Driving Through BRIC Markets Lessons for Indian Car Manufacturers
December 2011 www.deloitte.com\in

ons for Indian Car Manufacturers

Contents
Executive Summary Introduction Overview Brazil Russia India China Conclusion Appendix Sources Contacts 4 6 7 10 15 19 24 29 31 33 34

Executive Summary
The BRIC block has emerged as the economic power house of growth for the automotive industry through the last decade. What started as an exploration of new/extra markets for car sales in the early 90s has gone on to become the mainstream market of the new millennium. Supported by attractive macro-economic factors such as growing economic activity, urbanization, rising household incomes, developing credit markets and very low car density, the BRIC countries currently make up for the top 7 automotive markets globally. The BRIC block has been strongly growing for over 10 years; with 3 of 4 BRIC economies surging ahead even during the 2008 economic crisis. So that prompts us to ask how the dynamics have transformed over the years. What were the major drivers of growth in car sales in the last decade and into the future? Is the current slowdown a blip or is it here to stay? More importantly, what does the growth dynamics in China, Brazil and Russia mean to the Indian automotive market? We offer our perspective on the impact of macroeconomic factors on car sales in the BRIC block between 2001 and 2011. Below are the key findings of our analysis: 1. Car sales in Brazil, Russia, India and China grew at a CAGR of 8.8%, 5.7%, 14.5% and 34.3% respectively as against a globalcar sales average of 4.0% between 2001 and 2010. 2. In 2011, weak macro-economic conditions in Brazil and India resulted in the slowdown of car sales. On the other hand, China continued to exhibit attractive macro-economic conditions but sales were impacted by government measures. Russia sustained its growth momentum as government incentives continued for most of 2011. 3. India and Brazil have the highest player concentration with 4 and 5 players contributing to around 80% of market share respectively. Going forward, these markets are expected to actively accommodate more players for the same share. 4. Hatchbacks have a 60% market share in Brazil and India unlike China and Russia where sedans or SUVs dominate. The domination of relatively low household income groups (of category $3,000 $10,000) in India coupled with the government's inclination to promote small cars through special tax measureshave resulted in hatchbacks becoming thepreferred choice amongst a majority of consumers. Road ahead will be characterised by transitions to higher household incomes that could result in surging demand forrelatively larger/pricier cars or second cars in India, in addition to the sustained demand for smaller cars. 5. The inflection points observed in car sales and identified by the higher growth in sales than the increase in prices (inflation rate) were: − In India the sales started picking up from 2002 when the per capita disposable income was $399 in nominal terms/$1381 in Purchasing Power Parity (PPP) terms. For Brazil & China, sales started picking up since 2004 when per capita incomes were $2320(nominal)/$5260(PPP) and $698 (nominal)/$1691 (PPP) respectively. Since then car sales have not been majorly affected by rise/decline in parameters such as inflation, interest rates and fuel prices. 6. In Brazil and Russia,household income groups with income > $5000 were the key drivers of car sales. This was $3000 and above household income groups in the case of India and China. However, China's car sales in the coming years will be strongly driven by $5,000 and above household income groups. 7. Urbanisation has been a major driver of car sales in BRIC through the decade. While current urbanization levels of 30% and 48% in India and China respectively are likely to continue driving sales, further urbanization in Brazil is unlikely to drive car sales in the coming years because of its higher urbanisation levels (87%). China's reported effort to control car sales in tier 1 cities will result in

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increased effort by automakers to aggressively penetrate lower tier cities 8. Unusually, average age of population as a growth driver of car sales in India is less prominent a factor as compared to other macro-economic parameters such as disposable income, urbanization, and car density. The sheer magnitude of first time car buyers subdues the impact of average age on car sales. 9. Fuel prices have hardly impacted car sales trends in the BRIC block. However, going forward, it is expected that governmentpolicies and measures will play a significant role in powertrain and technology choices for cars sold in the BRIC block. Automakers in Brazil have already adapted to flex fuel powertrain technologies and it is likely that similar trends will be followed in China (hybrid, EVs) and eventually in India. Deregulation of fuel prices (petrol) in India have already resulted in diesel to petrol car sales ratio increase to 45:55 (from 23:77 in 2005) in 2011. 10. The key takeaways from the regression model were: − Brazil: the top 3 individual parameters influencing car sales were Per Capita Disposable Income (PCDI), average age and lending rates. A positive impact is observed on the sales of cars by both PCDI and average age. Lending rates have a negative impact on the sales of the cars − India and China: the top 3 individual influencers with about 90% confidence level were car density, per capita disposable income and urban population. Sale of cars is impacted positively by all these three factors.

Lessons for Indian Car Manufacturers | 5

Introduction
The automotive industry CEOs are often confronted with situations where they have to make decisions involving hundreds of millions of dollars. In most cases, they are required to commit investment dollars into markets that may be growing but are highly competitive or where the present growth looks attractive but questions loom large about sustaining volumes. As difficult as this may seem, not committing to investment may mean loss of opportunities and future cash flows and the cost of waiting could turn out to be higher. To make sense of the high growth markets and provide some insights into what may be driving demand for passenger cars, we have tried to correlate some key macro-economic variables with the sale / consumption of cars in the BRIC countries. We have attempted to compare and contrast the particular drivers that determine the growth of car sales. We trust the accompanying data and analysis that are presented would be useful to the reader in understanding the BRIC markets. Further, we believe the understanding of demand drivers in these countries will help companies in making informed decisions in the future of the Indian market rather than go with just the buzz. Research Methodology: • The Macro-economic variables considered for analysis are: Inflation; Per Capita Disposable Income (PCDI); Global Crude Oil Prices; Lending Rates and Household Income groups. Only significant parameters from our initial analysis were used as factors for regression. Parameters used in the regression tests: Urban Population; Car Density; Average Age; Lending Rates; and Disposable Income.

•

Note: all ‘$’ symbols in the report refer to USD.

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Overview
With the economic slowdown and recession in 2008-09, sales of cars plunged globally, except for a few emerging markets like Brazil, India and China. Hence, for global automobile players, it is imperative to buy some exposure into these emerging and rapidly growing markets. Besides offering an avenue for growth, the emerging markets can also help the automobile players to insulate themselves from the cyclicality of the global auto industry.

Growth Trends in BRIC Automotive Market:
Car production in Brazil, Russia, India and China recorded a CAGR of 7.3%, 1.9%, 17.6% and 39.3% respectively between 2001 and 2010. The share of production of Brazil, Russia, India and China has risen at a great pace throughout the decade, from 11% in 2001 to 36% in 2010.

FIGURE 1: Market Share of the BRIC Countries for Passenger Car Production
Brazil 4%

2001

Russia 3%

India 2% China 2% South Korea 6% Mexico 2%

Brazil 4%

2005

Russia 2% India 3%

China 7% South Korea PCP*: 46.8mi 7%

PCP*: 39.8mi

Mexico 2% Rest of world 81% Rest of world 75%

Brazil 5%

2009

Russia 1% India 5%

Brazil 5%

2010
Russia India 2% 5%

PCP*: 47.6mi
China 22% Rest of world 58% South Korea 7% Mexico 2% Rest of world 55% Mexico 2% South Korea 7% China 24%

PCP*: 58.2mi

*PCP – Passenger Car Production

Source: OICA, Deloitte Analysis
While the share of India has more than doubled and that of China has grown twelvefold, Brazil’s share has remained steady in a market where the rest of the world lost its market share. This is representative of the inherent growth potential that Brazil, India and China offer in passenger car production. On the other hand, Russia lost its market share in passenger car production primarily due to the slowing growth rate in car production as compared to its BRIC counterparts.

Lessons for Indian Car Manufacturers | 7

Sales of passenger cars
Passenger car sales indicate a similar trend as seen in the production. FIGURE 2: Passenger Car Sales in BRIC

Car Sales in Millions

16 14 12 10 8 6 4 2 0 Brazil 2001 2005 2009 2010 2011E 1,197,700 1,369,200 2,474,600 2,644,700 2,783,000 Russia 1,401,000 1,762,000 1,465,700 1,910,600 2,438,000 India 675,120 1,143,100 1,977,000 2,520,000 2,596,034 China 754,000 3,774,800 10,171,000 13,911,000 15,003,000

The BRIC economies have been characterized by factors such as high economic growth; rapidly rising income levels; urbanization and very low per capita car consumption. These factors coupled with a slew of government measures in support of the domestic auto industry have accelerated growth of car sales in the region for over a decade now. China and India registered double digit CAGR in GDP (13% and 10% respectively) between 2001 and 2010 and have also emerged as the most favoured low cost destinations for global car production. On the other hand, Russia and Brazil with an above average GDP growth through the decade (7% and 6% respectively) are homes to greater number of middle income households with higher disposable incomes.

2011 In Perspective: A Slowdown
After a decade of growth and a strong post economic crisis recovery in 2010, three of the four BRIC economies seem to have apparently lost the growth momentum. Growth in car sales in Brazil, India and China has substantially slowed down compared to their respective CAGR and 2010 growth figures. FIGURE 3: Car Sales Growth in the BRIC Markets

Sale s Gro wth

40% 35% 30% 25% 20% 15% 10% 5% 0%

35%37% 30% 28% 27% 14% 9% 7% 5%
Brazil

6%

3%
India 14% 27% 3%

4%
China 35% 37% 4%

Russia 6% 30% 28%

CAGR (2001-2011) 2010 Growth 2011E Growth

9% 7% 5%

Source: OICA, EIU

One of the significant reasons for the slowing down could be attributed to the roll back in late 2010 of a number of incentives provided by the governments in each of the BRIC countries - after all such incentives

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were introduced to provide the fillip for the automotive industry to meet the recession. Countries like China and Brazil have also imposed newer/reinstated pre-recession period taxes that have resulted in higher buying prices. India and Brazil have also tightened credit markets by increasing lending rates to contain inflation. Russia, on the contrary, is the only market to be sustaining a high growth rate in 2011 and this is because of the continuation of government incentives to the auto sector. However, growth levels of 2011 is unlikely to keep pace with that in the past in the upcoming years as the Russian market is also likely to feel the effect of rollback of incentives between 2011 and 2013. However, on a positive note, the trends reflect the reality situation in each of the economies. It needs to be looked favourably for having registered a growth post a period that was heavily incentivized/subsidized by various governmental policies and schemes. Critical Reasons Behind the Slow-down of Car Sales in B(R)IC: Brazil • Tightening monetary policieson concerns of credit defaults Hike in interest rates& down payment options Slowing Economic activity Inflationary pressures Raise in industrial production tax for cars with