Why Global Automakers are exiting India? – Explained, pointwise

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Introduction

To add to the problems of the Indian automotive industry, another big automaker has announced its exit from India. Ford has decided to stop manufacturing cars in India after failing to find a sustainable path forward.

The exit is the latest in the series, after Harley-Davidson announced its withdrawal in Sep 2020 and General Motors in 2017.

Other reputed international automakers who have exited the Indian market include names like, UM Motorcycles, Fiat, and Eicher Polaris.

Let’s have a detailed look at the underlying issue.

Why big global automakers exit India?

Demand slowdown: Auto sales have registered a combined annual growth rate of just 1.5% in India over the past five years, upsetting the plans of MNCs who have heavily invested in the Indian markets.

Shift from ICEs to EVs: Global companies bid to move from Internal Combustion Engines to electric vehicles could also be one of the probable reasons. The existing trend underscores the pressure on global automakers to invest more in electric, automated, and connected vehicle technology. Hence, global automakers are walking away from money-losing ventures and redirecting capital to electrification & investment in technology.

Rise in demand for shared mobility: There are several factors for an increase in demand for shared mobility, like increase in traffic, increase in fuel prices, lack of parking spaces, less costly than owning a car, less pollution, etc. Governments worldwide are promoting shared mobility as part of smart mobility, and shared cars likely mean lower growth for vehicle sales.

High ownership costs: India, the 5th largest market for passenger vehicles and largest for two-wheelers, has seen growth in both segments tapering in past decades due to increasing ownership costs. CAGR for passenger vehicles dropped to 3.6% b/w FY 10 – 20 against 10.3% in a decade before this.

Shortage of semiconductor chips: Automakers from across the world are lowering production due to the global shortage of semiconductor chips. As a result, consumers will have to bear the burden of paying more to acquire these products.

India’s tax structure: India has a differentiated tax structure that is tilted heavily in favor of small cars. Cars less than four metres in length and engines of up to 1.2 liters attract a duty of 29% (28 percent GST and 1% cess). Imposts on larger vehicles (longer than four metres and with engine capacity higher than 1.2 litres) can go up to 50%.

Dominance of Japanese and Korean carmakers: The Indian market is especially tough for these MNCs due to the dominance of the Japanese and Korean carmakers. Maruti Suzuki has a roughly 48% share in the Indian market, while Hyundai India has around 17%.

Impact of the pandemic: The pandemic has only made matters worse for auto companies, as they were forced to keep their retail outlets shut during the lockdown period.

Present scenario

The Indian automobile sector is currently valued at $118 billion and is likely to become the world’s third-largest automobile market by 2026.

The Electric Vehicle market is expected to grow at a CAGR of 44% between 2020-2027 and is expected to hit 6.34 million-unit annual sales by 2027. The EV industry will create five crore direct and indirect jobs by 2030.

Implications

Job loss: The most sensitive issue involved in global automakers exiting India is the potential job loss. The recent Ford exit will affect 4000 employees and the car dealerships who had invested for the long term.

Make in India program: Under the Make in India program, the government is making consistent efforts to urge foreign businesses to manufacture locally. Exits by global automaker brands not only hamper this process but also lands a blow to Brand India’s image worldwide.

Suggestions

Giving industry status for the auto retail sector: Industry status will help the sector to get priority lending from banks, external commercial borrowing, financing from top lenders, private equity investments, easier access to domestic and global funds, and more tax benefits. Better financing options are required since the sector is capital-intensive in nature. This will boost confidence in the sector immensely and will result in the scaling up of infrastructure, bringing in new investments.

Upskilling: The world is changing. We are amidst a global shift towards a more ecologically sustainable society. Hence, people should be able to work in the new world of the automobile industry, soon to be dominated by electric vehicles. In fact, the shortage of mechanics and technicians is already apparent. It is precisely here that policymakers can design policies to upskill a large section of our population, who are already engaged in the automotive sector, in areas like Electric vehicles, automation, and connected systems.

Make in India not enough: China, which began attracting manufacturing investments decades ahead of India, initially relied on cheap labour and low taxes as incentives but now banks on a strong domestic market to sustain its attractiveness. India, too, would do well to suitably modify its ‘Make in India’ package to ensure that global manufacturers find it equally attractive to both make in India and sell in India.

Way forward

It’s said that never let a good crisis go to waste. The crisis that the Indian automotive industry has been facing due to the sudden exits of global automakers is indeed an opportunity, to effect progressive changes in line with the demands of the future.

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