TOKYO MOTOR SHOW

Carmakers look to emerging India to drive sales

by Kaho Shimizu

With the 40th Tokyo Motor Show officially opening Saturday, Japanese automakers are hoping the biennial event will encourage visitors to buy new cars and help curb the domestic sales slump.

The show, however, is expected to do little to stimulate the sluggish market, which is near saturation.

Well aware of the tough conditions at home, Japanese carmakers, especially Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., have successfully expanded market share in the United States at the expense of their American rivals.

However, given the uncertainties over the U.S. economy amid the lingering subprime mortgage crisis, the big Japanese players are increasingly turning to emerging markets to reduce their dependence on North America.

India, with its rapid economic growth and 1.1 billion people, is looming as the next market with huge potential after China.

Car sales in India, including commercial vehicles, doubled to roughly 1.75 million in 2006 from the 2002 level. The car market is seeing double-digit growth annually and is expected to reach 2 million units by 2010 from 1.3 million in 2006.

“The Indian market has been growing in leaps and bounds and it is attracting” many automakers, said Christopher J. Richter, a senior analyst at Calyon Capital Markets Asia B.V.’s Tokyo Branch.

“But the maker with a big lead is Suzuki, controlling more than half of the (car) market.”

India is a unique overseas market because small autos hold sway. Minivehicle maker Suzuki Motor Corp. is by far the biggest automaker, and it continues to demonstrate its strength built on its long history in the country.

In business 2006, Suzuki sold a record 635,000 vehicles in India, up 20.4 percent from the previous year, controlling about 55 percent of the market.

Toyota, which sells the Corolla sedan there, and Honda, which sells the Civic and Accord sedans, began local production nearly a decade ago but have yet to capture the hearts of many Indian drivers because their products are larger and more expensive than Suzuki’s.

“India is the country where Toyota has not been successful,” said Koji Endo, a senior analyst at Credit Suisse Securities (Japan) Ltd. in Tokyo, citing Toyota’s higher cost structure compared with that of Suzuki.

The Shizuoka-based minicar maker’s Indian market debut dates back to the early 1980s. In those days, no foreign-run automaker was there because of the country’s protectionist policy.

To foster India’s car industry, the government chose Suzuki in 1982 as a joint-venture partner for state-run automaker Maruti Udyog Ltd. , which was established in 1981. Maruti began manufacturing the Maruti 800, based on Suzuki’s old Alto minicar, in 1983.

That was around the time when other major Japanese automakers were beginning to expand into the U.S. market by setting up plants there.

“We had no financial power to follow suit nor did we have models suitable for the U.S. market, where large cars were popular,” Suzuki spokesman Yoichi Kojima said. “But we wanted to become No. 1 somewhere overseas, and that’s when we heard about the Indian government’s offer.”

Maruti, now owned 54.2 percent by Suzuki, has been pursuing the low-end market with cars powered by 800cc to 1.3-liter engines and priced 200,000 to 300,000 rupees (¥600,000 to ¥900,000).

Because auto ownership in India is still low — only about 2 percent of the population, according to analysts — Toyota, Honda and Nissan are also planning small cars to cash in on the increasing number of owners.

Toyota said it is developing a small, low-price model. Nissan, scheduled to begin local production in 2009 in a joint venture with Renault S.A. and a local partner, is meanwhile planning a $3,000 car, far cheaper than the Maruti 800, Suzuki’s cheapest model.

Honda also has aggressive plans for India to double its existing plant’s annual capacity to 100,000 units by the end of the year. In addition, Honda will invest $230 million to build a second plant with capacity to produce 60,000 small cars that will start up by the end of 2009.

Suzuki, on the other hand, is shifting gears and going upmarket.

In May, Maruti-Suzuki introduced the SX4 sedan powered by a 1.6-liter engine, the largest and most expensive in its line. With a sticker price of 600,000 to 700,000 rupees, it is two to three times more expensive than conventional models.

“Those people who have already owned cars will step up to buy upper-class models, so we’ll have to capture such demand,” Suzuki’s Kojima said.

But he added that the company will also have to continue attracting entry-level buyers by expanding its sales network to rural areas to reach out to customers who have been inaccessible.

To meet the growing demand, Suzuki is boosting production capacity. Last October, Maruti-Suzuki opened their second plant. Its capacity will be raised to 300,000 units in business 2009. A combined production capacity, expected to run at full steam, will be about 960,000 units.

“We are planning to launch one new model every year” to attract new customers, Kojima said.

Suzuki will have to fend off almost all the world’s major players to maintain its leading position in India.

“There’ll be more competition from other makers . . . and (Suzuki’s) share may go down slightly, but in absolute terms, their volumes could grow quite a bit,” thanks to the growing base of buyers, Calyon analyst Richter said.

Another important factor is that India is a market with thin margins, Richter said. Carmakers are targeting people who are just barely able to buy cars, and therefore, skills to develop small cars at low costs are needed to ensure profitability — a key hurdle for other automakers.

Suzuki “has a very much thorough organizational low-cost mentality and I think this is what turns into a competitive strength for them to operate in India, where being low-cost matters,” he said.