Why are automobile manufacturers leaving India? Explained.

automobile manufacturers leaving India

Prologue
Buying a car is one of the most cherished desires of most people. In India, it is almost a life event – family, neighbours, colleagues, relatives, etc. everyone is excited. If it is your first car, it is an unmatched feeling of upgrading your life to the pro version! Many people recently experienced the same feeling except that a few days later their happiness converted into questions and doubts. On September 9, Ford Motor Company announced that it will be shutting down its car manufacturing plants in Gujarat and Tamil Nadu by Quarter 2 of FY 2022, as a part of its global restructuring. While the company has promised to provide its customers with spare parts and service, it is clear that Ford has made up its mind to leave India. The American manufacturer which entered India in 1995 and invested over USD 2.5 billion in India, employed 4,000+ people and 170 dealers, has accumulated losses of USD 2 billion over these years. The company which manufactures 4 lakh cars per year has left its customers, employees and dealers in shock, as their plans suddenly seem unclear. Surprisingly, the company has also announced a few weeks later that it shall build 4 new electric vehicle factories in America, generating huge employment for the American workers which could have been done in India as well where labour is cheaper. So what are we exactly missing here?

Backdrop
“Come, Make in India!” Back in 2014, when the newly elected Prime Minister Narendra Modi came into power, he announced his flagship programme – ‘Make in India’, as a part of India’s renewed focus on manufacturing. The objective was simple – the huge workforce of the country could benefit themselves if they turn into a manufacturing hub, something that China did long ago. The Government aimed to make India the most preferred global manufacturing destination, building our manufacturing capacity on four pillars – New Processes, New Infrastructure, New Sectors and New Mindset. As a part of the same initiative, various measures have been launched over the years including ‘Ease of Doing Business’, ‘Minimum Government Maximum Governance’, ‘Startup India, Standup India’ and ‘Skill India’. The government has well-marketed its initiative worldwide over the past years, and at times, even routine regulatory changes have been marked as being part of the same initiative.
Whether the same has boosted the prospects of our country in terms of globally preferred manufacturing destination, employment opportunities generation, innovations and product developments, advancement of the industrial technology and development of widespread infrastructure, is incalculable and at best, debatable, as only the future can tell us whether we were or not successful in the past. Some milestones tell us about the progress in our journey, however, India is a huge nation, and it is not possible to assess if the same has been consistently achieved in all sectors of the industry and all parts of the society. And most importantly, it is way more difficult to conclude whether we have progressed ‘exceptionally’ or ‘at just the normal rate’. However, there’s one sector which is clearly showing problematic signs – Automobiles.
Since 2017, six automakers have already left India – General Motors, Harley-Davidson, UM Motorcycles, MAN Trucks (Volkswagen Group), Fiat and Eicher Polaris; Ford is now seventh on this list. There’s no question over the need for automobiles in India – it’s a huge market, the fifth largest car market in the world. In fact, Kia Motors and MG Motors have recently entered the Indian markets with some really big ambitions. This leaves us with the question – why were the aforesaid companies forced to exit from India?

Complex Indian market and pricing
Unlike developed countries and other developing countries, the Indian economy is different, its challenges are uncommon and most importantly the consumer preference is unlike the rest of the world. What sells in the west, does not necessarily sell in India. Indian market consists of a large number of middle-class people who are price sensitive. And it’s not just about the sticker price of the vehicle – the mileage, the after-sales service, cost of replacements and the longevity of the cars are factors that affect the choice and preference of the Indian consumers. The government’s inconsistent policies and sudden move to BS-VI add more complexities to the same. These factors together often result in low volumes for cars that are already underpriced to lure the customers. Thus, the overall margins are wafer-thin and thus, the losses accumulate with the failure of each new model introduced.

Market share and dominance
Having said that the consumer preference is difficult to understand, a few companies have managed to understand the market well and it shouldn’t be a shocker that these are Indian automakers. India’s car market is dominated by Maruti who has managed to understand the expectations of Indian buyers and grab a major part of the market share. Hyundai, Tata, Toyota, Mahindra, Honda and Renault are amongst others who have managed to keep a pie of the market for themselves. Kia and MG have also gained a lot of attention as new entrants. On the contrary, Skoda, Volkswagen, Jeep+Fiat, Force, Citroen and Ford are amongst manufacturers who may have to decide on their future – Ford has already made!

Pandemic and the aftershocks
Pandemic has hit multiple industries and the automobile industry has been one of them. Incomes have been deeply affected and thus, personal expenditure cut has resulted in lower sales of cars. Of late, there has been a recovery in the sales figures, however, there have been setbacks in between owing to new waves. Before the pandemic, Ford had agreed with Mahindra and Mahindra to enter into a joint venture to launch Ford Escort, however, the same was never executed after the pandemic. Passenger vehicle sales have dipped by 2% in the last financial year which has pushed back various industry segments.

The future – Electric vehicles
After the success of Tesla, globally automakers have been moving towards the new market, and why not? the existing market is full of competition while the new market is full of opportunities, huge prospects, no close competitors and multiple untapped segments. Companies across Europe, the United States and even Japan have entered the uncertain phase of reinventing themselves. Ford has already announced its ambitions of entering into electric vehicles, within weeks of its announcement of exit from India. General Motors and others have already entered the race, while Toyota has also moved away from its earlier thoughts of hybrid cars, to launching fully electric models. The times are changing and so will the companies, as time and tide wait for no man!

The impact
In the automobile industry, if one direct employee is removed, it means at least 3-4 indirect employees would also lose jobs. Automobiles have several parts and specifications which automatically generates opportunities for various small and medium-sized enterprises to manufacture and progress. However, these MSMEs deeply depend on the contracts with such automakers and their exit is a huge blow for such enterprises. And of course, the employees of all such enterprises turn jobless automatically. Only if another automaker buys Ford’s plants and continues to operate the same, for their models, the industry would not face the heat of the company’s exit.
India was once the third-largest car market, however, now it has slipped to the fifth position. There’s certainly a very uncommon consumer preference, however, at the same time, the economy and the policies haven’t been of much help to counter the same. Most companies are working their way around – Volkwagen has let Skoda lead its India charge, Toyota is piggybacking Maruti Suzuki for volumes rather than bringing its range of models. Besides, the world is moving towards electric vehicles. Something needs to be done, as change is not just a makeshift process, but also an opportunity to turn the tables – with the right policies in place, infrastructure and the motive to grow, maybe we can lead the globe with dominance in the future of automobile sector by staying ahead – we have been behind already for a very long time!
Endnotes.

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