India's carmakers on fast track to capacity glut

Sun Feb 12, 2012 11:40pm EST
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By Henry Foy

MUMBAI (Reuters) - In the race for sales, India's carmakers may need to ease off the accelerator as they speed towards a head-on collision with a capacity glut.

Lured by 30 percent sales growth over the past two fiscal years, carmakers have pledged $6 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 (MRTI.NS: Quote), the industry's biggest player in India, announced a $390 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. Global majors like General Motors (GM.N: Quote), Toyota (7203.T: Quote) and Peugeot (PEUP.PA: Quote) 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.

"If everybody comes along with what they say they are going to do, we are definitely going to have serious surplus capacity," said Maruti's chairman, R.C. Bhargava.

"With more manufacturers coming, everyone will have to work with thinner margins," Bhargava said, adding that capacity could be 30 to 40 percent higher than demand in the next few years.

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