Case study about the Foreign Direct Investment in the automobile sector in India.

1. FDI IN AUTOMOBILE SECTOR IN
INDIA
MAR ATHANASIOS COLLEGE FOR ADVANCED STUDIES TIRUVALLA
ACCREDITED BY NAAC WITH ‘A’ GRADE

3. PRE- INDEPENDENCE SCENARIO
• First assembly plant in Mumbai in 1928 by General Motors from US.
• Ford Motors Company 1930 in Madras and 1931 in Calcutta.
• Hindustan Motors in 1942.
• Premier Automobile in 1944.

4. POST INDEPENDENCE
• Government didn't gave high priority to Automobile Sector.
• Duopoly in passenger car manufacturing :-
Hindustan Motors and Fiat by Premium
• Cars were expensive.
• Poor Mileage.
• Volume of sales was slow.

5. INVESTMENT FRAME WORK
Import Substitution Phase (1947-1981)
Restriction of 25000 cars in a year
Resulted in:-
• Slow growth.
• Little Competition.
• Lack of technology.
• Industrial disputes.
• High Tariff barrier and import restriction.

6. Maruti Suzuki Era (1981-1991)
• 50-50 joint venture between Suzuki Motors and Maruti Udyog Ltd.
Revolutionary change in
• Technology.
• Supply Chain Management.
• Tariff Protection.
• 75% market in 1991.

7. POST LIBERALISATION (1991- PRESENT)
• Paved path to FDI in Automobile sector.
100% FDI was allowed, Manu. And import were made free which
resulted in
• Competition.
• Reduced Cost.
• Increased efficiency.

8. FDI IN AUTOMOBILE SECTOR
• Automobile sector accounted for 3.7 percent of FDI inflows in India
during April 2000 to December 2007.
• Increased competency due to reduction of import tariffs.
• Reduction from 30 per cent in 2001-2002 to 7.5 – 10 per cent in
2007-2008.

9. ADVANTAGES IN AUTOMOBILE SECTOR
• Availability of skilled manpower with engineering and design
capabilities.
• Huge domestic market with high growth potential.
• Rising income levels of target customers.
• Increased demands in new segments due to rapidly changing
lifestyles.
• Strong base for supporting industries such as auto components.
• Presence of strong industry associations.

10. INDIAN AUTOMOBILE MARKET
• Two wheelers had 75.13 per cent of market share followed by
passenger cars having 16.04 per cent, commercial vehicles with 5.05
per cent, three wheelers 3.78 per cent.
• Major domestic players were Tata Motors Ltd, Mahindra and
Mahindra Ltd, Hindustan Motors, Ashok Leyland etc.
• Foreign players include Maruti Udyog Ltd, Hyundai Motors India Ltd,
Fiat Motors, Ford Motors Ltd, General Motors Ltd etc.

11. FDI LIBERALISATION AND INDIAN AUTO INDUSTRY
• Growth of production capacity by the end of 1993.
• Highest growth of 30 percent in 2005.
• India is currently the fastest growing passenger car market.
• India has also become the key sourcing for automobile parts.
• Increased proficiency in understanding global automotive standards
and technical designs.
• Increased automation led to cost economies in production.

12. CONCLUSION
FDI in Indian automobile sector has resulted in:
• Investing substantially in increasing production capacities.
• Committing substantial resources in indigenous R&D.
• Forging strategic alliances in India and abroad so as to enhance their
competitiveness.
• Investing overseas by way of acquisition as well as establishing
greenfield manufacturing facilities.

14. 1. Critically evaluate impact of protectionist measures restricting
foreign direct investments in India’s automobile sector.
Import Substitution Phase resulted in
• Slow growth.
• Little Competition.
• Lack of technology.
• Industrial disputes.
• High Tariff barrier and import restriction.

15. 2. Find out the strengths and weaknesses of Indian automobile industry
under different frameworks of investment policy regimes.
STRENGTHS
• Domestic market is large.
• Government provides monetary assistance for manufacturing units.
• Reduced labour cost.
WEAKNESS
• Infrastructural setbacks.
• Low productivity.
• Too many taxes levied by the government increase the cost of production.
• Low investments in research and development.

16. 3. Identify and discuss the reasons that a foreign firm should invest in India
for manufacturing automobiles or its components.
• Availability of skilled manpower with engineering and design capabilities.
• Huge domestic market with high growth potential.
• Rising income levels of target customers.
• Increased demands in new segments due to rapidly changing lifestyles.
• Strong base for supporting industries such as auto components.
• Presence of strong industry associations.

17. 4. How did FDI liberalization contribute to Indian firm’s enhancing their
competitiveness?
• Investing substantially in increasing production capacities.
• Committing substantial resources in indigenous R&D.
• Forging strategic alliances in India and abroad so as to enhance their
competitiveness.
• Investing overseas by way of acquisition as well as establishing
greenfield manufacturing facilities.

18. SOURCE
Case: “FDI in automobile sector in India” – Page 533 – “International
Business” by Rakesh Mohan Joshi, 1st Edition, 9th impression, Oxford
University Press – New Delhi.