Automotive industry in IndiaThe automotive industry in India is one of the largest in the world and one ofthe fastest growing globally. Indias passenger car and commercial vehiclemanufacturing industry is the sixth largest in the world, with an annual productionof more than 3.9 million units in 2011. According to recent reports, India overtookBrazil and became the sixth largest passenger vehicle producer in theworld (beating such old and new auto makers as Belgium, United Kingdom, Italy,Canada, Mexico, Russia, Spain, France, Brazil), growing 16 to 18 per cent to sellaround three million units in the course of 2011-12. In 2009, India emerged asAsias fourth largest exporter of passenger cars behind Japan, South Korea, andThailand.In 2010, India beat Thailand to become Asias third largest exporter ofpassenger cars. The Indian Automobile Industry manufactures over 11 millionvehicles and exports about 1.5 million each year. [ The dominant products of theindustry are two-wheelers with a market share of over 75% and passenger carswith a market share of about 16%. Commercial vehicles and three-wheelersshare about 9% of the market between them. About 91% of the vehicles sold areused by households and only about 9% for commercial purposes. The industryhas a turnover of more than USD $35 billion and provides direct and indirectemployment to over 13 million people.??? Tata Motors is leading the commercialvehicle segment with a market share of about 64%.Maruti Suzuki is leading thepassenger vehicle segment with a market share of 46%. Hyundai Motor IndiaLimited and Mahindra and Mahindra are focusing expanding their footprint in theoverseas market. Hero MotoCorp is occupying over 41% and sharing 26% of thetwo-wheeler market in India with Bajaj Auto. Bajaj Auto in itself is occupyingabout 58% of the three-wheeler market.
Key players in the automobile industry• Mahindra & Mahindra Ltd.• Tata Motors• Maruti Suzuki India Ltd.• Hyundai Motor India Ltd.• Hindustan Motors• TVS Motors• Toyota Kirloskar Motor Private Ltd.• Ford Motor Co.• Hero Honda Motors Limited• Ashok Leyland• General Motors India Private Ltd.• LML• Kinetic Engineering Ltd.• Bajaj Auto Ltd.• Hero Honda Motors Ltd.
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MarutiSwift.Maruti Suzuki, a subsidiary of Japans Suzuki Motor, is the largestautomobile manufacturer in India.Mahindra Scorpio, one of Indias best selling indigenously developed SUV.The Tata Nano - the cheapest car made in IndiaA Tata Safari on display in Poznan,Poland.
SWOT Analysis - Tata Motors Limited • The company began in 1945 and has produced more than 4 million vehicles. Tata Motors Limited is the largest car producer in India. It manufactures commercial and passenger vehicles, and employs in excess of 23,000 people. This SWOT analysisis about Tata Motors.Strengths • The internationalisation strategy so far has been to keep local managers in new acquisitions, and to only transplant a couple of senior managers from India into the new market. The benefit is that Tata has been able to exchange expertise. For example after the Daewoo acquisition the Indian company leaned work discipline and how to get the final product right first time. • The company has a strategy in place for the next stage of its expansion. Not only is it focusing upon new products and acquisitions, but it also has a programme of intensive management development in place in order to establish its leaders for tomorrow. • The company has had a successful alliance with Italian mass producer Fiat since 2006. This has enhanced the product portfolio for Tata and Fiat in terms of production and knowledge exchange. For example, the Fiat Palio Style was launched by Tata in 2007, and the companies have an agreement to build a pick-up targeted at Central and South America. • · The Nano is Tata‟s iPod. Great engineering and design in a rules-breaking product that has generated global awareness and admiration • · The brand is very well established in the economy segment • · Tata‟s management is strengthened by the collective experience of its partners and acquired companies – this includes general management, marketing, sales and operations • · Tata‟s buying power is enhanced and leveraged through its size • · Tata is making smart acquisition and partnering decisions so far. Local management teams remain in place vs. installing Tata leaders from afar.
Weaknesses • The companys passenger car products are based upon 3rd and 4th generation platforms, which put Tata Motors Limited at a disadvantage with competing car manufacturers. • Despite buying the Jaguar and Land Rover brands (see opportunities below); Tata has not got a foothold in the luxury car segment in its domestic, Indian market. Is the brand associated with commercial vehicles and low-cost passenger cars to the extent that it has isolated itself from lucrative segments in a more aspiring India? • One weakness which is often not recognised is that in English the word tat means rubbish. Would the brand sensitive British consumer ever buy into such a brand? Maybe not, but they would buy into Fiat, Jaguar and Land Rover. • Tata Motors is not well positioned in the luxury segment. This is not a problem during recessionary times but a lack of diversification can hurt during better times • Most of the automobiles Tata manufactures are based on older platforms • The Company‟s manufacturing practices trail competitors Opportunities • In the summer of 2008 Tata Motors announced that it had successfully purchased the Land Rover and Jaguar brands from Ford Motors for UK £2.3 million. Two of the Worlds luxury car brand have been added to its portfolio of brands, and will undoubtedly off the company the chance to market vehicles in the luxury segments. • Tata Motors Limited acquired Daewoo Motors Commercial vehicle business in 2004 for around USD $16 million. • Nano is the cheapest car in the World - retailing at little more than a motorbike. Whilst the World is getting ready for greener alternatives to gas-guzzlers, is the Nano the answer in terms of concept or brand? Incidentally, the new Land Rover and Jaguar models will cost up to 85 times more than a standard Nano! • The range of Super Milo fuel efficient buses are powered by super-efficient, eco-friendly engines. The bus has optional organic clutch with booster assist and better air intakes that will reduce fuel consumption by up to 10%. • The Nano could sell well in other geographic markets. Expanding markets such as China may find the Nano just the answer • Jaguar and Land Rover provide Tata with an opportunity to establish itself in the luxury segment
Threats • Other competing car manufacturers have been in the passenger car business for 40, 50 or more years. Therefore Tata Motors Limited has to catch up in terms of quality and lean production. • Sustainability and environmentalism could mean extra costs for this low-cost producer. This could impact its underpinning competitive advantage. Obviously, as Tata globalises and buys into other brands this problem could be alleviated. • Since the company has focused upon the commercial and small vehicle segments, it has left itself open to competition from overseas companies for the emerging Indian luxury segments. For example ICICI bank and DaimlerChrysler have invested in a new Pune- based plant which will build 5000 new Mercedes-Benz per annum. Other players developing luxury cars targeted at the Indian market include Ford, Honda and Toyota. In fact the entire Indian market has become a target for other global competitors including MarutiUdyog, General Motors, Ford and others. • Rising prices in the global economy could pose a threat to Tata Motors Limited on a couple of fronts. The price of steel and aluminium is increasing putting pressure on the costs of production. Many of Tatas products run on Diesel fuel which is becoming expensive globally and within its traditional home market. • Powerful competitors for the luxury market including Honda, Toyota, Ford and Mercedes-Benz are beginning to push into the Indian market • Tata‟s competitive price advantage will be under pressure as environmental regulations are tightened • Rising material costs will create pressure to increase prices • There is a trending rise in diesel fuel costs which will hurt Tata‟s line of products
SWOT Analysis: Hindustan Motors Strengths: • Hindustan Motors was the first Indian Car Company to start production in India in 1942. • HM has become a vast company, manufacturing cars like the sturdy Ambassador, the elegant Contessa, and in collaboration with Mitsubishi of Japan now manufactures the new Mitsubishi Lancer. • HM started production of the Landmaster in 1954, and in 1957 began the production of the Ambassador. Later tie-ups with General Motors Corporation of USA, Vauxhall Motors, UK, Marion Power Shovel Co, USA led to new products being launched. • In 1963 commenced the production of the Ambassador Mark2 Later versions and more forays in related vehicle segments followed. • Export has been steadily increasing, mainly in the British and Japanese markets. Trucks are being exported to Bangladesh, Egypt, New Zealand, Sri Lanka and Mauritius. The Earth moving Equipments are being exported to Oman, Jordan, Iraq, Bangladesh, Mauritius and Libya. • HM has a vast service network. The Passenger Car and Utility Vehicle market is being attended by a 115 strong dealer network, 50 Service and Parts dealers and additional 60 exclusive Parts dealers. 4 Regional Offices and Nation-wide Territory Offices support it.Weaknesses: • The license Raj before 90‟s, lead to lack of product activity in the Indian market was mainly due to the Indian government‟s complex regulatory system that effectively banned foreign-owned operations. Within this system (referred to informally as the “license raj”), any Indian firm that wanted to import technology or products needed a license/permit from the government. The difficulty of getting these licenses stifled automobile and component imports, creating a low volume high cost car industry that was inefficient, unprofitable, and technologically obsolete. • The dominant product Ambassador, although customized to the poor road conditions in India, were based on a stale design concept (with outdated features), and were also fuel inefficient. • Inefficiency of Employees, output of each employee was less due to Union interference. • Inefficient management principles.
Opportunities: • Efficiency through management principles. • Exports • Acquisitions for strengthening its distribution tie-ups. • Entry into other related diversification categories like Truck parts manufacture, and other parts automotives. • Can bring out more sophisticated cars with high technology standards. Threats: • Emergence of strong players in the market mainly overseas competitors. • Lack of employee motivation. • Lack of design for cars (mainly new age look for cars).
SWOT ANALYSIS-ASHOK LEYLAND • Strength of the company • Good Training System • Good Organisational Climate • High Market Share • Skilled Employees. • Strong Functional Structure. • Standard Quality Product Weakness of the company • Low margin • High price • Sales representatives are less. • There is no proper mechanism to handle the grievance of the customersOpportunities for the company • Due to liberalization, demand for heavy vehicle havesteeped up all over the globe. • National market through good advertisement. • Company provides better credit facility to dealers • Company introduces promotional programmes Threats faced by the company • High competition Liberal credit policy of other brand Promotional programmes of other brand. Complicated national market Good replacement facility if other brands.
SWOT Analysis-Mahindra & Mahindra Strength • 1. Mahindra has been one of the strongest brands in the Indian automobile market 2. Mahindra group give employment to over 110,000 employees 3. Excellent branding and advertising, and low after sales service cost 4. Sturdy SUV‟s good for Indian roads and off-road terrain Weakness • 1. Mahindra‟s partnership with Renault did not live up to international quality standards through their brand Logan Opportunity • 1. Developing hybrid cars and fuel efficient cars for the future 2.Tapping emerging markets across the world and building a global brand 3.Fast growing automobile market 4.Growing in the market through electric car Reva (controlling stake) and entry into two- wheeler segments Threats • 1. Government policies for the automobile sector across the world 2. Ever increasing fuel prices 3. Intense competition from global automobile brands 4. Substitute modes of public transport like buses, metro trains etc • The auto industry is considered to be an oligopoly. • Today there are 15 companies in production of which 5 are automotive producers and 10 are commercial vehicle producers. The automotive industry is one of the four largest exporters.Significant contribution to: - National production and development - Employment - Level of technology
Competitive analysis between Mahindra and Mahindra and Tata motorsAuto major Mahindra & Mahindra is gearing up to intensify competition in the mini truck segmentwith homegrown rival Tata Motors, which is currently leading the market with its Ace model.Thecompany, which launched a CNG variant of its mini truck Maxximo - priced at Rs 3.99 lakh (Exshowroom Delhi), said it is looking to expand customer base through its "superior productoffering".With its new truck segment it was able to build a good share in the market which was dominatedby tata ace for a long time and due to its superior product offering,it was believed that morecustomers will get attracted to it.Mahindra‟s share was 22% in the load segment while that of Ace was 68%. In the loadsegment, Maxximo had 29% share while that of Ace was over 60%.With the CNG variant of the Maxximo, M&M is optimistic that it would be able to add morecustomers from the Delhi and National Capital Region as compared to Tata Ace.M&M is the second largest passenger cum utility vehicle manufacturer in India (after TataMotors) with current market capitalization of about Rs.41,600crores. It posted net margins (11%in 2011) more than twice that of its nearest competitors i.e. Tata Motors (4%) and AshokLeyland (5.5%).Mahindra XUV500 was chosen as the most reputed car from a list of 200 different models from19 different car manufacturers. Following the Mahindra XUV500 is the Tata Nano, rankedsecond most Reputed car model in India, followed by Maruti Suzuki Swift Dzire on third position.
Mid priced segment targeted by the Automobile industryTata Motors • Tata motors has targeted on themid priced segment through its new Tata Indigo. Tata Indigo has an innovative design. Inspiring front frame and bright headlamps make the car look exclusive. In the back end, the vehicle has a trendy taillights bunch. Its comfortable seats provide you more reliable driving. Even with being a compact car, it provides enough leg and head room for both front and rear seat passengers. Tata indigo has well-appointed interiors. Its steering is very comfortable. Tata Indigo is available in both diesel and petrol engine. The petrol variants of the car are GLX, GLE and, GLS while the diesel versions come in two models LS and LX . The models are in the price tag of approximate Rs 4.75 lakhs to Rs 5.90 lakhs.Mahindra and mahindra motors • Hindustan motors have targeted the mid priced segments through its „Verito‟ – the Logan. The new Verito retains the famed strengths of the Logan, while adding a new style with some key changes. Now equipped with several rugged and sporty styling elements, the Verito is all set to be the most exciting buy in the entry level sedan category for Indian consumers. It is competitively priced at Rs. 4.82 lakh (petrol BS3 version) & 5.62 lakh (Diesel BS3 version). The BS4 compliant version is also available for BS4 markets.Powered by the Renault engine, the Verito is a sedan which remains true to itself and theconsumer by offering the unique proposition of space, mileage and performance along withstyle. The exterior of this car is quite unique with ski racks and side cladding, which areavailable for the first time on a sedan in the Indian market. • Other 1 is the Bolero -Base model is priced at Rs. 6.19 lakhs (Ex-showroom New Delhi) (September, 2011) Will be available in four variants: SLE, SLX, and ZLX (New variant introduced). Features are revised front grille and new bumpers which include the all- new hawk-eye head lamps.It consists of a new gear knob and leather wrapped steering wheel in top model,all-new digital instrument cluster,new rear wiper and defogger, new beige coloured interiors, new body decals/graphics.
Tata indigoMahindra and mahindraverito Mahindra bolero Ashok leyland truck
MARKET STRUCTURECHARACTERISTICS OF OLIGOPOYMARKET • Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs • Ability to set price: Oligopolies are price setters rather than price takers • Entry and exit: Barriers to entry are high.The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market • Number of firms: "Few" – a "handful" of sellers There are so few firms that the actions of one firm can influence the actions of the other firms. • Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. • Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles). • Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.
PRICE LEADERSHIP IN OLIGOPOLISTIC MARKETSOligopolies may pursue the following pricing strategies: • Oligopolists may use predatory pricing to force rivals out of the market. This means keeping price artificially low, and often below the full cost of production. • They may also operate a limit-pricing strategy to deter entrants, which is also called entry forestalling price. • Oligopolists may collude with rivals and raise price together, but this may attract new entrants. • Cost-plus pricing is a straightforward pricing method, where a firm sets a price by calculating average production costs and then adding a fixed mark-up to achieve a desired profit level. Cost-plus pricing is also called rule of thumb pricing. • There are different versions of cost-pus pricing, including full cost pricing, where all costs - that is, fixed and variable costs - are calculated, plus a mark up for profits, and contribution pricing, where only variable costs are calculated with precision and the mark-up is a contribution to both fixed costs and profits. • Cost-plus pricing is very useful for firms that produce a number of different products, or where uncertainty exists. It has been suggested that cost-plus pricing is common because a precise calculation of marginal cost and marginal revenue is difficult for many oligopolists. Hence, it can be regarded as a response to information failure. Cost-plus pricing is also common in oligopoly markets because it is likely that the few firms that dominate may often share similar costs, as in the case of petrol retailers. However, there is a risk with such a rigid pricing strategy as rivals could adopt a more flexible discounting strategy to gain market share. • Cost-plus pricing can also be explained through the application of game theory. If one firm uses cost-plus pricing - perhaps the dominant firm with the greatest market share - others may follow-suit
DEMAND CURVEAbove the kink DC is relatively elastic because all other firms price remain unchanged,below the kink, demand is relatively inelastic because all other firms will introduce asimilar price cut ,eventually leading to a price war ,therefore the best option for anoligopolist is to produce at point E which is equilibrium point and the kink point.
Contribution of automobile industry to GDPRole of Automobile Industry in India GDP-Sales Trends • In the year 2006-07 the number of Passenger Car sold were 10,76,408 • In the year 2006-07 the number of Passenger Vehicles sold were 13,79,698 • In the year 2006-07 the number of Commercial Vehicles sold were 4,67,882 • In the year 2006-07 the number of Three Wheelers sold were 4,03,909 • In the year 2006-07 the number of Two Wheelers sold were 78,57,548 • In the year 2006-07 the number of automobile sold were 1,01,09,037Role of Automobile Industry in India GDP-Growth • The growth rate of the Passenger Cars in the year 2007 is 13.50% • The growth rate of the Utility Vehicles in the year 2007 is 10.10% • The growth rate of the Multi Purpose Vehicles in the year 2007 is 24.40% • The growth rate of the Light Commercial Vehicles in the year 2007 is 16.05% • The growth rate of the Commercial Vehicles in the year 2007 is 3.43% • The MarutiUdyog Ltd is the largest car manufacturer in the country and the rate of growth in the year 2007 was 20.7% • The Mahindra & Mahindra Ltds cumulative sales for the year 2007 was 1,06,094 units and the rate of growth was 35.8% • The Honda Siel Cars India Ltd, the leaders in India pertaining to the manufacturing of premium cars, registered a growth of 16.1 % during the year 2007 and sold 41,638 units • The Daimler Chrysler sales for the year 2007 was 1,681 units in India and the growth rate was more than 22% • The General Motors India, registered a 114% increase in the national sales in the August of 2007 • The Hero Honda sold more than 2 million units in the Jan-Aug period of the year 2007 • The export pertaining to the motorbikes was 3,21,321 units in the year 2007
THE DEMAND SIDE ANALYSISLaw of demand • states that the relationship between a good‟s price and thequantity demanded of that good is negative. This is referred to as a “change inquantity demanded”. Own-price changes cause movements along a givendemand curve. The demand for automobiles for is dependent of certain factors • The demand function for X: • XD= f (PX, Ps, Pc, I, T&P, Pop, A, O, PPP, R, SP, Av, In, Tr, F) • Where: XD= quantity demanded • PX= X‟s price; the price of a car • Ps= the price of substitutes • Pc= the price of complements • PPP=Purchasing Power parity of the consumers • R= Rising income level of the consumer • I= Inflation of the country • A=after sales service cost • T&P=tastes and preferences • Pop=population in market or market size • O=Oil prices • SP= Price of Spare Parts
• Av= Availability of nearby service station• In=Lack of proper roads• Tr= Traffic Condition on the Roads• F=Financing options available in the marke
The supply side analysis 2.1 Law of supplyThe Law of Supply states that the relationship between a good‟s price and the quantitysuppliedof the good is positive. Own-price changes cause movements along a given supplycurve.The supply of cars e.g. Honda city is dependent on certain factors.The supply functionfor X:X• S= g (PX, Pfop, Poc, S&T, N)• Where:• XS= quantity supplied• PX= X‟s price• Pfop= prices of factors of production• Poc= opportunity costs (alternatives in productions)• S&T = science and technology• R= Price of raw materials like Steel, tyre, plastics for making dashboards, etc.N = number of firms in the market
Changes in this causes movements along the demand curve:• Price• A change in the quantity demanded is a movement along the demand curve.• A movement along the demand curve for X would be caused by a change in Px.• When price increases, the quantity demanded by consumers falls at every price and when price decreases, the quantity demanded by consumers rises at every price.
Changes in these shift the demand curve:• Number of buyers• Tastes and preferences• Income of the consumers• Purchasing Power Parity• Change in Fuel Prices• Change in Financing Options• After sales servicing cost• Availability of spare parts• Lack of Infrastructure Facilities like Roads, etc.• Price of substitutes or complements• Expectation of future prices• Shift of the entire demand curve is caused by a change in one of the “ceteris paribus” demand variables.• This is referred to as an increase or decrease in demand.
• An increase in demand is a rightward shift in the entire curve. A decrease in demand is a leftward shift in the entire curve. • Number of buyers Demand is originating from new segments of the market; Apart from the usual clientele likeindustrialists, film stars and chairpersons of companies, an increasing number of youngprofessionals like doctors, chartered accountants, lawyers and software professionals owningstart-ups do not mind splurging on our cars. • Tastes and preferences The surge in demand for compressed natural gas (CNG) and liquid petroleum gas (LPG)vehicles in India is driven by the increasing price of petrol and diesel, as well as by the fact thatCNG prices are relatively low compared to prices for more traditional fuels. Demand is driven by growing environmental concern and the Indian governments proactivemeasures to implement Euro-II emission norms. • Price of substitutes or complements Substitutes: Goods that can serve as replacements for one another: when the price of oneincreases, demand for the other goes up. When the price of a Honda city goes up, the demand for its substitute the Hyundai car goesup. • Complements/complementary goods: Goods that “go together”, i.e. a decrease in the price of one results in an increase in demand for the other. If the price of petrol increases, the demand for car and its complementary good will fall. if theprice of Cars were to rise dramatically, less people would chose to buy and use cars, switching
perhaps to public transport - trains perhaps !. It follows that under these circumstances thedemand for the complementary good - Petrol - would also decrease. • Expectations of future Price Changes Just as an actual increase in the price of a product may reduce demand, so the expectationthat prices are about to rise will increase demand, as people buy more now, in order to avoidpaying a higher price latter. For example if price of automobiles is expected to increase after the budget the peoplewould prefer buying their vehicles before the budget is put to effect in anticipation of high pricesin future. • Changes in income There are two ways an increase in the level of income can affect the demand of cars. On thedemand side, typically an increase in income would mean an increase for the demand of cars.However, this may not apply to low end cars such a maruti. Since people have more money,they most likely would buy a nicer car, so low-end cars may see a decrease in demand. • Purchasing Power Parity Though there is increase in income level of the consumers but that does not mean that hispurchasing power has increased. Due to the rising inflation prevailing in the country the value ofthe money decreases and that decrease the purchasing power of the consumers. This willaffctthe demand of the cars in country. • Rising fuel Price As we know that when the fuel prices increases the sales of premium vehicles decreases asFuel Prices and Cars are complementary goods. In the case of complementary goods the priceof one product affects the demand of other complementary good. So there has to be a properdecision in the price of complementary goods. Lack of infrastructure facilities: • Lack of infrastructure facilities also affects the buying decision of the consumers. Since there is no proper infrastructure facility like roads, so due to this there can occur traffic jams, so consumer in that condition postpone their decision to buy a new car and that decreases the demand for the automobiles.
• Changes in this causes movements along the supply curve:Price • A change in the quantity supplied is a movement along the supply curve. • A movement along the supply curve for X would be caused by a change in Px. • When price increases, the quantity supplied by suppliers rises at every price and when price decreases, the quantity supplied by suppliers falls at every price.Example:When price increases from $1000 to $5000, the quantity supplied rises from 3 units of cars to 5units of cars. • Changes in these shift the supply curve: • Price of resources(labor, land, Capital, Raw materials) • Management skills • Technology • Marketing • Production techniques • Expectations • Price of other commodities-There are two types Competitive supply-If a producer switches from producing A to producing B, the price of A willfall and hence the supply will fall because its less profitable to make A.
Example- if the car producers switches from producing luxury car, Honda city to producingsmall segment car, the price of Honda city will fall and hence the supply will fall because it isless profitable to make Honda city. Joint supply-A rise in one product may cause a rise in another. Example- a rise in the price of cars may cause a rise in the price of car accessories and cargear. This means supply of car accessories and car gear will rise because it is more profitable. • Costs of production-If production costs rise, supply will fall because the manufacture of the product in question will become less profitable. • Change in availability of resources-If steel becomes scarce; fewer cars can be made, so supply will fall. • Research and Development: R&D cost increases the price of the vehicles, regular products
The consumer equillibrium analysis • The equilibrium price (and quantity) is determined from the intersection of the supply and demand curves.Imbalance • Surplus: the amount by which quantity supplied exceeds quantity demanded when the price in the market is too high. • Shortage: the amount by which quantity demanded exceeds quantity supplied when the price in a market is too low • Less wealthy buyers will be largely prevented from entering the market because of substantially higher ERP and fuel costs. • Existing owners who can afford these usage cost increases will replace their cars after six to seven years - up from the current four to five years • The new measures to contain vehicle growth and improve public transport are likely to weed out the marginal car owners, force others to keep their cars longer...… And eventually stabilize the car population
Price elasticity of demand • Proportion of income spent; Since buying an automobile involves a large proportion of income being spent, thedemandfor automobiles is elastic. Consequently even a little increase in price would affect the demandfor cars. • Closeness of substitutes;Automobiles have a large number of substitutes available , for e.g. Honda city,Hyundai Accent,etc inluxury segment of cars, consequently the demand for automobiles is elastic, as consumershave the option of buying from a variety of substitutes if the price of the product increases. • Nature of goodsAutomobile are luxury goods the demand for which is price elastic as changes in price levelaffect the luxury goods comparatively more than the necessary goods.INCOME ELASTICITY OF DEMANDHow would the demand for a good change if income increased or decreased? This is knownasthe income elasticity of demand.For example, how much would the demand for a luxurycar increase if average income increased by 10%? If it is positive, this increase in demandwould be represented on a graph by a positive shift in the demand curve. At all price levels,more luxury cars would be demanded.The income elasticity of automobiles is greater than 1as automobiles are luxury goodsandconsequently their demand increases with an increase in the income of the consumer.For e.g. ifa person earns 10 million p.a. and owns a Hyundai Santro, on a rise of incometo 20 million p.a.,the consumer shall buy more and costlier cars.The promotional elasticity of demand; The influence of advertising and promotional activities on the demand for automobiles is veryhigh. The type of, segment, accessories, color, model of the car purchased are affected by theads and sales promotion, thereby making the advertising elasticity for automobiles high. The cross elasticity of demand of automobiles: Another elasticity sometimes considered is the cross elasticity of demand, which measuresthe responsiveness of the quantity demanded of a good to a change in the price of anothergood. This is often considered when looking at the relative changes in demand when studyingcomplementary and substitute goods
Individual elasticity curveAutomobile Industry elasticity curve
Economies of scaleEconomies of scale are the cost advantages that a business can exploit by expanding theirscale of production in the long run. The effect is to reduce the long run average (unit)costs of production over a range of output. These lower costs are an improvement inproductive efficiency and can feed through to consumers in the form of lower market prices.But they can also give a business a competitive advantage in the market. They lead to lowerprices but also higher profits, consumers and producers will both benefit.There are manydifferent types of economy of scale and depending on the particular characteristics of anindustry:- Internal economies of scale (IEoS)Internal economies of scale arise from the growth of the firm itself. Examples include: • Large-scale businesses can afford to invest in expensive and specialist capital machinery. • Specialisation of the workforce: Within larger firms they split complex production processes into separate tasks to boost productivity. • Marketing economies of scale and monopsony power • Managerial economies of scale • Network economies of scale: • External economies of scale • External economies of scale occur outside of a firm, within an industry. Thus, when an industrys scope of operations expand due to for example the creation of a better transportation network, resulting in a subsequent decrease in cost for a company working within that industry, external economies of scale are said to have been achieved. • Diseconomies of scale • A firm may eventually experience a rise in long run average costs caused by diseconomies of scale. Diseconomies of scale a firm may experience relate to: • Control – monitoring the productivity and the quality of output from thousands of employees in big corporations is imperfect and costly – this links to the concept of the principal-agent problem – how best can managers assess the performance of their workforce when each of the stakeholders may have a different objective or motivation? • Co-operation - workers in large firms may feel a sense of alienation and subsequent loss of morale. If they do not consider themselves to be an integral part of the business, their productivity may fall leading to wastage of factor inputs and higher costs.
Operating leverage• The degree of operating leverage (DOL) is a measure, at a given level of sales of how a percentage change in sales volume will effect profits.• Degree of operating leverage (DOL) = Contribution margin ÷ Net operating income• Declining sales volume is a big problem for automakers like Ford and General Motors considering that both motor companies are highly leveraged. In other words, they exhibit high operating leverage. Without getting into the technicalities. Low operating leverage exhibits low fixed costs and high unit variable costs, while high operating leverage exhibits high fixed costs and low unit variable costs. A higher operating leverage indicates that a change in sales volume will have a relatively greater impact on profits. This is desirable for a company who is operating above the breakeven point, or where revenues exceed costs. As sales volumes increase, fixed costs remain the same and variable costs are low so increasing sales volume does not drastically impact costs. Both Ford and General Motors are operating below the breakeven point and because they exhibit high operating leverage their profits have suffered by a larger degree due the burden of high fixed costs. High operating leverage is the reason why sales volume is such a crucial factor for the survival of these U.S. automakers. Revenues must exceed costs so profits remain respectively less effected by higher fixed costs.
Revenue in the oligopoly markets• Marginal revenue The change in total revenue resulting from a change in the quantity of output sold. Marginal revenue indicates how much extra revenue a firm receives for selling an extra unit of output. Marginal revenue= change in total revenue change quantity• Average revenue The revenue received for selling a good per unit of output sold, found by dividing total revenue by the quantity of output. average revenue= total revenue quantity• Market control means these market structures face negatively-sloped demand curves. As such, the price received is not fixed, but depends on the quantity of output sold, and so too does average revenue.In an oligopoly firm, marginal revenue is less than average revenue and price, all three of which decrease with larger quantities of output. The constant or decreasing nature of marginal revenue is a prime indication of the market control of a firm.• Marginal cost The change in total costs arising from a change in the managerial control variable.
In the short run, fixed costs do not vary with output, so marginal costs can also bewritten as:... where δTVC is the change in total variable cost. If the total cost function isknown or has been estimated, marginal cost would be the derivative of total costs withrespect to output.Marginal revenue and average revenue is the same for market structures like monopoly,oligopoly, and monopolistic competition, because these firms are price makers ratherthan price takers, there are a few key differences.
CONCLUSION• The Indian Automotive Industry after de-licensing in July, 1991 has grown at a spectacular rate of 17% on an average for last few years. The industry has now attained a turnover of Rs. 1,65,000crores (34 billion USD) and an investment of Rs. 50,000 crores. Over of Rs. 35,000 crores of investment is in pipeline. The industry is providing direct and indirect employment to 1.31 crore people. It is also making a contribution of 17% to the kitty of indirect taxes. The export in automotive sector has grown on an average CAGR of 30% per year for the last five years. The export earnings from this sector are 4.08 billion USD out of which the share of auto component sector 1.8 billion USD Even with this rapid growth, the Indian Automotive Industry‟s contribution in global terms is very low. This is evident from the fact that even though passenger and commercial vehicles have crossed the production figure of 1.5 million in the year 2005- 06, yet India‟s share is about 2.37 percent of world production as the total number of passenger and commercial vehicles being manufactured in the world is 66.46 million against the installed capacity of 85 million units. Similarly, export constitutes only about 0.3% of global trade.• It is a well accepted fact that the automotive industry is a volume driven industry and a certain critical mass is a pre-requisite for attracting the much needed investment in Research and Development and New Product Design and Development. R&D investment is needed for innovations which is the life-line for achieving and retaining the competitiveness in the industry. This competitiveness in turn depends on the capacity and the speed of the industry to innovate and upgrade. No nation on its own can make its industries competitive but it is the companies which make the industry competitive. The most important indices of competitiveness are the productivity both of labor and capital• Areas to Focus• The future challenge for Indian automobile industry would be to develop a supply base with emphasis on lower costs and economies of scale, develop technical and human capabilities, overcome infrastructural bottlenecks, stimulate domestic demand and exploit export and international business opportunities. The key to success is to achieve the critical mass that would make India competitive and profitable for sustained investments. Keeping these in view the identified challenges and interventions are in the areas of competitiveness in manufacturing and technology, demand, brand building and infrastructure; export and international business, environmental and safety standards, and human resources development. A key deficiency that needs to be addressed for attaining the vision is to improve competitiveness in manufacturing. Systemic deficiencies could be overcome through along-term and stable policy regime that will support the industry to fulfill its‟ potential.• Competitiveness in manufacturing
• The share of manufacturing sector (within the Industry sector) has shown only a marginal improvement from 16.6% in 1991 to 17% of Indian GDP 2003. In comparison in some East Asian economies the share of manufacturing has ranged from 25% to 35% of their GDP. It is known that stagnation of manufacturing as a proportion of G has adverse impact on employment generation. Therefore it is imperative to boost manufacturing given the huge anticipated increase in the workforce over the next years. Demand creation, brand building and infrastructure In order to raise the contribution of automotive industry to GDP from 4.4% to10%, there has to be a focus both on the domestic market as well as exports. Domestically the focus should be on developing and selling appropriate products for the large population of the country. These products could include cost effective small carriers, strong, rugged, low cost vehicle for the rural market, USD 300-350 motorbikes and small, safe four wheelers for family transport. For exports, the focus should be on new geographies for growth beyond traditional markets. India‟s GDP is expected to grow from USD 650 billion to USD 950 billion in2010 and USD 1390 billion in 2016. Automotive industry‟s contribution in these years is expected to rise from USD 34 billion to USD 69 billion and to USD 145 billion respectively. These translate into a contribution to GDP to grow from the current 5.2%to 7.2% and 10.4% in 2010 and 2015. Secondly, the challenge lies in developing appropriate infrastructure to sustain this growth. Also, important would be to establish a brand image not only in the domestic market but internationally also. An appropriate policy for attracting investment would ensure realization of the potential. Government is aiming for creating suitable stable, predictable, and sustainable policy environment and partnering with industry to look beyond borders.