Hyundai sees 5-7% growth in auto sector on tepid rural demand

New Delhi: Hyundai Motor Co. will not need to build new factories in India as local car sales are unlikely to grow faster than 10% annually over the next five years.

“Double digit is not possible. It is not easy. But I am not pessimistic, I am very positive about the market, but it will not be a six million market (by 2021),” Y.K. Koo, managing director and chief executive of Hyundai Motor India Ltd said in an interview on Saturday. “I am expecting the market to grow by 5-7% every year.”

The remark comes as India faces economic headwinds, including back-to-back drought years that has withered rural demand, a banking system that is crippled by rising bad loans, companies holding back on investments and weak global demand for its exports.

Car makers, however, are relatively better off as low oil prices and declining interest rates have helped increase sales.

Consulting firms PricewaterHouseCoopers and IHS Automotive are more optimistic. They expect Indian passenger vehicle sales to increase to six million by 2021-22.

“If market grows to six million, then I will have to run and report to (South) Korea (where the parent company is based) for a new factory,” Koo said. As of now, “we have two factories, which is enough for the next 3-5 years.”

India’s second largest car maker is, however, preparing a plan to surpass Maruti Suzuki India Ltd, which has a dominating 47% share of the Indian market. Hyundai follows with 17.3% share.

As part of the plan, the South Korean car maker will introduce two new products every year and is currently studying the feasibility for the introduction of Hyundai’s luxury Genesis brand, which competes with Toyota’s Lexus, Nissan’s Infiniti and Honda’s Acura.

Hyundai, which completed 20 years in India on 5 May, aims to achieve leadership position in the next 20 years, Koo said. The company will also introduce mild-hybrid technology in its cars, besides bringing semi-automatic transmission gear boxes and a sub-4 metre sport utility vehicle (SUV) with a 1 litre turbo-charged engine.

Koo is also hoping for a good monsoon this year that, he hopes, will lead to a recovery in rural demand. Still, the underlying weakness in the Indian economy, Koo says, may not allow the car market to grow at a very fast rate over the next five years.

“I think it is a very tough and difficult situation,” Koo said.

Tepid demand for automobiles from rural areas will hurt prospects of the Indian vehicle industry, he said. As a result, the passenger vehicle industry growth will languish in single digits in the coming years, Koo added.

Government estimates are, however, more rosy. It expects the passenger vehicles market to triple to 9.4 million units by 2026 if the economy grows at an average rate of 5.8% a year, according to a document titled Auto Mission Plan 2016-26. If the economy grows at an average yearly pace of 7.5%, the size of the market is forecast to rise to 13.4 million units, making it the world’s second largest after China.

Hyundai, which has flexible assembly lines for exports and domestic demand, is running to capacity. In the year ended 31 March, the company stretched its production by 10,000 units to 648,000, of which 484,000 were sold in the Indian market, according to Society of Indian Automobile Manufacturers, or Siam, data. Hyundai can still increase the plant’s productivity and churn out as many as 710,000 units a year, Koo said. At the same time, the company can cut production for exports to meet local demand, he added.

Hyundai’s slightly conservative strategy in the Indian market is in contrast to that of Maruti Suzuki, which is preparing to sell at least 2 million units by 2020 from 1.3 million last fiscal. Maruti plans to introduce 15 models by 2020. It has also signed a contract manufacturing agreement with parent Suzuki Motor Co., which is setting up a factory to produce as many as 1.5 million vehicles a year in Gujarat.