Baby you can drive my car

The Marketing Times car showroom at Savitri Commercial Complex in South Delhi is bustling with customers, even on a weekday. The Maruti Suzuki outlet is hurriedly taking orders for the festive season and several customers are testy that deliveries could take over a month. The scene is no different a few kilometres down the road on Delhi's Mathura Road at Nath Nissan where dozens of new Nissan Micras are parked at the dealership for delivery.

Up and down the country at various dealerships, no matter which manufacturer's brand is on the signboard, times have never been better. Discounts? Salesmen will laugh in your face if you mention the word. The high growth of the Indian automotive industry is not without its own set of problems. The most obvious is factories choking on demand - despite new capacity coming up rapidly at carmaker premises dotting the country.

The Renault-Nissan combine has put up a 400,000 unit-a-year plant outside Chennai, which only recently started production of the new Micra. At General Motors' new factory at Talegaon outside Pune, the carmaker has "just added a second shift to keep up with demand," explains Karl Slym, Managing Director, GM India. Toyota Kirloskar Motors has brought forward the expansion plan for its factory at Bidadi outside Bangalore.

A chunk of Suzuki Motor Company's Rs 1,300-crore fresh investment in Maruti Suzuki India will go into adding capacity of 700,000 cars by 2013 to a factory that already rolls out one million cars a year. With total Indian passenger vehicle sales expected to cross two million units for the first time in 2010-11, according to JD Power and Associates, a market tracking agency, the increase in capacity is just about enough to keep up with burgeoning demand. So much so that India's position as a global small-car hub, which has ambitions to cater to demand from as far as Marrakesh to Monte Carlo, is under threat. Not from a lack of overseas demand - but from too much domestic demand.

That demand is alive and kicking even at a time when banks have had little option but to hike lending rates. After all, since April 2009, the Reserve Bank of India (RBI) has increased repo rates by 1.25 per cent in a bid to curb inflation. The repo rate is the rate at which banks borrow money from the RBI. But, as Arvind Saxena, President, Hyundai Motor India Limited (HMIL) explains: "Banks are lending again and interest rates for car loans have only increased by 1 per cent or so at the most."

So what explains the buying binge? Answer: Pent-up demand after a slow 2009, points out Saxena. Example: the Hyundai i20. HMIL has been forced to stop exports of 4,000 or so i20s that it would ship every month from India, with its parent moving that production to Turkey. "We are selling 7,000 i20s a month right now in India. Did I believe such numbers were possible a year ago? No," says Saxena.

But is the increased demand also a sign of how buoyant India's informal or "black" economy is doing? Vikas Sehgal, Partner at Booz and Co., certainly believes so. "I think this (black) economy is growing at close to 20 per cent, and that is the reason high-end car sales are booming. That said, India will maintain its 'pyramid' structure of car sales, with mini and sub-compact cars still dominating the market."

For the beleaguered US car makers, the growth in India is just the kick-start they needed. Ford Motor Company and General Motors entered the Indian car market soon after it was de-licensed in 1993, but have been unable to break through in a big way. Until recently. Ford introduced its first small car in India, the Figo, earlier this year, and sales - of some 50,000 units since launch in March - have surprised even Michael Boneham, the Australianborn boss of Ford India.

"There is so much latent demand for cars in India which, despite the seeming infrastructure problems, is pleasing," he says. So pleased is Ford with the success of the Figo that it plans to introduce eight new cars in India over the next five years - compared to the six it launched in its first 15. Others are following Ford into the small car segment after blissfully ignoring it even as Maruti went on to corner that market with an array of offerings. Toyota's new Etios, the world's biggest carmaker's first small car in India, is expected to be launched later this year and Honda's yet-to-be named small car is gunning for a mid-2011 launch date (see our feature on new launches, New Metal).

Both products were extensively developed using Indian engineers, hoping to ride on the tailwind of Maruti's Swift. Six years after launch, the Maruti Swift remains one of the topselling cars in India, moving more than 11,000 units every month. The Swift was one of the first cars in India with local design inputs - 30 engineers spent over two years at the Hamamatsu Suzuki headquarters. As Maruti plays a bigger role for Suzuki, the Japanese parent is spending Rs 250 crore on an engineering centre at Rohtak in Haryana, which should come on stream by 2011.

But designing an India-focused vehicle is easier said than done. Ask the President of Mahindra & Mahindra's automotive division, Pawan Goenka, a long-time veteran of General Motors who returned to India in the early 1990s, and then went on to lead the development of the Scorpio SUV. Nine years after the vehicle hit the roads and M&M developed the follow-up Xylo, the M&M automotive head still faces challenges in finding good people.

"It is not as bad as it once was, but still many millions of young engineers enter the computer science field. On Day Zero recruiting drives, the financial firms still get top billing," he says. But the scenario is slowly but surely improving, with "a new-found enthusiasm among engineers to work for automotive projects," he adds.

The trend is early but catching on. General Motors is doing far more highend technical work at its captive centre in Bangalore, and other companies have outsourced key development work to Indian vendors, from engineering to automotive computerisation, points out Sehgal, the Booz & Co. partner.

Yet, if India is to become a true global car manufacturing hub, engineering skills and resources will need to be dramatically ramped up as well.