Honda Looks To ‘Amaze' In India As Market Still Offers Huge Growth

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Honda Motors ( HMC ) launched its first diesel car called Amaze in India recently, and the model has generated a pretty impressive response with a waiting period extending up to 4 months. Diesel prices are subsidized in the country due to which diesel car sales are increasing while gasoline car sales are tumbling. Given the country's huge potential, it is a worrying sign for General Motors ( GM ) and Ford Motors ( F ) since they have been able to garner only a tiny fraction of the market despite having a presence of more than a decade. On the other hand, Japanese automakers such as Toyota Motors ( TM ) and Honda are doing much better.

Apart from the initial investment, the running cost of a vehicle also hurts the middle class' pockets. Japanese cars are seen positively in that respect. Due to lower mileage and higher prices of spare parts, American cars and to a certain extent European cars are considered an expensive proposition.

See our complete analysis for Honda stock here


Gauging Future Demand

As incomes in the developing markets rise, a new segment of the population is able to afford cars. Even in China, which is the biggest automotive market in the world with ~20 million unit sales, 60% to 70% of the customers are still first-time owners. Even after almost a decade of witnessing jaw-dropping growth rates, car ownership rates stand at about 91 vehicles per 1,000 people, only a fraction of what it is in the developed world. The vehicle ownership rate in the U.S. is about 850 vehicles per 1,000 people while in Europe it generally hovers between 600 and 800 depending on the country.

A country's vehicle ownership rate has a strong relationship with its per capita income. However, the relationship is usually not linear in nature. Once incomes cross a threshold of ~$3,000 per capita, there is an explosion of growth and the change in the automotive market outpaces that of GDP growth. A ratio of 2:1 is not rare. This trend goes on until per capita income reaches ~$10,000 after which the market size consolidates.

In the last seven years, China's automotive market has grown at an average rate of 19% annually roughly twice its GDP growth rate. Although the vehicles sales growth has somewhat cooled off in the last couple of years, there is still tremendous upside as vehicle ownership rates are still pretty low.

Usually countries which follow a similar growth pattern tend to have similar vehicle ownership rates corresponding to a given per capita income. If you go back 9-10 years when China's per capita income was ~$3,500, its vehicle ownership rate was about 20 vehicles per 1,000 people. India, which currently has a per capita income of ~$3,500, has a similar vehicle ownership rate. This means India is a few years behind China. China's GDP growth has historically exceeded that of India's so you can probably assume that in another 13-14 years  (instead of 9-10 years), India's vehicle ownership rates could be about 90 vehicles per 1,000 people. This is about four times the current level. Even though the automotive market turned negative last year in India, the country holds huge potential.

Factors such as high interest rates will affect the market in the near term, but the long term prospects looks sound. Due to the gloomy figures reported of late, it is easy to forget that India's automotive market has grown at an average rate of 12% in the last 6-7 years. In fact, a recent report by J.D. Power forecasts India's auto market to triple to 9.3 million units by 2020.

Caveats To Extrapolating Market Size

At the same time, to assume that vehicle ownership rates in China or India will reach levels close to those in the Western world would be overly optimistic at this point. Considering how huge the populations of India and China are, penetration levels even close to western ones would lead to a spike in oil prices making it prohibitively expensive to own a car without substantial gains in new technologies.

This also ignores the infrastructure challenges for both countries. The saturation levels will also depend on how developed a country's public transportation is. For example, in Europe you will find saturation rates lower than that in the U.S. due to better public transportation in most cities. Furthermore, cities in China and India are highly congested and will therefore have lower saturation rates. People will look to use more public transport rather than drive on congested roads. Then there are other factors like disparity of incomes where wealth is concentrated in a small section of people, which reduces the total number of potential buyers. So while we still believe there is tremendous upside to car sales in India, it should be thought of in context to its specific market potential and limitations.

We have a $42 price estimate for Honda Motors, which is about 10% above the market price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: F , GM , HMC , TM , TSLA

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