as well as Tier 1 suppliers like systems, and braking systems, value chains, from product
Bharat Forge and the TVS as well as materials not typically development to purchasing to
Group, forcing a change in used in cars, including plastics manufacturing to marketing,
long-established patterns of for exterior body components but that is by no means the
global competition. such as doors, and strong, case in emerging markets. In
lightweight alloys and composites these markets, the sophisticated
With the shift to smaller cars for
for structures. infrastructure available to
emerging markets, carmakers
Western manufacturers to back
must develop new technologies Meanwhile, the very concept
up the design and building of
and new business models to of how the auto industry is
cars—for instance, the large
meet the demands of these organized in the emerging
supplier base equipped with the
markets. Small cars must be markets, and of how cars get
latest technology to do much of
lighter and more fuel-efficient, designed and built, is diverging
the component design—simply
so manufacturers are turning to from the Western model. Western
doesn’t exist. Instead, OEMs
such technologies as alternate manufacturers have long had

Booz & Company 3

in the developing world must
often work around large gaps in
this infrastructure, using small
teams of engineers, designing cars
around available components,
and turning for technology and
components to non-traditional
suppliers such as makers of
two-wheeled vehicles, when
necessary. Even the concept of
vertical integration is different in
the developing world, which does
not have the West’s wide variety
of outsourcing options—
a condition that forces OEMs
to develop business models in
keeping with their own
unique environments.
Finally, the small-car revolution
is taking place within the
context of the very different
needs and desires of the new
consumer in emerging markets.
Consumers buying cars that
cost $8,000 differ greatly from
those buying $15,000 cars.
Those low-cost cars are typically
their first, and they will be
used as family cars, but not for
long-distance trips—instead,
they will be predominantly
driven around town. For this
and other reasons—people in
developing countries shop for
food much more frequently than
Americans, for instance—cargo
capacity is less important than
people-carrying capacity. You
can’t, however, impress these
consumers with $15,000 cars
from which critical features have
been removed to save money.
Cars for this market must
be built from the ground up,
frugally but not cheaply. It takes
a special engineering mindset to
do it successfully.
4 Booz & Company
India and the World
These conditions have led the
developing world to create a
particular kind of innovation to
develop and build a particular
kind of small car, in a particular
way, and then to sell them to
a particular kind of customer.
Consider the Nano, which
India’s Tata Motors developed
specifically as the world’s first
$2,500 car. The Indian passenger
vehicle market is greatly tilted
toward two-wheeled motorcycles
and scooters, which made up
78 percent of vehicles sold there
in 2007. That’s because India
remains a poor country, with
projected median household
income of just over $3,000 in
2008. Until the advent of the
Nano, the cheapest car sold
in India cost about $5,000,
unaffordable for the average
Indian family. Nano’s price of
$2,500, however, puts it well
within the realm of possibility for
a much larger, and fast-growing,
number of households.
The Nano is explicitly a
product of Tata’s engineering
skill, combined with its deep
understanding of what the
market for $2,500 cars wants.
We believe that extending these
factors to the entire Indian
auto industry will allow India
to maintain and extend its
position in the small-car market
worldwide. Indeed, India boasts
certain advantages in its quest for
control of the small-car market.
First, the sheer size of the Indian
market has given the auto
industry the scale it needs to
further expand its export efforts.
On the demand side, India is
one of the largest markets for
small cars in the world, with
more than 8 million households
that can afford cars in the
$5,000 to $8,000 range. With
the introduction of cars like
the Nano, and similar vehicles
being developed by players such
as Toyota, Renault, and Suzuki
in the $2,500 to $5,000 range,
the number of households that
can afford a car will triple.
That market already supports
a well-established engineering
talent pool and a large supplier
base that can engineer and
manufacture cars suited for
export to other emerging
markets. Scaling up further to
meet the coming demand from
markets outside India, while
a challenge, is well within the
realm of possibility.
Second, given the nature of its
auto market, it’s no surprise that
India’s base of OEMs is strong
and growing. This is true both
for two-wheeled vehicles, which
includes such players as Bajaj,
Hero Honda, and TVS, and four-
wheelers, where local companies
such as Tata, Mahindra, and
Maruti are well-established, as
are such global OEMs as Suzuki,
Hyundai, Honda, Toyota, Ford,
and others. Most of the local
and global OEMs have already
announced plans to increase their
sales and manufacturing base
in India, and use the country as
a hub for manufacturing small
cars, both for local consumption
and for export.
A Competitive Environment
Despite India’s advantages as
it goes after the global small-
car market, winning the game
will not be easy. The rise of the them GM, Toyota, Renault, and Korea. Given all these strengths,
emerging markets offers the Volkswagen, are determined to India, we believe, should aspire
same opportunities to every enter or re-enter this burgeoning to displace South Korea as the
country that wants to expand segment. Renault, for instance, is world’s leading exporter of small
its auto industry: Japan, Korea, already working on a sub-$5,000 cars (see Exhibit 3).
China, and Thailand are all car. Pressure on OEMs to provide
looking to grow exports to smaller, more economical cars is Supporting the Industry
emerging markets. Korea and forcing them to make investments In order to reach that goal,
Japan, especially, have long been in a variety of products. Unlike however, India must work to
strong players in the small-car Indian OEMs, however, these promote its auto industry along
segment. Both countries have the old-line companies are lagging in two lines: The Indian government
advantages of a large installed both experience in these markets must support the auto industry
base, great technology, and and the significant labor and cost by developing policies that can
accessible markets across the advantages of India’s young but further the industry’s small-car
world. Meanwhile, China’s fast-developing local supplier base. goals. And the industry must
Chery and other local Chinese continue to innovate, developing
India is already the second-
OEMs have access to the fastest- the means to build more
largest exporter of small cars
growing car market in the paradigm-shifting products like
after South Korea, and its low
world, and that, together with the Nano.
labor costs give it a significant
its low-cost labor, makes it
competitive advantage over On the policy side, India can
likely to become India’s most
South Korea, where labor costs learn a lesson from Thailand,
formidable challenger.
are much higher—indeed, rural which succeeded in building
At the same time, a number of Alabama currently offers lower a powerful global position in
large traditional OEMs, among labor costs than does South the pick-up truck market by

Exhibit 3
Small-Car Exports by Country

Segment A Exports Projected % Share of Asia’s Segment A Exports

(2000 and 2007) (2015)
250 241.0 Malaysia
226.9 4%

2000 2007
200
179.1 Thailand
9%
Volume (thousands)

148.7
150 Japan India
10% 34%

100
China
58.9 15%
50 35.6
South Korea
8.3 5.0 4.2 5.3 28%
0
South Korea India Japan China Malaysia

Notes: “Exports” is defined as the surplus of production over sales, assuming imports are insignificant; Segment A includes A & MIC global segments; assumes same Segment A-to-
total passenger vehicle export ratio for 2007 as for 2005 for South Korea, India, Japan, and China. For Malaysia, assumes constant Segment A growth rate between 2005 and 2015
Sources: Global Insight 2004; SIAM; KAMA; Japan Automobile Manufacturers Association; China’s Ministry of Commerce; Booz & Company

Booz & Company 5

adjusting government policies to
benefit the pick-up segment. With
a domestic market of fewer than
1 million vehicles sold annually,
Thailand’s domestic market
is too small to support a wide
variety of auto segments. So in
hopes of developing a domestic
industry that could in turn
support a robust export business,
the Thai government promoted
domestic sales of pick-ups by
lowering taxes on pick-ups
relative to other segments to push
the market in that direction. At
the same time, the government
encouraged investment in pick-up
truck production by reducing
excise taxes on trucks built
for export. The result: Despite
its relatively small economy,
Thailand is the second-largest
market for pick-ups in the
world, and the largest exporter
of such vehicles.
Using Thailand’s success in
promoting its pick-up industry
as an example, India should
further encourage investment
in small-car production and
actively promote small-car R&D,
by encouraging universities to
participate in the development
of new auto technologies,
components, and materials,
and by investing in testing labs
that could be shared among
OEMs and Tier 1 suppliers.
Moreover, it should look at the
entire auto value chain, giving
added incentives to suppliers
in their efforts to support
the OEMs. Compared with
Western countries, India still
has a relatively underdeveloped
supplier base, and without strong
suppliers, it will be much more
difficult for OEMs in India
6 Booz & Company
to design and build the new India can increase the demand
products needed to win in the for small cars while ensuring
export market. The government that the country’s vehicle fleet
can help local suppliers increase becomes as clean and fuel-
both their capabilities and efficient as possible.
their capacity by encouraging
exports, providing capital to The Innovation Imperative
build globally efficient scale, Even as the Indian government
and offering incentives to invest works to support the country’s
in new technologies. Finally, it small-car market, Indian
could further develop the local manufacturers must invest in
supplier base by encouraging bringing to market a wider
foreign companies looking to do variety of low-cost, high-value
business in India to enter into products that consistently
joint ventures and partnerships offer quality, reliability, and
with local companies. durability—with style. And they
need to do so not just for the
India should also take a larger
domestic market, but for other
role in encouraging its base of
emerging markets throughout
two-wheeler OEMs—the second-
the world, from Brazil to Eastern
largest in the world. These
Europe to Vietnam. That means
manufacturers are naturally
maintaining an ongoing effort to
adept at building low-cost,
innovate on a number of fronts,
high-volume vehicles, and their
from product to technology
entrance into the small-car
to business model and even
market would greatly benefit
customer service.
India’s competitive position.
The Nano represents the kind
Promoting small cars in India
of product innovation in which
isn’t just an economic issue—it’s
India must continue to excel.
also an environmental issue, and
That entails identifying new
even a national security concern,
market segments that will bring
since India relies on foreign oil
significant opportunities in the
for nearly all of its fuel needs. To
form of several million units
that end, the Indian government
of a single model of vehicle,
may need to create disincentives
and then engineering cars for
for larger cars through even
that segment. The Nano is the
more progressive and aggressive
perfect example of a new product
tax structures that penalize
segment. Tata Motors set itself a
larger vehicles. It could also
goal of building a low-cost car,
aggressively force the issue of
not a cheap car. Tata’s relatively
product life. Indian consumers,
small team of engineers designed
like their counterparts in much
the car from the bottom up,
of the developing world, tend
choosing features as a function
to keep their cars as long as
of the explicit needs of the target
they can. By lowering the life of
market, using non-traditional
products, or even mandating that
suppliers, and co-locating them
cars more than eight or 10 years
with its own manufacturing.
old be scrapped, for instance,
When the Nano goes on sale in for the masses, such as low-cost
autumn 2008, it is expected to hybrid vehicles, and engines
sell 250,000 units in the first that can use a variety of fuels—
year, and 1 million units per year gasoline, diesel, natural gas,
over the upcoming years, half of kerosene—at the same time. And
them in the export market. it means investing in production
and assembly technologies that
For India to play in the global
don’t require production runs
small-car market, and to take
of 100,000 cars a year. After all,
share from other players, its cars
many small-car markets around
have to be as good or better than
the world are just not large
the best in the market, in styling
enough to support truly large-
and quality, as well as execution.
scale plants, and shipping cars
Designing cars by simply
there simply adds too much to
removing content and features
the price of the car.
from more expensive cars will
not help India take the lead in Given the flexibility of the value
the worldwide small-car market. chains used by Indian OEMs,
Instead, technology innovation they also have the option of
will be critical to its success innovating new business models
(see Exhibit 4). That means as well. These might include
developing auto technologies partnering with two-wheeler
Exhibit 4
Customer Preferences for Small Cars by Region
United States
Modern
Sub-Compact with
Good Fuel Economy,
i.e., Toyota Yaris
Relatively Rich
Emerging Economies
Western Europe (ASEAN)
Modern City Car,
Modern Small Car
Small Car with Latest
i.e., Fiat Panda
Segment Technology,
100HP i.e., Suzuki Swift
Emerging Economies
(India)
Simple and Low-Cost
Family Car,
i.e., Tata Indica
Source: Booz & Company
Booz & Company 7
manufacturers for distribution
and service, performing contract
manufacturing for other
companies, or even selling car
kits that can be assembled by the
customer. We can imagine OEMs
developing a sales model, much
like how Dell sells computers,
whereby customers order their
vehicles on the Internet or at sales
kiosks that share floor space with
other retail stores. That might
allow companies to reduce their
sales footprint while maintaining
a strong service footprint,
thus saving money. Ultimately,
companies might even develop
decentralized assembly footprints
so that cars can be produced
as close to customer locations
as possible, increasing regional
customization and further
cutting costs. However, local tax
structures and infrastructure need
to be developed to support these
new business models.
Finally, auto makers should
look to develop innovative
financing and ownership models
in keeping with the needs of
the emerging-market consumer.
Companies could put together
financing structures that allow
extended families to finance a
car together. Alternatively, some
combination of bank financing
and microfinancing could be used
to build up local markets. One
can imagine cars being rented by
the hour, much like the Zipcars
seen on the streets of urban
America, or cars shared among
several different co-owners.
Given the limited resources
of many potential buyers in
emerging markets, carmakers will
need to be creative in developing
new ownership models.
Conclusion
Considering its advantages—the
scale of its domestic small-car
industry, low labor costs, and
its deep understanding of the
emerging-market consumer—
India is in a strong position
as it looks to expand further
into the export market. Success
in this effort will also bring
many benefits to India itself.
India currently spends more
than $40 billion annually to
import the oil it needs. So the
8 Booz & Company
development of new, more fuel- of its middle class and pulling
efficient technologies will help a significant segment of its
the country reduce its massive population out of poverty.
trade deficit while making its
The worldwide small-car
cars more attractive in other
market presents a tremendous
emerging markets. Indeed, by
opportunity for India. But
2011, for every 50 gallons of fuel
winning that market will require
India can save, its government
that India act on a variety of
could provide primary school
fronts to promote its export
education for one additional
efforts. And to ensure that it
child. Moreover, a more robust
stays ahead of its many able
auto industry will mean an
competitors, it must act now.
additional 4 million jobs by
2012, furthering the development
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