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The automotive sector in India, comprising of the automobile and auto component sub sectors, is one of the key segments of the economy having extensive forward and backward linkages with other key segments of the economy. It contributes about 4% to India’s Gross Domestic Product (GDP) and 5% to India’s industrial production. The well-developed Indian automotive industry ably fulfills this catalytic role by producing a wide variety of vehicles like passenger cars, light, medium and heavy commercial vehicles, multi-utility vehicles such as jeeps, scooters, motorcycles, mopeds, three wheelers, tractors etc.
Favorable demographics (1.2 billion people; ~60% below 30 years of age), expanding population, low vehicle penetration (15 for every 1000 people), abundant availability of skilled talent, and a maturing automotive components segment have propelled India-based automotive companies to play an important role globally. While international companies are eyeing India for top line growth, the country also remains a favored outsourcing hub for many automotive multinationals, not just for lower-cost manufacturing, but increasingly as a source of higher value innovation. India has a well-developed, globally competitive auto ancillary industry and established automobile testing and R&D centers. The country enjoys natural advantage and is among the lowest cost producers of steel in the world. 
Rothschild, a UK-based global financial advisory firm, forecasts that India would become the third largest auto industry by volumes by 2015. The Indian automobile industry today boasts of being the second largest two wheeler manufacturer in the world, the largest three wheeler market, the second largest tractor manufacturer in the world, the fourth largest car market and fifth largest commercial vehicle manufacturer in the world. 
The component industry, which is an important part of the automotive sector, comprises about 500 firms in the organized sector and more than 10,000 firms in the unorganized sector has been one of the fastest growing segments of Indian manufacturing. The auto component industry is one of the few sectors in the economy that has a distinct global competitive advantage in terms of cost and quality. The value in sourcing auto components from India includes low labor cost, raw material availability, technically skilled manpower and quality assurance. An average cost reduction of nearly 15-20% has attracted several global automobile manufacturers to set base since 1991. India’s process‐engineering skills, applied to re‐designing of production processes, have enabled reduction in manufacturing costs of components. Today, India has become the outsourcing hub for several global automobile manufacturers. In the coming years, innovation and cost pruning hold the key to meeting the global challenge of rising demand from developed countries and competition from other emerging economies. Several large Indian auto component manufacturers are already gearing to this  new  reality  and  are  in the  process  of  substantially  investing in  capacity expansion,  establishing  partnerships  in India and abroad, acquiring companies  overseas  and  setting  up  greenfield ventures, R&D facilities and design capabilities.
According to industry statistics derived by Automotive Component Manufacturers Association of India (ACMA), Engine parts form the largest segment (31%) of auto part industry followed by drive transmission and steering parts (19%). Suspension & braking parts and Body & Chassis account for 12% each in the entire product range, followed by equipment accounting for 10% of the same. Further, estimates made by ACMA reveal that auto component exports would robustly grow at a compounded annual growth rate (CAGR) of 18.8% over 2011-21. European and North American markets account for 36 and 23% of the entire industry exports, respectively, while 28% of the exports are made to Asian countries. While Indian manufacturers have achieved scale and high competence in some areas of component manufacture, segments which still have potential for foreign investment include auto safety, dual clutch, special castings etc., where the industry has yet to build competence and scale. 
The Original Equipment Manufacturer (OEM) landscape in India is witnessing strong competition with the entry of international OEMs.
Domestically established OEMs: The home-grown OEMs have developed suitable products with affordable features (higher localized content), supported by well-functioning dealer/service networks.
Globally established OEMs: These OEMs (international OEMs that have been present in India for >15 years) are aiming for higher localization while maintaining the perception of high-quality products. 
New global OEMs: These OEMs (international OEMs that have entered the Indian market quite recently, i.e., over the last 3 to 4 years) are enhancing their market reach beyond tier 1 cities and have devised ambitious long-term growth plans. 
While most of the OEMs are focused on the domestic Indian market opportunity, some also aim to make India a global hub for their small/compact car production.
Key Statistics
The cumulative production for financial year April 2011 to March 2012 registered a growth of 13.83% per cent over April 2010 to March 2011, manufacturing 20.3 million vehicles during the period
While Passenger vehicle segment grew at 4.72% during April 2011 to March 2012, overall commercial vehicle segment registered an expansion of 19.83% per cent year-on-year (y-o-y)
The industry exported 2.9 million units registering a growth of 25.44% in April 2011 to March 2012. 
As per the 2011-12 data released by the Society of Indian Automobile Manufacturers (SIAM), domestic vehicle market is dominated by two-wheelers segment with 76.9% of the pie. Passenger vehicles, commercial vehicles and three-wheelers account for 15.3%, 4.5% and 4.3% of the market, respectively. 
Hero MotorCorp rules the two-wheeler market with 56% of the share. Maruti Suzuki holds its leader position in passenger vehicle segment with 38% of the pie, while Hyundai follows with 15% of the share. 
For passenger vehicle segment, the share of the entry-compact segment (that consists of cars like the Tata Nano, Maruti Alto, Ford Figo, Maruti WagonR, Hyundai’s Santro, i10 and Eon and GM’s Beat) stood at 47% in 2011, while premium compacts (like Maruti Swift, Hyundai i20 and VW Polo) maintained their share of 11%. Sports-utility vehicle (SUV) segment registered the fastest growth rate (32%) to capture over 18% of the market share, while Sedans had 19% of the pie.
Opportunity for Investors:
While multiple routes are available for international players to enter India, Joint ventures or partnerships have been more attractive as both the international and Indian partners are able to leverage each other’s strengths to joint venture’s advantage. Some of the opportunities that India’s automotive sector offers to a foreign investor include:
Leveraging India as a global manufacturing hub for small cars and components.
Utilizing India as an innovation hub for new/emerging vehicle categories given specific Indian market requirements has led to the introduction of Small Commercial Vehicles (sub 1 ton), alternate fuel vehicles (CNG/LPG), and alternate mobility options such as fleet taxis, etc.
Tapping the huge auto component demand-supply equation to their advantage (given that automotive OEMs have already committed huge investments in the Indian market). 
A lot of auto grade steel is currently imported. Investors keen on setting up plants for manufacture of auto grade steel will find a huge market opportunity in India. 
The government of India has identified the automotive industry as a focus industry for Foreign Direct Investment (FDI) given its importance from an employment generation perspective. To accelerate and sustain growth in the automotive sector, the “Automotive Mission Plan (AMP): 2006-2016” has been prepared in order to make India a global automotive hub. The Plan, aims at doubling the contribution of automotive sector to GDP by taking the turnover to USD 145 billion (with special emphasis on export of small cars, MUVs, two and three wheelers and auto components) and providing employment to 25 million people by 2016.
Foreign Direct Investment (FDI) up to 100% is allowed under automatic route in the automotive sector. 
Government to introduce new fuel mileage standards and labeling for new cars beginning 2015, giving manufacturer’s time to introduce and invest in new technology.
Important Links: 
Department of Heavy Industries: http://dhi.nic.in/
Department of Industrial Policy and Promotion: http://dipp.inc.in/ 
Society of Indian Automobile Manufacturers (SIAM): www.siamindia.com/ 
The Automobile Component Manufacturers Association of India (ACMA):  www.acmainfo.com