Carmakers Maruti, Toyota, Honda and others plan to invest Rs 11,000 cr to expand capacity, counter slowdown

 MUMBAI: Carmakers in India are passing though their toughest ride in a decade - sales dropped 7% last fiscal, capacity utilisationhas slipped to 60-65%, profit margins are down as companies bank on steep discounts and freebies to push sales. Yet, five carmakers plan to invest a total of Rs11,000 crore to build additional capacity for one million cars, or one-third of the current market size.

Maruti Suzuki, Ford, Honda, 
Toyota and Renault-Nissan have all lined up big expansion plans with their eyes on the long-term potential as well as competitive nature of the market although there is real fear of a glut if the market does not rebound in the near future.

"Our expansion is based on long-term projections," says RC Bhargava, chairman of market leader Maruti Suzuki, which is investing Rs 1,700 crore to increase capacity by 250,000 units. He, however, points out that the three-million-unit Indian car market needs to grow at least 10% a year to absorb an additional one-million units capacity. "The utilisation of new plants completely depends on which direction the market will move. If the market does not go up and demand does not improve, it can hamper companies with high cost of manufacturing," Bhargava says.

If Maruti Suzuki is building capacity to protect its market share, its Japanese rival
Honda looks to increase it by entering new segments to address 50% of the overall Indian car market up from its presence of just 10% now. Ford and Renault Nissan are building new capacity for exports while Toyota has both domestic and export markets in mind.


Industry experts, however, warn about huge idle capacity once the planned expansions go on stream if the market remains gloomy following a meagre 2% growth in FY12 and a drop last year. With installed capacity of close to 5 million units, the Indian passenger vehicle market currently operates at 60-65% of capacity, one of the lowest levels in the last five years.

"The auto industry is sitting on significant idle capacity at the moment,"
Deepesh Rathore, MDIndia at consulting firm IHS Automotive, says. The fear is that if the market does not take off in the immediate future, the 10-15 new launches from firms such as Ford, Honda and Renault Nissan may not really expand the market and instead eat into the existing models, he said.


V G Ramakrishnan, MD at Frost & Sullivan, South Asia, points out that slow offtake has already resulted into high discounts at the cost of margins. "Higher depreciation and higher cost of financing this investment will further put pressure on their profitability and overall margins," he says.

The compounded annual growth rate for the next 5-7 years is expected to slip 11-12% on a larger base and the margins to have fallen by several hundred basis points.



Deepesh Rathore of IHS Automotive, however, adds that such short-term worries do not affect long-term strategies. "Every automaker has its own long-term strategy - on expansions and new products and the short-term slowdown cant deter long-term aspirations," he says.

Jnaneswar Sen, senior vice-president (sales & marketing) at 



Honda Cars, says, "Tough times don't last forever. There is enormous growth potential in India."

The Japanese carmaker, which recently launched its first diesel car, the Amaze, plans to double its capacity in India to 240,000
cars by investing Rs 2,500 crore. Honda currently utilises just about two-thirds of its installed capacity in the country. But it is confident of using the entire capacity as it plants to be present in segments that account for half the total car sales in India with new launches.

Ford and Renault Nissan are expanding capacities despite using less than 50% now. They are betting on export markets to utilise their full capacity. Renault Nissan, which produced over 1.93 lakh units in fiscal 2013, exported over 50% cars made out of India. "We will reach our full capacity in 2014, we do have an opportunity to expand within the same plant," a Nissan Motor India's spokesperson says.

Industry experts say capacity utilisation of 85-90% in developed markets should not be treated as a benchmark for emerging markets like India because fluctuation in demand is an integral part of growing markets. They say 
carmakers don't want to commit the same mistake they did two years back when sales had plummeted. In 2009-10 when the demand soared, they were caught off guard due to production constraints.

"All of us were playing catch up then. Many of us were operating above 100% capacity to meet the demand," an industry official says. "In a highly competitive market, no company wants to lose customers to competition because of capacity constraint. So right now, there is a trade-off between controlling cost in the short term or being ready with capacity. And most companies prefer the later option," the person adds.

Sandeep Singh, deputy managing director and chief operating officer, marketing and commercial, at 
Toyota Kirloskar Motor, says short-term issues such as current marketcondition, demand and interest rates are important in decision-making, but they cannot be the deciding factors for long-term planning. "Sluggish market is certainly affecting sales and profitability. It will continue to be so in the coming months. However, this is just a temporary phase," he says.