Shunning the spotlight since taking charge of the $100
billion Tata group in December, 44-year-old Cyrus Mistry has
focused on belt-tightening at a conglomerate left bloated by
explosive growth under his predecessor.

“Ratan was much more … strategic, more over-arching.
‘s much more focused. The CFOs as well as the business
heads are going to find it a much more rigorous exercise,” a
director who sits on multiple Tata company boards told Reuters.

In early February, at his first Tata Chemicals
board meeting as group chairman, Mistry sat quietly as directors
debated efforts to find synergies between interests dotted
around the globe, from Wyoming to Gabon. Bringing the discussion
to a halt, Mistry politely but firmly outlined that further
consolidation was the only way forward.

“He summed up the decision: ‘This is what we are doing’,” a
person present at the meeting told Reuters. “It’s quite clear he
believes in the process of consolidation.”

FAST GROWTH

The last decade of Ratan Tata’s tenure saw revenue grow
ten-fold to $100 billion in the year ended March 2012, fuelled
by acquisitions including an ill-timed $13 billion deal for
Anglo-Dutch steelmaker Corus and a more successful $2.3 billion
purchase of luxury car brands Jaguar and Land Rover (JLR).

The group spent billions more on overseas assets like
engineering firms, luxury hotels and coffee brands. Tata
Chemicals alone bought, invested in or merged with eight
companies between 2004 and 2011.

Mistry’s job is to consolidate, three directors said, an
effort focused on getting more from existing businesses, as
opposed to shedding assets.

“A very good numbers man, very hard-nosed in the way he
approaches things, which is what is probably sorely required
now,” the first director said.

In his first five months on the job, Mistry has ordered his
CEOs to tighten spending, and replaced oversight structures to
give him greater influence over the running of the more than 100
group companies.

The impact is starting to be felt. This month Tata Steel
announced a $1.6 billion write-down, an
acknowledgement that it overpaid for Corus. Last month, its
mobile phone unit, which ranks sixth in India by users, said it
will surrender part of its CDMA mobile airwaves in most of its
zones after the government asked carriers to pay surcharges.

“Each company will be doing it for himself … that’s the
overall guidance and the strategic direction,” another director
told Reuters.

Besides Tata Chemicals, Mistry’s to-fix list includes
underperformers such as the domestic arm of Tata Motors
, Tata Steel, and Tata Power, people familiar
with the plans told Reuters.

All directors and executives who spoke to Reuters for this
article declined to be identified due to the sensitivity of
their comments. Mistry declined to be interviewed.

In response to written questions, the Tata group noted it
has invested more than $10 billion over the past three years and
has already committed a similar amount towards expansion over
the next two years, in India and globally.

“Growth through both organic and inorganic means as well as
consolidation, where appropriate, have been consistent themes
for the past two decades, and we see no change in these twin
themes looking ahead,” a spokesman said.

Among newer initiatives, Tata is in the process of forming
an Indian airline with Malaysia’s AirAsia Bhd, and is
widely expected to apply for a licence to set up a bank in
India.

MYSTERY MAN

Described by friends and colleagues as quiet and unassuming,
Mistry was a surprise choice to replace Ratan Tata, who retired
on Dec. 28 after 21 years in charge. Mistry’s appointment, in
November 2011, sent the media into a frenzy to profile a man few
had heard of.

Ubiquitous in India, the Tata group makes the buses that
transport millions of commuters to work each morning, the steel
that built their offices and the salt that flavours their lunch.

Mistry rarely speaks in public. He gave brief remarks at the
January “Vibrant Gujarat” event organised by Narendra Modi,
chief minister of the state where Tata’s low-cost Nano car is
made and a potential candidate for prime minister, but his other
appearances have mainly been at company functions.

Those who have heard him say he has yet to develop the
gravitas and charm of his predecessor. At a banquet in January
to mark his ascension, his tribute to Ratan Tata resembled a
curt, formal vote of thanks, a person present told Reuters.

“It was almost like he was addressing people at a function,
thanking the organisers for putting on a good show, that kind of
thing,” said the person.

Mistry, who has chosen not to move into the former
chairman’s empty office, is yet to sit for a media interview or
address a press conference, but is known to attend company
events unannounced and without fanfare. At a Jaguar Land Rover
party last year, he mingled with guests in an open-collared
shirt.

Tata companies are in the midst of reporting the first full
quarterly results of Mistry’s tenure, and many shareholders will
get their first glimpse of him as chairman during the summer
annual meetings season.

FAMILY TIES

Educated in Mumbai and London, Mistry joined the board of
his family’s engineering company, Shapoorji Pallonji & Co Ltd,
aged 23 and became its managing director three years later.

His path was paved by his father, Pallonji Mistry, a
billionaire Irish construction magnate whose 18.4 percent stake
in Tata Sons, the group’s holding company, makes him
the largest individual shareholder in a conglomerate mostly
controlled by charitable trusts.

The senior Mistry, dubbed “The Phantom of Bombay House” for
his influence at Tata’s storied colonial headquarters in south
Mumbai, gave up his seat on the holding company board in 2006 to
make room for Cyrus.

Like the Tatas, the Mistrys are part of Mumbai’s tight-knit
Parsi community, and Cyrus Mistry’s sister is married to Noel
Tata, Ratan’s half-brother who had been seen as a potential
successor. Mistry is married to a lawyer’s daughter.

BRAIN TRUST

To strengthen his hand in the battle on Tata’s bulge, Mistry
abolished two committees created by Ratan Tata and replaced them
with a “group executive council”, a brain trust of lieutenants
close in age to Mistry.

Members of the council, which includes former Bombay Stock
Exchange head Madhu Kannan and Ernst & Young veteran N.S. Rajan,
will soon be given seats on Tata company boards. A member with
responsibility for the finances of the overall group will soon
be appointed, a Tata Sons official told Reuters.

“It’s not revolution, it’s evolution,” said Andrew Holland,
CEO of Ambit Investment Advisors in Mumbai, who manages funds
with investments in various Tata group companies. “If they can
consolidate, get some costs down, get the debt down, then it
would be a much more attractive investment.”

Mistry became only the sixth chairman of the 145-year-old
conglomerate after spending little more than a year shadowing
Ratan Tata around a diverse group that includes India’s biggest
IT exporter, biggest automaker by revenue, and largest
private-sector steel and electricity producers. Some 60 percent
of revenue is made overseas.

The group’s spending spree, almost all before the global
financial crisis, made Tata’s blue ‘T’ logo a global brand, but
has also distracted from problems including skidding sales in
its domestic car business and falling cellphone market share.

Excluding Tata Consultancy Services (TCS), a cash
cow, the top 10 publicly-listed Tata companies saw combined net
profit fall an annual 18.3 percent in April-December, despite
revenue rising 14.6 percent, according to Reuters calculations.

“The world has changed quite dramatically since the big
acquisitions,” said a banker who worked on the JLR deal. “They
do need to trim down.”

(Additional reporting by Aradhana Aravindan, Sumeet Chatterjee,
Aditi Shah and Indulal PM; Editing by Tony Munroe and Ian
Geoghegan)

The yen’s dramatic decline since Japan’s Prime Minister Shinzo Abe embarked on his campaign for bold monetary easing has proven to be a huge filip for Japanese and Japan-related firms, and could give Maruti a further leg up over rivals like Tata Motors Ltd (TAMO.NS: Quote, Profile, Research, Stock Buzz).

Cheaper imports of parts and a smaller royalty payment to its parent Suzuki Motor Corp (7269.T: Quote, Profile, Research, Stock Buzz) contributed to an 80 percent rise in January-March net profit, smashing analysts’ forecasts. Maruti’s shares shot up 5 percent after the results.

“Indirect costs are on a quarter lag, so you have not seen the full impact of the indirect import benefit,” Chief Financial Officer Ajay Seth told an analysts conference call.

Also benefiting from robust sales of its Ertiga multi-purpose vehicle, net profit for the quarter was 11.5 billion rupees ($212 million) excluding the impact of its recent merger with its engine production unit Suzuki Powertrain India Ltd.

That was far higher than the 7.2 billion rupees expected by analysts polled by Thomson Reuters I/B/E/S.

“The numbers were superb, really extraordinary,” said Ashish Nigam, an auto analyst at Antique Stock Broking in Mumbai. “The yen impact could be much more in the coming quarters, so margins can only improve.”

The yen has also weakened further since the end of the quarter and many expect additional softening in the months ahead if Japanese investors shift funds abroad in search of higher returns.

Maruti’s results assumed a value of 94 yen to the dollar, while the yen is currently trading at around 98. The automaker spends the equivalent of around a quarter of its net sales on yen-denominated imports and royalties to Suzuki.

IMPRESSIVE MARGINS

The carmaker’s EBITDA (earnings before interest, tax, depreciation and amortisation) margin for the fourth quarter, excluding the powertrain unit, was 10.6 percent, compared with 7.5 percent in the same quarter last year, said Seth.

The yen impact accounted for 1.3 percentage points. He declined to comment on margin expectations going forward.

Maruti, which accounts for 40 percent of all of India’s passenger vehicle sales, has also struck gold as its Ertiga, a family sized multi-purpose vehicle (MPV), hit a sweet spot with consumers, helping it weather the first fall in India’s annual industry-wide car sales in a decade.

MPVs and sports-utility vehicles were the only segments to see sales soar last year, on a trend towards more bulky cars for India’s often poorly maintained and traffic-clogged roads, and generous government subsidies on diesel, the segments’ primary fuel.

Although its overall sales of vehicles declined by 4 percent during the quarter, the better product mix lifted Maruti’s net sales 9.4 percent to 125.7 billion rupees, excluding the powertrain unit.

Helped by expectations of yen weakness, Maruti has been the only automaker in India to see its share price climb for the year through to Thursday’s close, gaining 6.8 percent compared to an average 9.2 percent drop for its local peers.

After the results on Friday, its shares rose to end up 5.2 percent higher at their highest level since October 2009, compared with a 0.6 percent decline in the broader market .BSESN.

Maruti currently hedges 30 percent of its yen exposure, Seth said, adding that it would soon increase that to 60 percent as the currency remained volatile.

It also said that despite the lower costs due to the yen, it would continue a drive to reduce its reliance on components imported from Japan by boosting its local sourcing.

($1 = 54.1900 Indian rupees)

(Additional reporting by Reshma Apte in BANGALORE; Editing by Edwina Gibbs)

The yen’s dramatic decline since Japan’s Prime Minister
Shinzo Abe embarked on his campaign for bold monetary easing has
proven to be a huge filip for Japanese and Japan-related firms,
and could give Maruti a further leg up over rivals like Tata
Motors Ltd.

Cheaper imports of parts and a smaller royalty payment to
its parent Suzuki Motor Corp contributed to an 80
percent rise in January-March net profit, smashing analysts’
forecasts. Maruti’s shares shot up 5 percent after the results.

“Indirect costs are on a quarter lag, so you have not seen
the full impact of the indirect import benefit,” Chief Financial
Officer Ajay Seth told an analysts conference call.

Also benefiting from robust sales of its Ertiga
multi-purpose vehicle, net profit for the quarter was 11.5
billion rupees ($212 million) excluding the impact of its recent
merger with its engine production unit Suzuki Powertrain India
Ltd.

That was far higher than the 7.2 billion rupees expected by
analysts polled by Thomson Reuters I/B/E/S.

“The numbers were superb, really extraordinary,” said
Ashish Nigam, an auto analyst at Antique Stock Broking in
Mumbai. “The yen impact could be much more in the coming
quarters, so margins can only improve.”

The yen has also weakened further since the end of the
quarter and many expect additional softening in the months ahead
if Japanese investors shift funds abroad in search of higher
returns.

Maruti’s results assumed a value of 94 yen to the dollar,
while the yen is currently trading at around 98. The automaker
spends the equivalent of around a quarter of its net sales on
yen-denominated imports and royalties to Suzuki.

IMPRESSIVE MARGINS

The carmaker’s EBITDA (earnings before interest, tax,
depreciation and amortisation) margin for the fourth quarter,
excluding the powertrain unit, was 10.6 percent, compared with
7.5 percent in the same quarter last year, said Seth.

The yen impact accounted for 1.3 percentage points. He
declined to comment on margin expectations going forward.

Maruti, which accounts for 40 percent of all of India’s
passenger vehicle sales, has also struck gold as its Ertiga, a
family sized multi-purpose vehicle (MPV), hit a sweet spot with
consumers, helping it weather the first fall in India’s annual
industry-wide car sales in a decade.

MPVs and sports-utility vehicles were the only segments to
see sales soar last year, on a trend towards more bulky cars for
India’s often poorly maintained and traffic-clogged roads, and
generous government subsidies on diesel, the segments’ primary
fuel.

Although its overall sales of vehicles declined by 4 percent
during the quarter, the better product mix lifted Maruti’s net
sales 9.4 percent to 125.7 billion rupees, excluding the
powertrain unit.

Helped by expectations of yen weakness, Maruti has been the
only automaker in India to see its share price climb for the
year through to Thursday’s close, gaining 6.8 percent compared
to an average 9.2 percent drop for its local peers.

After the results on Friday, its shares rose to end up 5.2
percent higher at their highest level since October 2009,
compared with a 0.6 percent decline in the broader market
.

Maruti currently hedges 30 percent of its yen exposure, Seth
said, adding that it would soon increase that to 60 percent as
the currency remained volatile.

It also said that despite the lower costs due to the yen, it
would continue a drive to reduce its reliance on components
imported from Japan by boosting its local sourcing.

($1 = 54.1900 Indian rupees)

(Additional reporting by Reshma Apte in BANGALORE; Editing by
Edwina Gibbs)

In an effort to raise stuttering sales that far lag emerging Asian rival China, the German big three of Mercedes-Benz, Audi AG(NSUG.DE: Quote, Profile, Research) and BMW AG(BMWG.DE: Quote, Profile, Research) want to win buyers outside the ultra-rich with locally-made hatchbacks and smaller cars.

“This is a real year of offensive,” said Eberhard Kern, managing director of Daimler AG’s(DAIGn.DE: Quote, Profile, Research) Mercedes-Benz brand, for which sales dropped nearly one-third in the financial year just ended. He expects the rollout of its hatchback A-Class and a diesel version of its B-class model to help spur double-digit sales growth this year.

After two decades of economic boom, the sight of a sleek Lamborghini or polished Bentley outside Mumbai or Delhi’s flashiest hotels or most exclusive nightclubs is not uncommon.

Yet annual sales of luxury cars stand at just over 20,000 vehicles, or about 1 percent of the total car market, compared with around 7 percent in China.

Tapping into India’s love for compact vehicles – which account for around 75 percent of all car sales – is no guaranteed fix for the German firms, whose luxury hatchbacks will face competition from far cheaper mid-market offerings made by competitors including Toyota Motor Corp and Volkswagen AG(VOWG_p.DE: Quote, Profile, Research) in a highly cost-sensitive market.

“What the (manufacturers) are trying to do is lower the prices and create a much more marketable population. That trend is going to continue,” said Abdul Majeed, automotive leader at PricewaterhouseCoopers India.

“In India you have to demonstrate a value-for-money proposition … but ‘How can I make sure that the BMW stands a class apart from the other products?’ will be the challenge for the (manufacturers),” Majeed told Reuters.

Luxury car sales fell an annual 14 percent in the financial year that ended in March, as India’s lowest economic growth in a decade brought years of rising demand to an end.

VIDEO: Luxury brands in India link.reuters.com/mek47t

Overall car sales fell for the first time in 10 years in 2012, and now to attract customers who are affluent but lack the vast resources of the super-rich, Mercedes and its rivals are introducing lower-priced models, more of which than ever before will be built in India.

Mercedes, which has built cars in India since 1995, is doubling assembly capacity at its plant in Pune in western India to 20,000 cars annually this year, and will bring its A-Class small cars to the country in the next three months. It is also introducing guaranteed resale prices across its range, and adding cars like its GL-Class to its local plant this year.

Kern said he does not think local assembly will put off buyers, “because the Mercedes-Benz quality everywhere in the world is the same”. Mercedes will add more models to its local production line in 2014, Kern added.

The range offered by Mercedes in India starts with the B-Class from around $40,000. The A-Class starts in Germany at around $27,000. No details of the local price of the A-Class were available.

Audi, owned by Volkswagen, and BMW are following similar scripts. The UK-based luxury Jaguar Land Rover unit of Tata Motors Ltd(TAMO.NS: Quote, Profile, Research), which saw sales in India double last year, is even mulling full production, using local parts, in the country.

In 2014, over 90 percent of the vehicles Audi sells in India will be made there, up from around 80 percent now, as it adds the Q3 compact SUV to its Indian assembly line where the A4, A6, Q5 and Q7 are already being built.

“We will look at which of our global models will allow us in India an even higher and faster scaling up of our production capabilities,” Michael Perschke, managing director of Audi India, told Reuters.

Cars built from imported kits, known as complete knock-down (CKD) production, avoid high import taxes on ready-to-drive models such as the top-end Audi R8 Spyder, which costs around $320,000 in India and will continue to be shipped in from overseas plants and sold alongside “Made in India” vehicles.

No details of the cost of the upcoming Indian-made cars were available.

In his February budget, the finance minister raised the import duty on luxury cars to 100 percent from 75 percent, making local production even more attractive.

YOUNG AND TRENDY

None of the German luxury trio sold more than 7,500 cars in the financial year just ended, when Mercedes fell to third place behind BMW and Audi in a market it used to dominate.

Stuttgart-based Mercedes-Benz, which entered India in 1994, expects the total luxury sales to rise to 280,000 annually by 2020, or 4 percent of the total forecast car market. The company believes it must break into new markets to secure that business.

“There is a different growing segment below the 30 lakh (3 million rupees) threshold, where we are not in the game right now,” said Kern. “There the game starts for us in the next three months.”

The A-Class will be India’s “first luxury hatchback” according to Kern, and will be launched alongside a diesel version of its B-Class model, a fuel that powers 90 percent of the cars Mercedes now sells in India.

Both those smaller models will be prime candidates for local assembly in 2014, further lowering their cost, while the company is also considering the CLA-Class compact for an Indian entry, Kern said.

BMW, the country’s biggest luxury carmaker by sales, began making its Mini small car in India last week, and will add the 1 series hatchback to its production line in the south Indian city of Chennai this year.

Mercedes has introduced guaranteed resale values on its new cars in India, increased financing options and made its branding more youth-oriented, including a competition for Indians aged 18-25 to race its cars internationally, in a bid to broaden the range of customers coming into its showrooms.

“The current segment of customers is a CEO or the owner of the business,” said Amar Sheth, director of Shaman Wheels, a Mercedes dealership in Mumbai. “With the new generation cars coming in, it will be totally different. It might be his son, or his wife… (or) people between 20 and 30 years old.”

(Additional reporting by Aradhana Aravindan; Editing by Tony Munroe and Daniel Magnowski)

In an effort to raise stuttering sales that far lag emerging
Asian rival China, the German big three of Mercedes-Benz, Audi
AG and BMW AG want to win buyers outside the
ultra-rich with locally-made hatchbacks and smaller cars.

“This is a real year of offensive,” said Eberhard Kern,
India managing director of Daimler AG’s Mercedes-Benz
brand, for which sales dropped nearly one-third in the financial
year just ended. He expects the rollout of its hatchback A-Class
and a diesel version of its B-class model to help spur
double-digit sales growth this year.

After two decades of economic boom, the sight of a sleek
Lamborghini or polished Bentley outside Mumbai or Delhi’s
flashiest hotels or most exclusive nightclubs is not uncommon.

Yet annual sales of luxury cars stand at just over 20,000
vehicles, or about 1 percent of the total car market, compared
with around 7 percent in China.

Tapping into India’s love for compact vehicles – which
account for around 75 percent of all car sales – is no
guaranteed fix for the German firms, whose luxury hatchbacks
will face competition from far cheaper mid-market offerings made
by competitors including Toyota Motor Corp and
Volkswagen AG in India’s highly cost-sensitive
market.

“What the (manufacturers) are trying to do is lower the
prices and create a much more marketable population. That trend
is going to continue,” said Abdul Majeed, automotive leader at
PricewaterhouseCoopers India.

“In India you have to demonstrate a value-for-money
proposition … but ‘How can I make sure that the BMW stands a
class apart from the other products?’ will be the challenge for
the (manufacturers),” Majeed told Reuters.

Luxury car sales fell an annual 14 percent in the financial
year that ended in March, as India’s lowest economic growth in a
decade brought years of rising demand to an end.

Overall car sales fell for the first time in 10 years in
2012, and now to attract Indians who are affluent but lack the
vast resources of the super-rich, Mercedes and its rivals are
introducing lower-priced models, more of which than ever before
will be built in India.

Mercedes, which has built cars in India since 1995, is
doubling assembly capacity at its plant in Pune in western India
to 20,000 cars annually this year, and will bring its A-Class
small cars to the country in the next three months. It is also
introducing guaranteed resale prices across its range, and
adding cars like its GL-Class to its local plant this year.

Kern said he does not think local assembly will put off
buyers, “because the Mercedes-Benz quality everywhere in the
world is the same”. Mercedes will add more models to its local
production line in 2014, Kern added.

The range offered by Mercedes in India starts with the
B-Class from around $40,000. The A-Class starts in Germany at
around $27,000. No details of the Indian price of the A-Class
were available.

Audi, owned by Volkswagen, and BMW are following similar
scripts. The UK-based luxury Jaguar Land Rover unit
of India’s Tata Motors Ltd, which saw sales in India
double last year, is even mulling full production, using Indian
parts, in the country.

In 2014, over 90 percent of the vehicles Audi sells in India
will be made there, up from around 80 percent now, as it adds
the Q3 compact SUV to its Indian assembly line where the A4, A6,
Q5 and Q7 are already being built.

“We will look at which of our global models will allow us in
India an even higher and faster scaling up of our production
capabilities,” Michael Perschke, managing director of Audi
India, told Reuters.

Cars built from imported kits, known as complete knock-down
(CKD) production, avoid high import taxes on ready-to-drive
models such as the top-end Audi R8 Spyder, which costs around
$320,000 in India and will continue to be shipped in from
overseas plants and sold alongside “Made in India” vehicles.

No details of the cost of the upcoming Indian-made cars were
available.

In his February budget, India’s finance minister raised the
import duty on luxury cars to 100 percent from 75 percent,
making local production even more attractive.

YOUNG AND TRENDY

None of the German luxury trio sold more than 7,500 cars in
the financial year just ended, when Mercedes fell to third place
behind BMW and Audi in a market it used to dominate.

Stuttgart-based Mercedes-Benz, which entered India in 1994,
expects total Indian luxury sales to rise to 280,000 annually by
2020, or 4 percent of the total forecast car market. The company
believes it must break into new markets to secure that business.

“There is a different growing segment below the 30 lakh (3
million rupees, or $55,500) threshold, where we are not in the
game right now,” said Kern. “There the game starts for us in the
next three months.”

The A-Class will be India’s “first luxury hatchback”
according to Kern, and will be launched alongside a diesel
version of its B-Class model, a fuel that powers 90 percent of
the cars Mercedes now sells in India.

Both those smaller models will be prime candidates for local
assembly in 2014, further lowering their cost, while the company
is also considering the CLA-Class compact for an Indian entry,
Kern said.

BMW, India’s biggest luxury carmaker by sales, began making
its Mini small car in India last week, and will add the 1 series
hatchback to its production line in the south Indian city of
Chennai this year.

Mercedes has introduced guaranteed resale values on its new
cars in India, increased financing options and made its branding
more youth-oriented, including a competition for Indians aged
18-25 to race its cars internationally, in a bid to broaden the
range of customers coming into its showrooms.

“The current segment of customers is a CEO or the owner of
the business,” said Amar Sheth, director of Shaman Wheels, a
Mercedes dealership in Mumbai. “With the new generation cars
coming in, it will be totally different. It might be his son, or
his wife… (or) people between 20 and 30 years old.”

Europe’s biggest carmaker plans to launch a budget brand in
China with one of its local partners by about 2015, aiming to
draw on more than 2,000 dealers and a market share of over 20
percent to take on similar no-frills ventures established by
General Motors, Nissan and Honda.

The brand, likely to be a major talking point at the
Shanghai auto show, may include a van, estate and small sedan
priced about 6,000-7,000 euros ($7,800-$9,1000), company sources
have said. If successful, it could be replicated elsewhere.

But expanding into budget cars is not without its risks for
a group which makes more than half its 11.5 billion euros ($15.1
billion) operating profit from luxury marques like Audi and
Porsche. And competitors are not standing still.

“It’s difficult for any carmaker to unlearn many decades of
engineering,” said Deepesh Rathore, managing director of
research firm IHS Automotive in India, referring to VW’s
traditional focus on technologically advanced vehicles.

In the face of plunging European car sales, VW has continued
to prosper thanks to strong demand for its upmarket models in
emerging markets, and it is determined to snatch the global
sales crown from Toyota in the next five years.

But a group which makes everything from motorcycles and
supercars to 40-ton trucks increasingly feels that to do this -
and then stay ahead – it will have to address the boom in demand
for no-frills cars, particularly in developing economies.

“We’re having talks about this on a rolling basis,” said
Bernd Osterloh, deputy head of VW’s supervisory board and the
group’s top labour representative. “We have to tap new markets
like Southeast Asia or Africa more vigorously than before.”

The opportunity looks huge. Global sales of cars priced up
to $11,000 are forecast to surge 39 percent to 33.1 million cars
by 2020, accounting for about a third of the world market, from
23.9 million last year, according to IHS Automotive.

At the same time, the two largest markets for budget
vehicles, China and India, are expected to see sales in the
segment increase 44 percent and over 100 percent to 7.02 million
and 5.03 million respectively, IHS data show.

THE LOW-COST CAR IMPERATIVE

VW has long neglected budget cars, fearing that making money
on stripped-down vehicles jars with its global pursuit of
quality and profitability, a senior VW manager said on condition
of anonymity because the matter is confidential.

It seems the German group is now prepared to put these
concerns to one side in a bid to build a stronger presence in
some of the fastest growing car markets.

In India, for example, where cars smaller than four metres
account for three-quarters of sales, VW is trailing Toyota, Ford
and General Motors (GM), which in recent years have earned
a foothold in the market by rolling out country-specific
low-cost models.

VW’s only model in those segments, the Polo, starts at
around $9,100. Maruti Suzuki’s entry-level model, and
India’s biggest-selling car, the Alto, costs half that price,
while Hyundai’s small-car range starts at around
$5,200.

Starting in China seems logical for VW. Not only is it the
world’s biggest car market, but the German group has over three
decades of experience there and is growing sales strongly.

To comply with local rules on manufacturing, VW’s budget
brand is expected to be a co-venture with one of its local
partners – SAIC or FAW Group.

And to keep costs low, VW would use pre-existing mechanics
from models that have gone out of production or are nearing the
end of production, rather than develop new costly underpinnings
for the new brand from scratch, VW brand development chief
Ulrich Hackenberg told Reuters.

CHEAPER AND CHEAPER

However, the German group will have a fight on its hands
from the likes of GM, which has already launched its low-cost
Boajun brand in tandem with SAIC and Wuling, and
Nissan, which has the Venucia brand with partner Dongfeng.

And even if VW cracks the low-cost market in China, it is
unclear how easy it will be able to apply its learnings in other
markets, where it may have a weaker presence.

Meanwhile – and largely in response to Europe’s plunging car
market – rivals like Renault and GM’s Chevrolet, as
well as Hyundai and affiliate Kia, have been improving their
budget offerings for years, closing the gap with mainstream
brands in everything from design to fuel efficiency.

Renault’s so-called Entry models, initially a flop in target
markets like India, were an accidental hit back home and have
become the French automaker’s biggest earner, with profit
margins above 6 percent. Italian rival Fiat is also
mulling a low-cost brand to penetrate India.

Renault and affiliate Nissan are also devising an even
cheaper crop of budget cars for India and other emerging
markets, including a vehicle platform that Nissan’s revived
Datsun brand would also use.

The decline of Tata Motors’ $3,000 Nano, however,
shows that the race to the bottom isn’t without risks. With its
breadth of technology, VW may well stay out of the ultra-cheap
market.

“If they (Renault-Nissan) have as much success as Tata with
the Nano…,” VW’s Osterloh chuckled.

Global carmakers such as General Motors Co (GM.N: Quote, Profile, Research) and Volkswagen AG that have between them poured billions of dollars into factories, product development and marketing in India’s once-booming car market are now struggling as slow economic growth, high interest rates and rising fuel prices keep their target customers from parting with their cash.

Still, automakers like Honda say they can only grit their teeth and continue to invest – or risk missing out on what experts expect to be the world’s third-biggest car market by 2020 and a foothold in an emerging global small-car export hub.

“If there was any worry, we would never have done this,” Kanayama said in an interview in Mumbai. “Of course it’s a pity that the economy is sluggish, but it doesn’t worry us at all.”

Honda said on April 2 – two days after the end of the worst financial year for Indian car sales since 2001 – that it was spending 25 billion rupees to double its output capacity in the country to 240,000 cars per year by 2014.

“The potential is very high here,” Kanayama said. “Our investment is based on such long-term projections.”

For graphic on India car sales, click link.reuters.com/ref37t

To read story — Car sales fall 7 percent in FY13, first drop in a decade, click here

Honda is not alone in appearing to be throwing good money after bad in India’s sagging automotive market.

Ford Motor Co (F.N: Quote, Profile, Research) is spending $1 billion on a new factory even as its current plant runs at only 60 percent of capacity. Maruti Suzuki India Ltd (MRTI.NS: Quote, Profile, Research), controlled by Japan’s Suzuki Motor Corp &269.T, is spending around $750 million to add 250,000 cars annually.

Carmakers say India’s huge population, low car penetration and rising incomes mean sales can only go up in the long run, while the opportunity to export to Africa and the Middle East makes for a compelling investment case. Sales fell 7 percent in the last fiscal year.

“Clearly we believe the macro conditions are a short-term blip,” said Nagesh Basavanahalli, managing director of Fiat SpA (FIA.MI: Quote, Profile, Research) and its Chrysler unit in India.

Basavanahalli, who took the reins at the Italian and U.S. carmakers this month, has been tasked with trying to re-launch the Fiat brand and introduce its Jeep and Abarth lines in India even as well-established names like India’s own Tata Motors Ltd (TAMO.NS: Quote, Profile, Research) see sales plummet.

“Are there challenges? Yes. But are we very confident based on the product plan that we have and based on the actions we are taking? … Absolutely yes,” he said.

Not everyone is convinced.

France’s Peugeot SA (PEUP.PA: Quote, Profile, Research) last year shelved a 600 million euro plan to build a factory in India, and a senior executive at an Asian automaker not present in India told Reuters last month that the company did not think the potential returns on setting up a factory were large enough.

GLIMMER AMONG GLOOM

Importantly, Honda’s investment is not just in capacity.

The Japanese carmaker launched a new sedan model last week and, like others, is in the process of adding diesel options across its range as it races against global rivals to tap market segments that are still growing as overall demand falls.

Government subsidies make diesel cheaper than petrol.

Customers hit hardest by the economic gloom have been first-time buyers and the emerging middle class which relies on bank loans for big purchases, analysts say, with sales of small cars – which account for over 70 percent of the market – falling by around 10 percent.

By contrast, demand for sports utility vehicles (SUVs) and mid-level diesel cars has risen, with models such as Maruti Suzuki’s diesel Dzire and Renault’s low-cost Duster SUV helping their companies outperform rivals. Honda’s new Amaze sedan, which starts at 500,000 rupees, is in a segment where sales were up 21 percent last financial year.

Ford, Fiat-Chrysler, Maruti and Honda are all lining up to launch new compact SUVs.

The firms which lack models in the growth segments are suffering most. Volkswagen, whose Indian failings are a blot on its global success, built 66,699 cars in the country in the last financial year – equivalent to no more than 31 percent of capacity, according to a report by Kotak Securities.

General Motors’ Indian unit, whose sales fell 20 percent in the last financial year, lost 7.46 billion rupees in the financial year ended March 2012.

Some of GM’s rivals are working to increase exports from their less-than-stretched Indian production lines to offset the local slump. Volkswagen nearly tripled exports from India last year and Ford now exports almost a third of its Indian cars.

Long-term estimates vary, but almost all industry analysts expect India’s annual car sales to hit 6 million by 2020, when it will trail only China and the United States. The Society of Indian Automobile Manufacturers (SIAM), the industry’s primary lobby group, has estimated sales of 9 million by then.

Optimists cite a young, fast-urbanising population, rising incomes and an expected rebound in the country’s economic growth, in addition to paltry ownership levels of around 12 cars per 1,000 people, according to SIAM, about a quarter of China’s.

“The entire structural story of India’s car potential still holds true, despite the current cyclical downturn,” said Jinesh Gandhi, automotive equities analysts at brokerage Motilal Oswal in Mumbai.

“I would clearly invest in new capacities for the future rather than wait for the market to turn around.” (Editing by Tony Munroe and Daniel Magnowski)

Global carmakers such as General Motors Co (GM.N: Quote, Profile, Research, Stock Buzz) and Volkswagen AG (VOWG_p.DE: Quote, Profile, Research, Stock Buzz) that have between them poured billions of dollars into factories, product development and marketing in India’s once-booming car market are now struggling as slow economic growth, high interest rates and rising fuel prices keep their target customers from parting with their cash.

Still, automakers like Honda say they can only grit their teeth and continue to invest – or risk missing out on what experts expect to be the world’s third-biggest car market by 2020 and a foothold in an emerging global small-car export hub.

“If there was any worry, we would never have done this,” Kanayama said in an interview in Mumbai. “Of course it’s a pity that the economy is sluggish, but it doesn’t worry us at all.”

Honda said on April 2 – two days after the end of the worst financial year for Indian car sales since 2001 – that it was spending 25 billion rupees ($460 million) to double its output capacity in the country to 240,000 cars per year by 2014.

“The potential is very high here,” Kanayama said. “Our investment is based on such long-term projections.”

Honda is not alone in appearing to be throwing good money after bad in India’s sagging automotive market.

Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz) is spending $1 billion on a new factory even as its current plant runs at only 60 percent of capacity. Maruti Suzuki India Ltd (MRTI.NS: Quote, Profile, Research, Stock Buzz), controlled by Japan’s Suzuki Motor Corp &269.T, is spending around $750 million to add 250,000 cars annually.

Carmakers say India’s huge population, low car penetration and rising incomes mean sales can only go up in the long run, while the opportunity to export to Africa and the Middle East makes for a compelling investment case. Sales fell 7 percent in the last fiscal year.

“Clearly we believe the macro conditions are a short-term blip,” said Nagesh Basavanahalli, managing director of Fiat SpA (FIA.MI: Quote, Profile, Research, Stock Buzz) and its Chrysler unit in India.

Basavanahalli, who took the reins at the Italian and U.S. carmakers this month, has been tasked with trying to re-launch the Fiat brand and introduce its Jeep and Abarth lines in India even as well-established names like India’s own Tata Motors Ltd (TAMO.NS: Quote, Profile, Research, Stock Buzz) see sales plummet.

“Are there challenges? Yes. But are we very confident based on the product plan that we have and based on the actions we are taking? … Absolutely yes,” he said.

Not everyone is convinced.

France’s Peugeot SA (PEUP.PA: Quote, Profile, Research, Stock Buzz) last year shelved a 600 million euro ($787.80 million) plan to build a factory in India, and a senior executive at an Asian automaker not present in India told Reuters last month that the company did not think the potential returns on setting up a factory were large enough.

GLIMMER AMONG GLOOM

Importantly, Honda’s investment is not just in capacity.

The Japanese carmaker launched a new sedan model last week and, like others, is in the process of adding diesel options across its range as it races against global rivals to tap market segments that are still growing as overall demand falls.

Government subsidies make diesel cheaper than petrol.

Customers hit hardest by the economic gloom have been first-time buyers and the emerging middle class which relies on bank loans for big purchases, analysts say, with sales of small cars – which account for over 70 percent of the market – falling by around 10 percent.

By contrast, demand for sports utility vehicles (SUVs) and mid-level diesel cars has risen, with models such as Maruti Suzuki’s diesel Dzire and Renault’s low-cost Duster SUV helping their companies outperform rivals. Honda’s new Amaze sedan, which starts at 500,000 rupees ($9,200), is in a segment where sales were up 21 percent last financial year.

Ford, Fiat-Chrysler, Maruti and Honda are all lining up to launch new compact SUVs.

The firms which lack models in the growth segments are suffering most. Volkswagen, whose Indian failings are a blot on its global success, built 66,699 cars in the country in the last financial year – equivalent to no more than 31 percent of capacity, according to a report by Kotak Securities.

General Motors’ Indian unit, whose sales fell 20 percent in the last financial year, lost 7.46 billion rupees ($137 million) in the financial year ended March 2012.

Some of GM’s rivals are working to increase exports from their less-than-stretched Indian production lines to offset the local slump. Volkswagen nearly tripled exports from India last year and Ford now exports almost a third of its Indian cars.

Long-term estimates vary, but almost all industry analysts expect India’s annual car sales to hit 6 million by 2020, when it will trail only China and the United States. The Society of Indian Automobile Manufacturers (SIAM), the industry’s primary lobby group, has estimated sales of 9 million by then.

Optimists cite a young, fast-urbanizing population, rising incomes and an expected rebound in the country’s economic growth, in addition to paltry ownership levels of around 12 cars per 1,000 people, according to SIAM, about a quarter of China’s.

“The entire structural story of India’s car potential still holds true, despite the current cyclical downturn,” said Jinesh Gandhi, automotive equities analysts at brokerage Motilal Oswal in Mumbai.

“I would clearly invest in new capacities for the future rather than wait for the market to turn around.”

($1 = 54.6250 Indian rupees)

($1 = 0.7616 euros)

(Editing by Tony Munroe and Daniel Magnowski)

Carmakers in India, two years ago the world’s hottest growth market after China, have seen high interest rates, rising fuel prices and prolonged economic gloom turn an industry recently growing at 30 percent a year into one plagued by huge discounts, showrooms full of unsold cars, and chronic overcapacity.

Quitting India is not an option for global majors such as Ford Motor Co (F.N: Quote, Profile, Research) and Volkswagen AG (VOWG_p.DE: Quote, Profile, Research), given its huge population, rising incomes and long-term potential. But manufacturers that have sunk billions into the country are likely to pare back expansion plans as economic troubles persist

“The industry, like the rest of the economy, has slowed down very substantially,” R.C. Bhargava, chairman of market leader Maruti Suzuki (MRTI.NS: Quote, Profile, Research), told Reuters.

While surging sales of SUVs have been a bright spot for some manufacturers, sales of the smaller cars that account for most of the passenger vehicle market have crashed this year.

“Everything has slowed down by two to three years,” Bhargava said. “Everybody has to consolidate their operations, look how to manage with less, do more with less … This recessionary period will force people to be more efficient.”

Car sales in the first 11 months of the financial year that ended March 31 were down an annual 4.6 percent, and in March sales fell for almost all carmakers in India. The official data for March and for the full year will be released by the Society of Indian Automobile Manufacturers (SIAM) on Wednesday.

Last year, car sales grew 2.2 percent in India.

The immediate future looks mostly gloomy for an industry that experts had expected to ring up annual car sales of 9 million by 2020 from less than 2 million this year, but looks set to significantly undershoot that target.

“I don’t think those goals are going to happen in that timeframe,” said Bhargava. “Conditions have changed a lot”

Sales will continue to remain weak in 2013, executives said, with a rebound only likely after a substantial cut in interest rates and sustained improvement in the country’s economic growth, which in the last financial year fell to its lowest in a decade.

“In the absence of any positive stimulus and sentiments … We foresee the pressure on volumes to continue until there is significant improvement in macro-economic factors,” said Rakesh Srivastava, senior vice president of Hyundai Motor Co’s (005380.KS: Quote, Profile, Research) Indian unit, which like Maruti specialises in small cars.

Hyundai, India’s No. 2 carmaker, has weathered the storm better than others, registering flat growth. Global rivals such as General Motors Co (GM.N: Quote, Profile, Research), Ford, Toyota Motor Corp (7203.T: Quote, Profile, Research) and Volkswagen have seen already underwhelming sales volumes fall by as much as 20 percent.

CAPACITY GLUT

In 2011, when sales were rising 30 percent a year, Ford and Maruti wrote cheques for around $1 billion each to build plants in Gujarat.

Last month, Tata Motors Ltd’s (TAMO.NS: Quote, Profile, Research) factory in Gujarat, built solely to manufacture its much-vaunted low-cost Nano, cranked out just 1,282 cars, a miserly 6 percent of total possible capacity at the 250,000 cars a year plant.

Tata has been India’s worst-performing major carmaker this year, with car sales plunging almost 30 percent, but its capacity utilisation woes are mirrored across the industry, where a race to ramp up in recent years has created a glut.

India’s total passenger vehicle production capacity stands at around 4.9 million, meaning the average industry utilisation level stands at just under 55 percent. Total capacity is slated to hit 5.5 million by the end of 2015.

“I suspect everybody will re-evaluate the time when they need new capacity,” said Bhargava, adding that his company, controlled by Japan’s Suzuki Motor Corp (7269.T: Quote, Profile, Research), would likely open its new plant in Gujarat in late 2015, later than planned.

The only bright spot has been a surge in demand for sport utility vehicles (SUVs). Sales of off-road and crossover models grew by over 50 percent over the past 12 months, providing incremental growth for some manufacturers.

Mahindra and Mahindra Ltd (MAHM.NS: Quote, Profile, Research), a domestic SUV specialist, grew its passenger vehicle sales by 27 percent in the last fiscal year, while Renault SA (RENA.PA: Quote, Profile, Research) sold almost 40,000 of its budget SUV Dusters, which it launched in July.

Sales of SUVs and vans are not counted as part of the passenger car figures released by SIAM. Including both cars and SUVs, overall passenger vehicles sales rose an annual 4.1 percent between April and February.

Even SUV sales, helped by cheap diesel, are starting to show signs of slowing growth as the government moves to reduce its subsidy on the fuel, while a recent rise in tax on the vehicles may curb demand.

“Any meaningful growth recovery will likely happen only in FY15E,” Macquarie wrote in a recent research report, referring to the financial year that ends in March 2015.

(Editing by Tony Munroe and Daniel Magnowski)

Carmakers in India, two years ago the world’s hottest growth
market after China, have seen high interest rates, rising fuel
prices and prolonged economic gloom turn an industry recently
growing at 30 percent a year into one plagued by huge discounts,
showrooms full of unsold cars, and chronic overcapacity.

Quitting India is not an option for global majors such as
Ford Motor Co and Volkswagen AG, given its
huge population, rising incomes and long-term potential. But
manufacturers that have sunk billions into the country are
likely to pare back expansion plans as economic troubles persist

“The industry, like the rest of the economy, has slowed down
very substantially,” R.C. Bhargava, chairman of market leader
Maruti Suzuki, told Reuters.

While surging sales of SUVs have been a bright spot for some
manufacturers, sales of the smaller cars that account for most
of the passenger vehicle market have crashed this year.

“Everything has slowed down by two to three years,” Bhargava
said. “Everybody has to consolidate their operations, look how
to manage with less, do more with less … This recessionary
period will force people to be more efficient.”

Car sales in the first 11 months of the financial year that
ended March 31 were down an annual 4.6 percent, and in March
sales fell for almost all carmakers in India. The official data
for March and for the full year will be released by the Society
of Indian Automobile Manufacturers (SIAM) on Wednesday.

Last year, car sales grew 2.2 percent in India.

The immediate future looks mostly gloomy for an industry
that experts had expected to ring up annual car sales of 9
million by 2020 from less than 2 million this year, but looks
set to significantly undershoot that target.

“I don’t think those goals are going to happen in that
timeframe,” said Bhargava. “Conditions have changed a lot”

Sales will continue to remain weak in 2013, executives said,
with a rebound only likely after a substantial cut in interest
rates and sustained improvement in the country’s economic
growth, which in the last financial year fell to its lowest in a
decade.

“In the absence of any positive stimulus and sentiments …
We foresee the pressure on volumes to continue until there is
significant improvement in macro-economic factors,” said Rakesh
Srivastava, senior vice president of Hyundai Motor Co’s
Indian unit, which like Maruti specialises in small
cars.

Hyundai, India’s No. 2 carmaker, has weathered the storm
better than others, registering flat growth. Global rivals such
as General Motors Co, Ford, Toyota Motor Corp
and Volkswagen have seen already underwhelming sales volumes
fall by as much as 20 percent.

CAPACITY GLUT

In 2011, when sales were rising 30 percent a year, Ford and
Maruti wrote cheques for around $1 billion each to build plants
in the western state of Gujarat.

Last month, Tata Motors Ltd’s factory in Gujarat,
built solely to manufacture its much-vaunted low-cost Nano,
cranked out just 1,282 cars, a miserly 6 percent of total
possible capacity at the 250,000 cars a year plant.

Tata has been India’s worst-performing major carmaker this
year, with car sales plunging almost 30 percent, but its
capacity utilisation woes are mirrored across the industry,
where a race to ramp up in recent years has created a glut.

India’s total passenger vehicle production capacity stands
at around 4.9 million, meaning the average industry utilisation
level stands at just under 55 percent. Total capacity is slated
to hit 5.5 million by the end of 2015.

“I suspect everybody will re-evaluate the time when they
need new capacity,” said Bhargava, adding that his company,
controlled by Japan’s Suzuki Motor Corp, would likely
open its new plant in Gujarat in late 2015, later than planned.

The only bright spot has been a surge in demand for sport
utility vehicles (SUVs). Sales of off-road and crossover models
grew by over 50 percent over the past 12 months, providing
incremental growth for some manufacturers.

Mahindra and Mahindra Ltd, a domestic SUV
specialist, grew its passenger vehicle sales by 27 percent in
the last fiscal year, while Renault SA sold almost
40,000 of its budget SUV Dusters, which it launched in July.

Sales of SUVs and vans are not counted as part of the
passenger car figures released by SIAM. Including both cars and
SUVs, overall passenger vehicles sales rose an annual 4.1
percent between April and February.

Even SUV sales, helped by cheap diesel, are starting to show
signs of slowing growth as the government moves to reduce its
subsidy on the fuel, while a recent rise in tax on the vehicles
may curb demand.

“Any meaningful growth recovery will likely happen only in
FY15E,” Macquarie wrote in a recent research report, referring
to the financial year that ends in March 2015.