India's automobile industry is currently the sixth largest in the world -- but IHS Automotive expects India to become the third-largest automobile market by 2016. The Indian auto industry is estimated to grow at about 11% annually till 2020, offering a bullish outlook for most automakers operating in the country. But in light of this expected growth, Ford (NYSE:F) and Honda (NYSE:HMC) seem particularly well-positioned to deliver exceptional growth over the coming years.
An American growth story
Ford is a prominent automaker across the globe. However, it is yet to make an impact on the Indian automobile industry. The U.S-based automaker has only a paltry 3% market share in India, and its operations in the country resulted in a fiscal 2012 loss of roughly $23 million. But these numbers could change very soon.
Ford has invested about $1 billion to develop a vehicle assembly in Gujarat, India. It's expected in 2014, with an annual manufacturing capacity of 240,000 vehicles and 270,000 engines. In addition, Ford has also invested $142 million in its Chennai manufacturing plant to boost the production capacity of its popular Ecosport in the country.
Once these facilities start working, Ford India will have an annual production capacity of 440,000 vehicles, up from the current 105,000. The automaker will not only cater to the rising Indian automobile demand, but can also export the surplus vehicles to other Asian countries. Thus, India's relatively inexpensive labor force will help the automaker cut the production costs of its exported cars and trucks.
Apart from boosting production, Ford India is also aiming to launch six new hatchbacks. One of these cars includes the low-cost Ka, targeted toward middle-class, first-time buyers. Since the Indian population includes mostly middle-class citizens, the low-cost hatchback can further propel Ford India's growth. With new launches and capacity expansions, Ford stands to greatly benefit from India's ongoing economic growth.
Honda Motor is also bullish on its Indian growth prospects. The Japanese automaker manufactures and assembles engines, cars and scooters in India. Its two-wheeler and four-wheeler segments in India command 25% and 4.92% domestic market shares, respectively, and the automaker is making great strides to strengthen its Indian market position.
Honda will invest roughly $416 million in India by 2014. It plans to build an assembly plant in Rajasthan, with an annual production capacity of 120,000 cars. This will double Honda's annual car production capacity to 240,000 units in India, and allow it to export surplus vehicles to neighboring countries as well. But that's not all.
Honda is tailoring its four-wheeler product portfolio for India. It plans to phase out the relatively expensive Accord and Civic models gradually, with an aim to introduce three relatively affordable cars by the end of 2014-15. One of these cars will be designed and manufactured exclusively for India, to suit its demographics and road conditions. This move will position Honda directly against its low-margin, high-volume peers like Maruti Suzuki and Hyundai.
In addition, Honda India also plans to invest about $81 million by March 2014, in order to increase its annual two-wheeler production capacity at its Narsapura plant by 600,000 units. Once the expansion project is complete, Honda will be able to manufacture up to 4.6 million two-wheelers annually in India.
In my opinion, Honda's capacity expansions and country-specific portfolio restructuring could catapult its Indian sales growth over the coming years.
A lazy peer?
When it comes to automobiles, it's hard to miss Toyota (NYSE:TM). The the world's largest automaker is known for its superior-quality cars, and its Indian arm, Toyota Kirloskar, has achieved in a 6% market share. But unlike its peers, Toyota Kirloskar doesn't offer lucrative growth prospects over the longer run.
Toyota Kirloskar inaugurated its engine and transmission manufacturing plant in Bangalore this past February. The plant boosted Toyota's annual manufacturing capacity in India by 50%, to 310,000 units. But that's about it for the company's near-term growth plans.
Toyota Kirloskar's management has pushed back the development of its new expansion projects in India to 2015. Although the automaker intends to execute its ongoing projects, the bottom-line is its delayed projects could slow-down its short-term growth in the country. In addition, Toyota Kirloskar has also announced that it won't launch any new models till 2015. This could put pressure on its market share, and allow its competitors to catch up.
In my opinion, Toyota Kirloskar's decision to push back the construction of its new projects, could limit its growth in India. However, Ford and Honda stand to benefit over the coming years. During the fiscal year 2010, Honda and Ford generated just 3% and 1.7% of their overall gross profit from India. But since both the automakers are creating automobile hubs in India, and planning to launch their new vehicles in the country, their sales and gross profits from the sub-continent should rapidly grow over the coming years.
Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Ford. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.