In the race for sales, India’s carmakers may need to ease off the accelerator as they speed toward a head-on collision with a capacity glut. Lured by 30 percent sales growth over the past two fiscal years, carmakers have pledged USD6 billion to almost double India’s annual production to more than 6 million vehicles. But now sales growth has come to a screeching halt and production capacity could be as much as 40 percent more than demand.
In September 2010, Maruti Suzuki, the industry’s biggest player in India, announced a USD390 million investment to expand capacity by 250,000 cars a year. It looked like a smart move then. Indians bought 2.5 million cars in the fiscal year that ended in March 2011, an increase of 63 percent or 1 million cars over two years. Major global automakers such as General Motors soon followed. But the sales boom didn’t last.
Car sales will likely shrink in the current fiscal year, for the first time in 10 years, leaving an excess capacity of around 1 million cars that the industry says will lead to falling utilization or a profit-eroding price war. Expecting an 11 percent fall in sales of its cars this fiscal year, Maruti will allow market conditions to dictate the progress of the company’s USD1 billion new plant initially envisaged to churn out 2,700 cars a day.
