Owning a car is one of the top priorities that is immediately equated to a wealthy standard of living in most Indian households and it is not a surprise that the country holds the space for being the 5th largest market in the world for automobiles.
There is no inadequacy of cars on Indian streets, directly contributing to air pollution and immense traffic. Incentives to make more cars for residents also was increased by the NDA-II government’s Make In India campaign initiated in 2014 aimed to convert India into one of the biggest global manufacturing hubs.
Regardless of these stimulants, many major companies - Ford, Harley Davidson, General Motors, Datsun (Nissan sub-brand), etc., have reeled back from the Indian market. A variety of reasons ensure these decisions. Some of them include;
The demonetization policy that was implemented in the year 2016 harmed the manufacturing industries on a large scale. It was a classic effect that followed the problem of lack of money supply in the economy due to newly printed currencies that were unavailable in commercial banks and even the RBI. The lack of cash or money with the people reduced their capacity to purchase cars, especially the luxury ones.
This derailed consumer demand significantly and forced the producers to cut down on the supply side to prevent manufacturing losses. A decrease in output led to an increase in unemployment, affecting the entire economy and automobile industry altogether.
Goods and Service Tax
Next was the issue with the introduction of GST by the government in the year 2017. The GST levied on automobiles comes up to around 28%, especially levying the same rate for two-wheelers and high-end cars as well.
Along with compensation cess, the cess on certain goods imported into India to compensate States for the loss of revenue associated with GST, the effective tax rate on most vehicles touches 43%. We observe that the trend of exits began in 2017 with General Motors. The switch from BSIV to BSVI in 2020 further increased costs for manufacturers
BSVI engines are more expensive to manufacture, and the transition from BSIV to BSVI can cost companies 150-200 crores for each manufacturing unit. A government think-tank further proposed phasing out all diesel engines by 2030, and while the government later stated that no such proposal would be made, the environment remains changing and unstable.
The tax imposed on scooters or even low-end vehicles or cars is too high for the lower-middle class to afford and access transportation. It makes the situation worse for the industry during the pandemic since automobiles are 2nd class non-essential goods, making it much less likely that a consumer would spend their minimal savings on a car, thus immensely affecting the manufacturing situation.
The advent of Ola, Uber, Metros, and other shared transportation services also severely hamper the need for purchasing a vehicle of their own. These shared services are relatively cheaper, require no maintenance, do not demand EMIs, and are far more convenient to access. The increase in the usage of public transportation services also increased due to consciousness in controlling air pollution, especially since the alarming rates of smog found in Delhi in the last couple of years, forcing the government to impose restrictions on using cars on a daily basis itself. All of this reduces the demand for owning cars and thus constrains the manufacturing capabilities.
The complex market system and the pricing in India in comparison to other countries strongly influence the decision to desert the country’s manufacturing atmosphere. The Indian market consists of a large population of potential consumers who are from the middle class and are extremely price sensitive. This is not simply because of the sticky prices of the product itself but also due to the after-sale expenses incurred due to maintenance, repair, fuel, etc. Only very few companies are able to manage and decode consumer preferences.
In most cases, these companies tend to be based from India itself, like Maruti, Tata, Mahindra, Renault, etc. These sorts of companies tend to grab a large chunk of the market share, demotivating foreign companies to set up shop in the Indian automobile market.
One of the recent and successful explorations when it comes to the automaker industry is the introduction of Electric Vehicles by Tesla and the interest being picked up by Tata Motors as well. Although an Indian company shows interest in selling electric cars, it is not yet a feasible idea for the Indian consumer market.
The prices and the demand would constantly be indirectly proportional and it will grow harder for the manufacturers to reach equilibrium by supplying cars at cheaper rates while aiming to make profits. In 2020, Annual EV sales went down by -26% largely due to lockdowns.
This causes multiple companies to pour their investment into different venues of manufacturing in various other countries. A new market full of opportunities awaits these companies in comparison to satisfying the incomprehensible Indian market and it appears to them that it might be a wiser decision to quit India.
Effects on Jobs
This exit has clearly had a negative impact on the GDP as well as the people of the country. People now have fewer options to choose from, and multiple people have lost jobs due to this mass exit. More than 4,000 employees of Ford and 2,000 of Harley Davidson suffered directly due to the closure. It is noteworthy that in the automobile industry when one direct employee is removed, 2-3 people suffer indirectly as there are multiple micro industries that rely on the auto sector.
An estimated 64,000 jobs have been lost in the last 5 years due to automobile companies leaving the country. Micro, Small, and Medium-Scale Industries (MSMEs) have been affected on a large scale. There are around 500 small-scale enterprises that supply to three or four firms, resulting in a loss of up to 50% of orders due to Ford's decision.
India struggles to provide economies of scale to these companies – the cost advantages gained due to the increase in efficiency stemming from a larger production of goods, i.e., a greater scale of operation. Most automobile brands have failed to acquire market share even after substantial investment, and most plants in this industry operate at less than 40% of their production capacity.
Basically speaking, the Indian economy is not what they expected it to be. India was viewed as a highly untapped market, and the GDP was expected to show accelerating growth considering the demographic dividend in India’s high population (with around 12 million people entering the working-age population of 15-59 every year).
However, these assumptions did not prove fruitful, and the light vehicle market grew annually grew at a rate of only 2% when compounded annually between the years 2011 and 2019. Most people turned towards servicing and replacing old cars, and first-time buyers were gradually reducing in the market, according to Gaurav Vanghal, associate director at IHS Markit.
Additionally, the cost of owning a car has increased significantly, as well as fuel prices as well. In an already price-sensitive market, this further lowers demand.
We conclude that red-tapeism, unstable government policies, difficulty in acquiring market share, and a disappointing Indian economy are the prime reasons for automobile companies leaving India. The little understanding of foreign companies of Indian culture and the demands and needs of the consumer base in a price-sensitive market that does not provide economies of scale make the endeavor unfruitful.
More: Slideshow on Why Major Automakers leaving India