Global Car-makers Wrestle With India Slump

MUMBAI — Car sales in India have fallen sharply, creating challenges for global automakers like General Motors, Honda and Volkswagen, which have invested billions of dollars in factories, product development and marketing in the country.

India’s slowing economic growth, high interest rates and rising fuel prices have led to the biggest slump in the car market in more than a decade. Sales having fallen 7 percent in the financial year that ended last month. But automakers like Honda, which is investing almost $500 million in India, say they are unconcerned because they are in it for the long haul.

“If there was any worry, we would never have done this,” Hironori Kanayama, the head of Honda’s India unit, 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 this month that it would spend 25 billion rupees, or $463 million, to double its output capacity in India to 240,000 cars per year by next year.

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

Honda is not alone in expanding despite the slumping market. Ford is spending $1 billion on a new factory in India, even as its current plant runs at only 60 percent of capacity. Maruti Suzuki India, controlled by Suzuki Motor of Japan, is spending about $750 million to add the capacity to make an additional 250,000 cars annually.

Carmakers say India’s huge population, low penetration of car ownership 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.

“Clearly we believe the macro conditions are a short-term blip,” said Nagesh Basavanahalli, managing director in India for the Italian carmaker Fiat and its Chrysler unit.

Mr. Basavanahalli, who began in his current role this month, has been assigned to try to reintroduce the Fiat brand and introduce the Jeep and Abarth model lines in India, even as established names like India’s own Tata Motors see sales plummet.

“Are there challenges? Yes,” he said, but he added that he was “very confident, based on the product plan that we have and based on the actions we are taking.”

Not everyone shares that confidence in the Indian market. For example, last year, Peugeot of France shelved a plan worth €600 million, or about $790 million, to build a factory in India.

For its part, Honda is not just investing in manufacturing capacity. The Japanese carmaker introduced a new sedan model last week and, like other companies, is adding diesel-powered options as it races against global rivals to tap market segments that are still growing, even as overall demand falls.

Government subsidies make diesel less costly than gasoline in India.

Customers hit hardest by the economic gloom in India have been first-time buyers and the emerging middle class, which relies on bank loans for big purchases, analysts say. Sales of small cars, which account for more than 70 percent of the market, have fallen about 10 percent.

By contrast, demand for sport utility vehicles and midlevel diesel cars has risen, with models like the diesel Dzire from Maruti Suzuki and the low-cost Duster S.U.V. from Renault helping their companies outperform rivals. The new Honda Amaze sedan, which starts at 500,000 rupees, is in a segment in which sales were up 21 percent in the most recent financial year.

Ford, Fiat-Chrysler, Maruti and Honda are all preparing to introduce compact S.U.V.’s.

Companies that lack models in those segments are suffering the most. Volkswagen, whose shortcomings in India are a blot on its global success, built 66,699 cars in the country in the past financial year, using no more than 31 percent of its manufacturing capacity there, according to a report by Kotak Securities.

Sales at the Indian unit of General Motors fell 20 percent by volume in the financial year that just ended, and it lost 7.46 billion rupees in the fiscal year that ended in March 2012.

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

Long-term estimates vary, but many industry analysts expect annual car sales in India to reach six million by 2020, at which point it would trail only China and the United States in sales volume. The Society of Indian Automobile Manufacturers, the industry’s primary lobbying group, has estimated sales of nine million by that year.

Optimists say a young, fast-urbanizing population, rising incomes and an expected rebound in the country’s economic expansion rate will drive the market’s future growth. In addition, paltry ownership levels of about 12 cars per 1,000 people — about a quarter of China’s rate — indicate lots of room for growth.

“The entire structural story of India’s car potential still holds true, despite the current cyclical downturn,” said Jinesh Gandhi, an automotive equities analyst at the brokerage firm Motilal Oswal in Mumbai. “I would clearly invest in new capacities for the future, rather than wait for the market to turn around.”