Incumbents in the automotive industry should prepare for a changing landscape as India grows into the world’s third-largest passenger-vehicle market and global trends disrupt the sector.
India is expected to emerge as the world’s third-largest passenger-vehicle market by 2021. 1 1. IHS Auto Database, Light Vehicle Sales Forecast, ihsmarkit.com. It took India around seven years to increase annual production to four million vehicles from three million. 2 2. Society of Indian Automobile Manufacturers, siamindia.com. However, the next milestone—five million—is expected in less than five years. Hitting that mark will depend on today’s rapid economic development continuing, with a projected annual GDP growth rate of 7 percent through 2020, 3 3. World Economic Outlook Database, April 2018, International Monetary Fund, imf.org. ongoing urbanization, a burgeoning consuming class, and supportive regulations and policies.
Stay current on your favorite topicsWith this growth in mind, we set out to build a perspective on the trends shaping the Indian market, the value proposition for the automobile industry in India, and imperatives for winning in the market. This article explores all three.
The market for passenger vehicles in the country will evolve in the context of several larger trends, some specific to India, and some relevant globally.
Currently, the automotive sector contributes more than 7 percent to India’s GDP. 4 4. Based on real GDP. The Automotive Mission Plan 2016–26 sets an aspiration to increase the contribution to 12 percent. 5 5. The Automotive Mission Plan 2016–26 (AMP 2026) is the collective vision of the government of India and the Indian automotive industry.
A number of economic trends could help in meeting this target. Rapid urbanization means the country will have over 500 million people living in cities by 2030—1.5 times the current US population. Rising incomes will also play a role, as roughly 60 million households could enter the consuming class (defined as households with incomes greater than $8,000 per annum) by 2025. At the same time, more people will join the workforce. Participation could reach 67 percent in 2020, as more women and youth enter the job market, raising the demand for mobility.
Some of them would leap straight into four-wheeler segment, and others will graduate from two- to four-wheelers. Over 44 percent of the consuming-class households will be in 49 growth clusters—for example, Delhi is expected to have the same GDP per capita at purchasing power parity as the entire country of Russia in 2025. 6 6. India's economic geography in 2025: States, clusters, and cities, October 2014. Cities like Delhi are a sweet spot for car manufacturers to target.
In the future, these macroeconomic and demographic trends could shift pockets of growth in passenger-vehicle market. Mini cars and hatchback cars have been the mainstay for the automobile industry in India, with share around 50 percent and growth of 6 to 7 percent between financial year 2014 and 2017. These segments will continue to maintain a dominant position, but the majority of growth is expected to come from new segments such as compact SUVs, sedans, and luxury vehicles.
Through the Automotive Mission Plan, the National Electric Mobility Mission Plan (NEMMP), and other initiatives, the government seeks to achieve two objectives—facilitate long-term growth in the industry and reduce emissions and oil dependence.
In the Automotive Mission Plan 2026, the government and industry set a target to triple industry revenues, to $300 billion, and expand exports sevenfold, to $80 billion. To meet these aims, it is estimated that the sector could contribute more than 60 million additional direct and indirect jobs, and the result could be improved manufacturing competitiveness and reduced emissions.
To tackle emissions, the government seeks to bring local standards up to par with global standards, enabling India to leapfrog from BS-4 to BS-6 emissions (the Euro 6 equivalent) by 2020 (Exhibit 1). Additionally, India has implemented Corporate Average Fuel Efficiency norms in which the manufacturers have to improve their fuel efficiency by 10 percent between 2017 and 2021 and by 30 percent or more from 2022.
Additionally, to address pollution from old vehicles, the government is working on an initiative that focuses on formulation of end-of-life or scrappage policies. It plans to give incentive for the adoption of these policies with the help of lower taxes, discounts on purchase prices, and simple compliance processes.
To reduce dependency on oil imports, the government is promoting adoption of alternative fuels through FAME2, which is an extension of the original FAME (Faster Adoption and Manufacturing of Hybrid and Electric Vehicles) initiative. Where “FAME1” offered incentives to electric vehicles (EV) and hybrid EV buyers, FAME2 is expected to incentivize electrification of the public-transport fleet of buses and taxis, as well as facilitate demand for all types of alternative fuel. Furthermore, to enable immediate adoption, a lower goods and services tax of 12 percent is applied to battery electric vehicles, compared with 31 to 48 percent for other vehicles.
The World Economic Forum ranks India 30th on the global manufacturing index, which assesses the manufacturing capabilities of more than 100 countries. The government’s “Make in India” initiative has played an important role in elevating country’s position. In the past three to four years, India improved on nine out of ten parameters for ease of doing business.
Would you like to learn more about the McKinsey Center for Future Mobility?Although there is still a long way to go before India becomes a leader in the manufacturing arena, companies in the automotive sector are embracing this opportunity to leverage India as a hub for low-cost, high-quality products. After creating a strong value proposition in mini cars, India is gaining global recognition in the compact sedan and SUV category.
The global automotive industry is undergoing a cascade of disruptions that will reshape it in unexpected ways, and India will be no exception to this. Four key trends will shift markets and revenue pools, change mobility behavior, and build new avenues for competition and cooperation.
Electrification. Electrification has just started to take off in India (Exhibit 2). Factors such as declining prices of batteries and supportive policies from the government are stimulating the segment’s growth. In 2017, only 2,352 units of electric vehicles were sold. 7 7. Electric Vehicles World Sales Database, ev-volumes.com. However, early signs of growth are visible through an order for 10,000 electric vehicles by the government’s energy-service company known as Energy Efficiency Services Limited. Likewise, local governments in ten cities, with populations of one million or more people, have placed orders for 390 electric buses during phase one. In the next phase, the order book is expected to be in the range of 1,000 e-buses. 8 8. Department of Heavy Industries, Ministry of Heavy Industries & Public Enterprises, Government of India, http://dhi.nic.in.
The pros and cons of electrification continue to evolve. Reduction in emissions and less dependency on oil imports are clear advantages of electrification. The level of adoption of electric vehicles will determine its impact on the automobile industry. According to industry experts, people carriers like buses, two- and three-wheelers, luxury passenger vehicles, and light commercial vehicles could see maximum penetration by 2030. This will be followed by other passenger vehicles, medium- and heavy-commercial vehicles, and construction equipment, which will take longer for EVs to penetrate (Exhibit 3).
From a customer point of view, the value proposition of electric vehicles will be reduced total cost of ownership, particularly in applications where asset utilization can be high. India is yet to see mass-market EV platforms, but both incumbents and new entrants are making efforts and the inflection point of volume growth may not be too far out.
However, this trend requires careful planning and execution, as there are certain risks associated with it. These include dependence on China for raw material, competitive disadvantage in power electronics and battery manufacturing, and lack of infrastructure—for example, there are fewer than 1,000 charging stations in India. Moreover, many consumers remain wary of electric vehicles because of the cost, range anxiety, and lack of options.
Shared mobility. Penetration of shared mobility in India remains low compared with China and the United States, but a major shift is under way in densely populated cities where the use of e-hailing cabs costs less, comparatively, than driving a personal car. Major stakeholders from the government to automakers to venture-capital funds and cab aggregators agree that the industry will continue to grow, becoming a significant alternative to commuting in growing urban areas. For example, two of the major cab aggregators covered 500 million trips together in 2016; that number is expected to rise with innovative models like cab-pooling and pay-later options.
The pace of this change likely depends on three main triggers: first is asset utilization, where cab aggregators’ ability to sweat their assets will determine their ability to expand and offer more competitive rates to customers while letting drivers earn. Second, clarity in regulations will simplify compliance and encourage more people to join the movement. Third, several cities in India are investing heavily to upgrade their transport infrastructure. This is not just limited to building metros in big cities. The role of shared-mobility players will evolve as transport infrastructure becomes mature. At the moment, rides and driver incentives are funded by private capital, which makes the model economically viable. It will be important to see how the industry fares once private capital dissipates.
Connected vehicles. Connectivity is still in the early stages of adoption in India. A minuscule share of vehicles sold in India come with factory-fitted connectivity features, but the mass adoption of smartphones, coupled with low data costs, could enable connectivity features to proliferate.
There are several connectivity-linked applications that are picking up in India. Basic in-car entertainment, navigation, and in-car connectivity (for example, through Bluetooth) have evolved rapidly over the last decade. More advanced telematics features that utilize car sensor data, driving behavior, and vehicle-health parameters are also evolving, particularly with aftermarket solutions. Several start-ups are leveraging this data coupled with proprietary hardware and algorithms to build solutions centered on improving safety and security, tracking vehicle activity or theft, monitoring and influencing driver behavior, and enabling timely repairs and maintenance.
Car connectivity also leads to several risks around which protocols and guidelines are at very early stages, not just in India but also globally. Data security, privacy concerns, cyberthreats are new challenges that vehicle connectivity creates. Moreover, car connectivity affects not just OEMs but also several ecosystem players, including insurance companies, telecom operators, and technology companies.
We see some early signs of adoption visible in the ecosystem. For example, one major vehicle-insurance player in India offers discounts on premiums if the vehicle has an antitheft device. Several automakers have recently introduced connectivity features, including infotainment, navigation, and communication interfaces. IRDA, the insurance regulatory body, has also invited views on pay-as-you-drive insurance products that use telematics to affect premium prices.