Harley to GM, India's auto market remains elusive for most global firms

Even as the fundamentals that attracted companies over the past two decades remain intact, a sputtering economy has stalled these grand plans
India’s automobile market has been nothing short of an enigma for global auto companies. Over the last three years, at least three global brands — Harley-Davidson, being the latest — were forced either to exit or scale down their operations. This is the very same market that, till a decade ago, promised much with its demographic dividend, low car and two-wheeler penetration and a growing economy.

Even as the fundamentals that attracted companies over the past two decades remain intact, a sputtering economy has stalled these grand plans. If that wasn’t enough, policy flip-flops, an unviable tax structure, and the introduction of a slew of regulations in a short span of time have also thrown a spanner in the works.

Last fortnight, a top official at Toyota Kirloskar Motor flagged the high taxation structure and pitched for a rate cut. Under the Goods and Services Tax (GST) regime, taxes on automobiles in India are among the highest in the world, attracting duties up to 50 per cent. This includes 28 per cent GST and a cess that varies from 3-21 per cent depending on the fuel type, engine size and vehicle length.

“It’s extremely tough to do business in India,” a top official at an auto company said, attributing it to a high taxation structure and frequent policy changes. The differential taxation on small cars and large ones have been impeding volume growth, he said.

Car sales plunged 18 per cent in fiscal 2020, the lowest in a decade. Motorcycle and scooter sales in the world’s largest two-wheeler market also skidded 18 per cent — sales were the lowest in four years. The crisis unleashed by Covid-19 has worsened the plight of all those on the fringes. Year-to-date, passenger vehicles sales have halved to a year ago period.
So, what is common to Harley-Davidson or General Motors that decided to quit India? What unites Ford, which took a call to “hedge” its India bet by ceding majority control to Mahindra & Mahindra, and Toyota Kirloskar Motor, which found itself on the wrong side with policy-makers when Shekar Viswanathan, its whole-time director and vice chairman, called the country’s tax structure unviable?

The common factor is that none of these auto-makers have managed to sweat their investments because asset creation far outstripped demand. It didn’t help that the slowing demand in India coincided with the changed priorities at the global headquarters. The exit of Harley and GM and Ford’s scaling down was part of these companies’ global re-alignments. On its part, Toyota Kirloskar, with only a third of its capacity utilised, has shelved further expansion in the country.

Take the case of Harley. The iconic motorcycle brand, which rode into India in 2011, set up an assembly facility in Bawal in Haryana. Subsequently, it started manufacturing the Street 750 and 500 models, the cheapest in its line-up with the idea of clocking higher volumes — 10,000 annually — and address both domestic and exports market. But demand didn’t take off. On the contrary, it only undid its carefully crafted image with niggling quality issues culminating in recalls.

“The step-down Harley didn’t go well with the buyers and diluted its brand equity. That was the beginning of the end for Harley in India,” said an auto analyst.

Ravi Bhatia, managing director and president at JATO Dynamics, a consulting firm, said most companies created capacities after taking into consideration the forecast for growth and purchasing power capability. “Most of these decisions were taken when the forecast was looking very good. In the last few years the purchasing power of buyers has taken a hit and is not in line with the capacity created. This has forced companies to take drastic steps.

India’s top two carmakers, Maruti Suzuki India and Hyundai Motor India, corner over 70 per cent of the market. The only other company that is showing initial signs of success is Kia Motors. With just one model, Seltos, Hyundai’s sister company carved out more than 5 per cent in its first year in India. It now has close to 8 per cent share and recently launched another vehicle, the Sonet, and before that a premium MPV, the Carnival. But such instances are few and far between.

A high cost structure, which includes indirect tax, and a high ownership costs have weighed on companies. While GM and Ford were forced to take radical steps, others, including the local arms of Nissan, Renault, Honda Cars and Volkswagen, have failed to capture even 5 per cent market share despite being in India for several decades.

Kavan Mukhtyar, partner and leader, automotive at PWC, said there is more to it than just taxation. “Despite the high taxes, the growth outlook is quite positive. Vehicle ownership is still a luxury in India, especially in cars, and therefore it will tend to be taxed higher. But that can’t be the bottleneck for growth. Of course it will help if taxes are lower.” According to Mukhtyar, it has also got to do with the price-value equation and the models that companies offer.

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