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The best way to describe my place in the investment world is as a curious observer and student of evolution. I've always had a deep interest in corporate strategy and branding which has obviously in recent years pulled me towards deep analysis of financials and non-numerical changes that might... More
  • Get Equity In Indian Automotive 0 comments
    Jan 3, 2013 11:20 AM | about stocks: TTM, BJJHY, MAHDY, MAHMF

    Before diving into the almost tailored book report summary I put forward allow me to cut to the chase ... In my admittedly novice but often times well respected opinion, I can see there being a ton of money to be made buying equity in some of the major players in the Indian automobile industry.

    The country of India is without a doubt developing into one of the world powers that will be in place in the coming years. For that reason it is almost obvious why many major corporations are looking to establish footing in the nation through a variety of different means. In addition to the outsourcing of labor to India that many people in the United States are aware of, there is also an increasing amount of foreign direct investment from companies looking to enter into this expanding market sector while it is still in the early years. It is the seventh largest country by geographical area, the second most populous country with over 1.2 billion people, and the most populous democracy in the world. Being the second most populated country in the world clearly allows for an enormous target market and thus would be intriguing to nearly any company given the potential for such a large customer base. Whenever one is interested in entering a foreign market one of the largest concerns or interests should be how many potential customers the market could provide; in this case depending on the type of product, India could provide more customers then almost any other country in the world. Over the last couple years one segment of the market of India which has gained world prominence is that of automotive production and manufacturing. More so then anything else, India has become known for their automotive production which is within the top five in the world across almost all forms of automobiles and motor vehicles. For a company looking to enter into India's automobile industry there are a number of aspects that should first be evaluated; the Indian economy, the current state of the automobile industry and of course where the automobile manufacturing industry in India looks like it will be trending towards in the coming years.

    The Economy of India is the ninth largest in the world as measured by their nominal GDP and the fourth largest purchasing power parity (NYSE:IMF). India has a per capita GDP of $3,586 (IMF) as per 2010 figures, making it a "low income country". The independence-era Indian economy was inspired with socialist practices, large public sectors, high import duties and lesser private participation characterizing it, leading to massive inefficiencies and widespread corruption. However, in 1991, India adopted free market principles and liberalized its economy to international trade under the guidance of current Prime Minister Manmohan Singh. Following these strong economic reforms, the country's economic growth progressed at a rapid pace with very high rates of growth and large increases in the incomes of people. India recorded the highest growth rates in the mid-2000s, and is one of the fastest-growing economies in the world. The growth was led primarily due to a huge increase in the size of the middle class consumer population, a large workforce comprising skilled and non-skilled workers, improvement in education standards and considerable foreign investments. India is the seventeenth largest exporter and eleventh largest importer in the world. Economic growth rates are projected at around 8% for the financial year 2011-2012. There are however some things that should be additionally noted when considering the strength of their economy, that being the factors that show potentially where the economy is heading in the future. The Reserve Bank of India (RBI), which regulates banks and sets interest rates, has a record of running a tight ship. According to RBI, "Gross non-performing loans have fallen from about a fifth of the total in 1995 to under 3% today" (Economist). Between 2005 and 2008 some foreign banks and several local ones got caught by a mini-boom in unsecured loans to consumers that quickly soured. And since the start of the global financial crisis the RBI has quietly given Indian lenders some get-out-of-jail cards; these may pale into insignificance compared with perks doled out by Western regulators but they suggest that the central bank prefers to fudge the recognition of losses in the system if it thinks stability is at risk. The problem that a potential investor should see in the RBI dealings is that many reports will make it seem as though their is no problem however, when looking a bit more deeply at the information it will undoubtedly become apparent that there is a lot of loans being defaulted on which threaten the security of the Indian banking system. Some prime example of this can be found in the recent accounts of previous dealings in India; in 2008, for instance, banks were allowed to restructure weak loans without recognizing them as bad debts. Such practices in recent years have lead to the stock of all provisions held against all non-performing loans being lower than in other countries. This means there is less of a buffer before losses start to burn up banks' capital, an obvious cause for concern when evaluating the economy. However, when in comparison to many of the so-called world powers of industry in the world right now, such practices aren't uncommon nor much of a deterrent from companies looking to enter into their market. As well, India is actually currently growing at a more significant rate then the generally well regarded Asian superpower of China; this means that India is trending towards reaching the same type of scale as Chinese business and perhaps even surpassing.

    The Automotive Industry in India is one of the largest industries and a key sector of the economy.The Indian automotive industry started from 1991 with the government's de-licensing of the sector and subsequent opening up for 100 per cent FDI through automatic route. Since then many large global companies have set up their facilities in India taking the production of vehicle from 2 million in 1991 to 9.7 million in 2006. India currently sits near the top on almost all tables of production figures in the automobile manufacturing sector of the world economy. They are currently; the largest tractor and three-wheel vehicle producer, second largest two-wheel vehicle producer, fourth largest commercial vehicle producer, and eleventh largest passenger car producer. According to the Society of Indian Automobile Manufacturers, the Indian automobile industry has reached double-digit growth for the past three years in a row. The notable aspect should be the consistency of this growth and that this was not simply "one lucky year". The largest of such growth periods being seen in 2006 when production figures grew by 16.22% over the previous year's numbers. It is undeniable that India is quickly becoming one of the epicenters for automobile manufacturing and clearly has been a successful growing market. In fact, over the last couple years a number of companies have decided to set up shop on India's turf. Among the car companies that are investing in India are US automakers General Motors and Ford, Germany's BMW and Chrysler, France's Renault, Japan's Suzuki, Toyota and Honda, and South Korea's Hyundai. Although it may not be the most statistically relevant reasoning to enter the market, it follows the general principle that if many of the world's largest and most renowned auto manufacturers are flocking to India then there more than likely is a reason. India is an attractive outsourcing destination for global auto companies because of its strong engineering skills and low costs. Sourcing parts from India is 10-20% cheaper for US auto makers and about 50% cheaper for their European counterparts (Business-in-Asia). The opportunity to manufacturer parts at a lower cost means the profits can be larger if a company decides to move their manufacturing options over to India.

    The reality is that where the current economy and automobile manufacturing currently stands does not matter to a firm looking to enter into the market currently, far more vital is where the market seems to be going and the factors that are shaping these changes. In the case of India's automobile manufacturing there is only one thing that really needs to be watched closely and evaluated, that being The Automobile Mission Plan (NYSE:AMP). An issue that consistently was found through various sources was that even though the automotive industry is robust, car manufacturers are complaining that the government's frequent change in policies is not encouraging the industry. Changing the policies and guidelines frequently severely hurts the companies' plans. In previous years this inconsistency in the government interactions in the market have lead some to be weary of investment. However, starting back in 2007 when AMP started coming into being, the ten year plan began instilling stability in the market due to the fact that companies knew exactly what steps over the following decade the government was going to take and as well what role they were looking to fill in the field. The plan seeks to remove obstacles in the way of competition, such as that required infrastructure be put in place well in time to alleviate its constraining impact on the growth. The plan envisages a tax holiday for the industry on investments exceeding $225,000, 100% tax deductions of export profits, and deductions of 50% on foreign-exchange earnings. It also calls for a one-stop clearance for foreign-direct-investment proposals in the sector and deductions of 30% of net income for 10 years for new industrial undertakings. To bring down the cost of power and fuel, which accounts for 6% of the manufacturing costs in the auto sector, captive power generation would be encouraged to enable industries to access reliable, quality and cost-effective power.

    For a company looking to enter into a foreign automobile manufacturing market, I think India is a very strong choice. This not only stems from the past success which is apparent through their production numbers, being a leader in automobile manufacturing worldwide, but as well through where the country as well as this market seems to be heading in the coming years. Although growth has slowed in the last couple years, the Indian economy is still growing at an exceedingly quick rate which suggests a promising future for a company that taps into this market while it is still growing. Additionally, with the creation of AMP a couple years back I believe the only issue with the automobile manufacturing field in India, the government, is all but a thing of the past. My strong suggestion is for immediate entrance into the market through one of two routes; either a wholly owned subsidiary or strategic partnership with an Indian manufacturing company. Both of these options could lead to a very profitable future for a company looking to expand internationally into India's market. In fact, I would suggest a company looking to enter into the Asian market as a whole to choose India as their destination even above the usual preeminent choice of China.

    "Automobile Industry in India, Potential of Top Automobile Company." Business in India. Web. 11 Nov. 2011. <http://business.mapsofindia.com/automobile/>.

    "Automotive Industry in India." Asia Business: Vietnam, China, Thailand and More. 11 Mar. 2010. Web. 9 Nov. 2011. <http://www.business-in-asia.com/countries/ automotive_industry_india.html>.

    Gadgil, D. R., and Sulabha Brahme. The India Economy: Problems and Prospects : Selected Writings of D.R. Gadgil. Oxford: Oxford UP, 2011. Print.

    "The Hindu : Business : Auto Mission Plan Envisages $40 B Investment." The Hindu. 14 Aug. 2007. Web. 9 Nov. 2011. <http://hindu.com/2007/01/30/stories/2007013007061700.htm>.

    "India's Economy: Reflections of Reality | The Economist." The Economist - World News, Politics, Economics, Business & Finance. 6 Aug. 2011. Web. 10 Nov. 2011. <http:// www.economist.com/node/21525452>.

    "The Industry Handbook: Automobiles." Investopedia.com - Your Source For Investing Education. Web. 10 Nov. 2011. <http://www.investopedia.com/features/ industryhandbook/automobile.asp>.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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