) 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 (
) 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
) 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
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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