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Category: Business

Autor: anton 29 April 2011

Words: 3666 | Pages: 15

Table of Contents

Introduction 3

1 The Nature of the Automobile Market 4

1.1 China: 4

1.2 India: 5

2 The Country Situation in India and China 7

2.1 China: 7

2.2 India: 8

3 The Type of FDI to Further Minimise Risks 10

4 Conclusion and Recommendations. 10

5 Bibliography 13

6 Appendices 17

6.1 List of Tables: 17

6.2 List of Figures: 22

List of Tables

Table 1: Comparison of Key Economic Indicators in China and India 17

Table 2: China - Top 10 Manufacturers’' Sales Rank 17

Table 3: India - Turnover of Automobile Manufacturers 17

Table 4: India - Automobile Production (2001-07) 18

Table 5: India - Automobile Domestic Sales (2001-07) 19

Table 6: India - Automobile Export (2001-07) 20

Table 7 - FDI Inflow, by regions and selected countries (1994-2005) 21

List of Figures

Figure 1: China's growth surpasses that of India 22

Figure 2: China -YTD April Sales by Manufacturer 22

Figure 3: There will soon be more cars in India & China than the US 23

Figure 4: India - Domestic Market Share in 2006-07 23


The automobile industry in China and India increasingly showing rising importance in the global scale. Thus, both are gradually viewed as a serious competitor in the global automobile industry (Fairclough and White 2007). This report looks in depth in the automobile industry of China and India to try to come to a conclusion and recommended investment in the automobile industry.

The report looks at the nature of the automobile industry in both countries. This includes, market size, competitors and demand. Then we review the countries’ situation to review FDI policies, infrastructure, and risks. This is followed by recommended FDI strategy for further minimizing risks and comparison of China and India to recommend specific location of investment.

1 The Nature of the Automobile Market

1.1 China:

In 2006 the Chinese passenger car production exceeded this of the U.S. for the first time, churning out 5.2 million cars compare with 4.4 million in the U.S. Motor vehicle export also showed a significant rise as it doubled to 340,000 units in 2006 compare to 2005 (Simon 2007), (Ostroff 2007), (Automotive Resources Asia 2006). “During the first eight months of 2006 China's automobile production and sales both increased by some 25 percent over the same period of last year” (CHINA.ORG.CN 2006). Forecasts predict that output will continue to rise about 10% to 15% annually making China the world's leading maker of autos by 2011(Ostroff 2007).

China has an enormous market size due to its population of 1.3 billion (Table 1). In addition, China’s GDP was $2.2 trillion in 2005, placing it at fourth position in the world (Kwan 2006). In 2005, per capita GDP in China stood at $1,703 ranking china at number 81st among the 177 nations according to “Human Development Index (HDI)” (Table 1), which combines per capita GDP (in Purchasing Power Parity terms) with other factors such as life expectancy and education levels. In addition, China has witnessed a remarkable economic growth since 1979 which stands at an average of 9.7 per cent (Figure 1).

Researches show that Chinese consumer’s purchasing power has risen to $5500, which has historically been the level of car consumption in other markets (Chen 2005, 182). Guang and Wei (2003) stated that “China’s rapid economic growth provides a stable market and plenty of scope for rapid growth of China’s automobile industry”. The cancellation of many taxes and fees involved in vehicle trade in 2002 led in term for the increase in purchasing power of consumers. This provides enormous market potential for passenger car manufacturers in China (Guang and Wei 2003).

The Chinese automobile industry has more than 100 makers. However, only about 20 manufacture in relatively significant magnitude. This in term led to intense competition which affected the average car prices. In recent years prices have fallen about 7 per cent annually, and in the first quarter of 2007, they dived a further 5 per cent (Fairclough and White 2007). The top 10 manufacturers are: SGM; SVW; Chery; FAW-VW; Beijing Hyundai; Guangzhou Honda; Tianjin Toyota; FAW-TAIC; Geely; and Dongfeng Ltd (Table 2, Figure 2). These top manufacturers’ total sale accounts for approximately 83 per cent of the market share (CHINA.ORG.CN 2006), (Norcliffe 2006, 2).

The reduction in prices of automobiles effectively promoted and stimulated the demand for vehicles. This increased the number of consumers and triggered a sharp growth in sales (Guang and Wei 2003). The Chinese auto demand is expected to skyrocket in 2020. It is estimated that demand is expected to reach approximately 20 million units by then (Peoples Daily 2004). Schifferes (2007) stated that predictions are indicating that in the coming years there will be more cars in China than in the U.S. (Figure 3).

1.2 India:

In 2005, India had a population of 1.1 billion. While growth rate has been falling in China, in India it remained high at 1.6 per cent (Table 1). The UN predicts that in 2030, Indian population will surpass China’s population. However, GDP in India remains at $800 billion compares to $2.2 trillion in China (Kwan 2006). In 2005 Indian per capita GDP stood at $723 compared to $1,703 in China. Furthermore, when looking at the HDI, India falls behind China, ranking 126th in the world (Table 2).

Madslien (2007) stated that the continuous rise of India's GDP by approximately 8 per cent a year will in term lead to the sharp increase of the number of drivers in India. It is estimated that the number of drivers will grow from seven in 1,000 in 2007 to 11 in 1,000 by 2010. However, two wheelers still dominate the domestic market in India with 77 percent of the total market share followed by passenger cars with 14 per cent (Figure 4).

India’s economic growth has been slower than China’s (Kwan 2006). Between 1979 and 2005, the Indian economy grown at an average of 5.5 per cent (Figure 1). Moreover, if take into consideration that the Indian population is increasing at a rate of an average one per cent faster that that of China, the difference in growth in per capita GDP terms becomes even larger (Kwan 2006).

Consumer spending in India is generally low due to poor purchasing power of rural residents which is estimated to reach 72 per cent of the total Indian population (Frost and Sullivan 2002). In addition, per capita income in India is about $3,300, which is approximately half of that of China (Jayate 2006). However, if overall economic growth remains on 7 or 8 per cent, it will lead to shifting the percentage of middle class from 5 per cent to 40 per cent by 2025 and placing India as the fifth largest market in the world by 2025 (Narayanswamy and Zainulbhai 2007).

The turnover of automobile manufacturers in India in 2005 was about double the turnover in 1999-2000 (Table 3). Statistics shows a remarkable increase in productions, sales and exports in the Indian automobile industry. Between 2001 and 2007 production and sales we doubled (Tables 4 & 5). In the case of export there was staggering jump from 184,640 total automobile exports in 2001 to 1,011,278 in 2006-07 (Table 6). Schifferes (2007) stated that in the coming years there will be more cars in India and China than in the U.S. (Figure 3).

The Indian Automobile market has grown over the years to accommodate 20 manufacturers and hundreds of models and variants ( 2007). Most major automobile manufacturers like Ford, GM, Toyota, Suzuki, Hyundai, Skoda, BMW, Mercedes, Peugeot, and Mitsubishi have already entered the Automobile market while other major manufacturers like Volkswagen are aggressively looking at market entry strategies (IndoBritish 2005).

2 The Country Situation in India and China

2.1 China:

With inflows of $72.4 billion, China country ranked among the world's top recipients of FDI in 2005 (Table 7). The Chinese auto industry was one of the first industries to absorb FDI. By the end of 2002, China had 1,256 foreign-funded enterprises in the auto industry (Tianmei 2003). In 1998 FDI in the automobile industry totalled $21 billion, accounting for 9 per cent of China’s total FDI stock during that period (Chen and Yao 2005, 186-188).

China’s entry into the World Trade Organization (WTO) in 2001 led to a more gradual liberalization and rewriting of policies regarding trade and FDI: tariffs on vehicles declined to 25 percent by mid-2006 (Kwan 2002), (Kwan 2003). In addition, foreign investors obtained the right to offer auto loans and to participate in car dealerships. Though, government’s regulations strictly limited joint ventures: foreign investors could purchase at most 50 per cent of assembly operations, and could assemble only one model, and could partner with at most two Chinese companies (Nobel et. al 2005), (Qiu 2005). In addition, there were some obstacles such as high tariffs and non-tariff barriers and local content requirements (Chen and Yao 2005, 186). “Local content regulations require at least 40 percent local content for sedans and 50 percent for commercial vehicles” (Veloso and Kumar 2002).

Leggett (2007) stated that “…government policy towards the auto industry and its development is an area of uncertainty”. The Chinese government declared the automotive industry a ‘pillar’ industry in 1985 (Chen and Yao 2005, 186). This was confirmed in 2004 by the introduction of ‘Auto Industry Development Policy’. The policy highlights the government’s desire to significantly reduce the number of automobile manufacturers and to put a halt to new entrants from outside the sector (Norcliffe 2006, 5). In April 2005, the Chinese government revised its automotive policy. Under this policy, an ‘Original Equipment Manufacturer’ (OEM) has the right to decide on joint ventures and new product plans once it gains control of 15 per cent of the market. This is a contrary to the past attempt to strictly control joint ventures (Zheng 2006).

Infrastructure in China is undergoing massive improvements. In 2002, China spent US$128 billion on power and transport infrastructure including improvements to its existing 1.4 million kilometres of highways. “The total length of highways in China ranked second among nations at the end of 2002 (Lienert 2003). The Chinese ports already handle 20 per cent of the world’s containers and China is developing massive new ports in Shenzhen and Shanghai. China’s close proximity to the modern port and facilities of Hong Kong positively affected China’s growth (Kalish 2007).

Geo-strategic risks (e.g Japan and Taiwan) and domestic risks (the unresolved political tensions between central and local governments) still exist in China (PricewaterhouseCoopers 2006). To add, labour skills and enforcement of intellectual property rights remain weak. China continues to be hampered by poor English skills and a lack of managerial talent. With more companies moving into the market, competition will make it even more difficult to recruit high-quality staff (ATKEARNEY 2005). Furthermore, Huang and Khanna (2003) notes that Chinese firms, especially private firms, report greater difficulty in obtaining capital, despite China’s extraordinary savings rate.

2.2 India:

The automobile industry is considered as a key industry for the development of India. Therefore, the industry is intensely protected from foreign engagement. Protection comes in the form of strict industrial policies that focus on high tariffs, extreme limitations to vehicle and components imports, and the limits to foreign investment (Veloso and Kumar 2002).

The nation's infrastructure is highly underdeveloped. Inadequate transportation and communication services, poor road conditions and equipment, and telecommunications unreliability clearly at present. India lacks sufficient port capacity and connectivity to service large cargo ships, which results in delays of handling exports and imports (Kalish 2007). National highways account for only two per cent of the total road network (approximately 200,000 kilometres) (Rathore and Swarup 2006). In 2002 India spent only US$18 billion on power and transport infrastructure compare to the US$128 billion in China. Furthermore, electricity costs twice as much in India compared to its Asian neighbours (PricewaterhouseCoopers 2007).

However, there has been an extensive investment in infrastructure improvement. The Indian government recently bounded a $24 billion project to improve roads as part of a larger $150 billion program to substantially upgrade infrastructure (Kalish 2007). Eight-lane highways been paved to link major cities (Madslien 2007). Moreover, the Indian government taken an initiative to construct 31,000 miles of roads and highways by 2012 (Razib 2006). Such investment in infrastructure is largely a response to the growth in car ownership.

According to PricewaterhouseCoopers (2007), India’s public debt (estimated at 74% as a share of the GDP) outweighs the decline in fiscal deficit, which in term can negatively affect growth in disposable income for the Indian buyer. To add, corruption, politics, bureaucracy and inadequate infrastructure are the main barriers to growth in India. The population’s newfound affluence can be traced back to India’s young, urban, college-educated workforce. On the other hand, most of India’s 767 million rural residents are non-participants in the national economy (PricewaterhouseCoopers 2007).

Despite its disadvantages, India is filled with smart engineers and inexpensive workers, many of whom, unlike most Chinese, are highly articulate in English. Moreover, “…India's homegrown entrepreneurs may give it a long-term advantage over a China hamstrung by inefficient banks and capital markets” (Huang and Khanna 2003).

The end of licensing of foreign automobile venture came to an end in 1993, then was followed by the historical lifting of virtually all restrictions on FDI in the automobile industry in 2001 (Nobel 2006). Though, tariffs remained rigid, at over 100 percent on vehicles and just under 35 percent on parts. However, preferential trade agreements with ASEAN, and notably Thailand, led to some cuts in duties.

3 The Type of FDI to Further Minimise Risks

Multinational Corporation often enter emerging markets through a joint venture or contract with a local firm that offers knowledge of the local market, regulations, business culture, and language. Establishing a joint venture with local partners yields many advantages especially to new entrants. First, a firm benefits from a local partner’s knowledge of the host country’s competitive conditions, culture, language, political systems, and business systems. Second, when the development costs and risks of opening a foreign market are high, a firm might gain by sharing these costs and risks with a local partner. Third, in many countries, political considerations make joint ventures the only feasible entry mode (China for example). Research suggests joint ventures with local partners face a low risk of being subject to nationalization or other forms of government interference (Hill, 2001).

Yeung (2007, 165) stated that “in a country where local business practices and social or legal system restrict a wholly-owned entry mode, multinationals tend to use collaborative governance modes, such as joint ventures and strategic alliances, teaming up with competent local partners in order to enter the market successfully. Such partnerships serve as an important means for multinationals to acquire and cultivate necessary resources, including market knowledge and management know-how. In china, it is especially crucial for foreign multinationals to find savvy and trustworthy partners, according to the local and/or global markets they intent to serve”.

4 Conclusion and Recommendations.

Despite the tremendous growth in the automobile industry in China and India, the two countries differ in many aspects. While China has recognised the need to build an infrastructure to support the industry, India still lagged behind (Kalish 2007). Moreover, the Chinese auto market is approximately four times the size of India’s. In 2006 China Produced 5.2 million passenger cars (Simon 2007) compare to 1.2 million in India (Table 4).

China has advanced ahead, with a per capital income roughly double that of India (Table 1), due to its lively labor-intensive manufacturing, supported by superior physical infrastructure and, partly as a result, greater attractiveness to FDI. Despite India’s current weakness (Nobel 2006), it may well have better long-term prospects because of its superiority in software and soft infrastructure, including a democratic political system, an independent judiciary, better (though still imperfect) financial system, proficiency in English, and better-managed companies largely free of political interference and full of experienced project managers with extensive international experience.

Economic growth has also been in favour of China. In 2005, GDP in India was $800 billion compares to $2.2 trillion in China. Furthermore, FDI inflows to China are approximately 10 times of those of India’s. In addition, in 2004 China was ranked at number 33 globally in regards to ‘Inward FDI Potential Index’ while India was ranked at number 82 (Table 1).

“China’s rates of savings and investments are nearly twice those of India, leading to significantly higher growth rates” (Nobel 2006). Tax revenues, have soared in recent years, allowing spending more on infrastructure while maintaining relatively sound government finances, and to trim and reduce tariffs, thus creating a more open and competitive economy. In the last few years R&D spending in China was more than four times greater than that of India.

China’s financial and regulatory backing, growing economy, low labour costs and enormous market, improving infrastructure, FDI policies, and the growing automobile market would in effect encourage more FDI in the industry. There is no doubt that both India and China play a major role in the global automobile industry. However figures and statistics have been in favour of China Political and financial risks exist not only in India and China but in any other country. Hence, we come to the conclusion that a joint venture in China is more viable that that of India.

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6 Appendices

6.1 List of Tables:

Table 1: Comparison of Key Economic Indicators in China and India

Unit, Period China India India/China, %

Level of Economic Development

Per Capita GDP

Human Development Index

$, 2005

Global Ranking, 2004







Economic Growth

GDP Growth Rate

GDP Growth Rate

%, 1979-2005

%, 2001-2005







Market Size



Billion, 2005

Billion dollars, 2005







Global Links





Billion dollars, 2005

Billion dollars, 2005

Billion dollars, 2005










Investment Climate

Inward FDI Potential Index

Global Ranking, 2004




Source: Kwan 2006. Available at:

Table 2: China - Top 10 Manufacturers’' Sales Rank

Rank Manufacturer 2006 2005 Growth










10 SGM




Beijing Hyundai

Guangzhou Honda

Tianjin Toyota



Dongfeng Ltd. 129,66









67,969 72,508









38,739 79%










Source: Automotive Resources Asia 2006. Available at:

Table 3: India - Turnover of Automobile Manufacturers

Year (Rs.In Million)

1999-00 422,933

2000-01 492,024

2001-02 499,136

2002-03 595,184

2003-04 661,769

2004-05 835,851

Source: SIAM – Society of Indian Automobile Manufacturers. Available at:

Table 4: India - Automobile Production (2001-07)

Source: SIAM – Society of Indian Automobile Manufacturers. Available at:

Table 5: India - Automobile Domestic Sales (2001-07)

Source: SIAM – Society of Indian Automobile Manufacturers. Available at:

Table 6: India - Automobile Export (2001-07)

Source: SIAM – Society of Indian Automobile Manufacturers. Available at:

Table 7 - FDI Inflow, by regions and selected countries (1994-2005)

(Billions of dollars and per cent)

Source: World Investment Report 2006. Available at:

6.2 List of Figures:

Figure 1: China's growth surpasses that of India

Source: Kwan 2006. Available at:

Figure 2: China -YTD April Sales by Manufacturer

Source: Automotive Resources Asia 2006. Available at:

Figure 3: There will soon be more cars in India and China than the US

Source: Schifferes (2007). Available at:

Figure 4: India - Domestic Market Share in 2006-07

Source: SIAM – Society of Indian Automobile Manufacturers. Available at:

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