Investment with the availability of low cost labor

Investment by Foreign Car Manufacturers: India has seen significant amount of
FDI from the foreign origin car manufacturers over the last decade. In all, the
automobile sector has seen a cumulative Foreign Direct Investment (FDI) equity
inflows of US$ 8.217 Billion (` 38, 571 Crore) in this sector during the period of
2000 to 2013 which is nearly 4.32 per cent of the total FDI inflows in the country
and the portion of Passenger Vehicle segment accounts to more than 50 per cent
of the total inflows in Automobile Industry Sector (Department of Industrial
Policy and Promotion Statistics, 2013).
? Increase in Passenger Vehicle Exports: The economy is adversely affected due to
a falling rupee but it is proving beneficial as far as the exports are concerned. This
is being attributed as one of the reasons for growing exports in the sector. The
exports of passenger vehicles from India has grown with a CAGR of more than 20
per cent over the last five years and despite the slowdown in the economy during
the last one year the exports have still managed a growth of 9 per cent in 2013
with the manufacturers realizing the slowdown in European markets and
consequently developing the new ones (ICRA, 2011; and SIAM, 2013c). In recent
years India has become the export hub for several global automobile
manufacturers. Several large automotive players in India are investing
substantially in capacity expansion, establishing partnerships in India and abroad,
positioning India as an export center for vehicles and corporate intelligence, and
setting up R&D facilities and design capabilities (Ernst and Young, 2012).
? Low Cost and Cheap Labor: Cost competitiveness remains one of the key
characteristic of India with the availability of low cost labor and inexpensive
manufacturing capabilities it is a key attraction for the businesses. In particular,
India’s attractive labor costs can explain the phenomenal growth of its rapidly
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growing manufacturing sector including the automobile. Although India has
witnessed some increases in its labor cost, but it remains a highly attractive
destination for investors who struggle to find the same mixture of low cost and
high quality (Ernst and Young, 2012).
? Rising Middle Class and Disposable Income Levels: Rising disposable income
over the last decade have led to increased discretionary spending which in turn
have driven car sales during that period. In 2002, the per capita disposable income
was $399 (nominal)/$1,381 (PPP), when the sales started picking up. The car sales
have mostly followed the trends in per capita disposable income. Post 2002, the
per capita disposable income has seen a CAGR of 13 per cent as against a CAGR
inflation growth of 7 per cent which has resulted in a real disposable income
growth of 6 per cent. With the growth in per capita income and overall growth in
the economy the proportion of middle class households have also grown which
explains the popularity of smaller cars segments in India in the last few years
(Delloite, 2011).
? Expertise as a Small Car Hub: With the launch of world’s cheapest car “Nano” at
a price of US$ 2500, Tata Motors bought a revolution in the industry, not just in
India but even globally. Presently, in India there are 33 Small Cars (198 Variants)
with in a range of ` 8 Lakh that are manufactured locally and 7 Hatchbacks (13
Variants) in the luxury segment ranging from ` 20 to ` 40 Lakhs which are
imported as CBUs, on offer and comprise of nearly 80 per cent of the total car
sales in the country. With changing customer preferences towards small fuelefficient
cars, in the developed countries, it is clearly an advantage for the
developing nations. Every big automobile player in the world is ready to invest in
the Indian automobile sector, especially in the small car segment.