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Reinventing The Wheel For India

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India currently has just one automotive company, Tata Motors, in the global top 20, while China has three in the top 20.

The transportation sector in India is witnessing rapid growth as India urbanizes and the economy continues to expand. Car sales for July recorded a jump of 38% from a year earlier, rising to an all-time high. Delhi, Bangalore, Mumbai and Kolkata are all building up mass-transit systems. The national capital has just opened a swanky new airport terminal and the civil aviation industry has never been more competitive.

Consumers today have lots of choices in how they choose to get around. This is a far cry from the earlier times when government carriers dominated the skies and entry into the automotive industry was heavily regulated and just a handful of players allowed to manufacture cars. With the exception of railways, which continue to be a government monopoly, every sector of transportation is witnessing a vibrancy never seen before in India.

The upward shift in the standard and quality of transportation in India is one of the most visible and tangible benefits bestowed by economic growth. The problem – and investment opportunity – is that we have only scratched the surface.

India currently has just one automotive company, Tata Motors, in the global top 20, while China has three in the top 20 and ten in the top 30. Interestingly, many of China’s large automotive firms are home-grown, while international auto companies like Suzuki, Honda and Hyundai dominate the Indian market.

Vast regions of the country are yet to be connected by roads and airports. Conventional approaches and legacy technology cannot meet all the new demand. The 300 millionth car to be sold in India may not even run on petrol or diesel. There is a need for innovation to ensure that transportation capacity scales in step with mushrooming demand in every sector, be it aviation, passenger cars, commercial vehicles or mass transit.

Relying only on technologies and ideas from the West is not feasible, since there has never been a transportation need of this scale in the developed economies. Indian policy-makers and entrepreneurs must think for themselves.

Investing in auto startups and building companies in the transportation sector is certainly not for the fainthearted. Building an auto company from scratch is extremely difficult. Most investors would balk at the idea of funding a car company, given the capital investment required to manufacture cars. But it is all but impossible for an entrepreneur to start up without financing.

Tesla Motors, the electric car company funded by leading Silicon Valley VC firms and built by PayPal co-founder Elon Musk went public recently in the first IPO by a US-based automotive company since Ford Motor Co. in 1956. Mr. Musk staked his considerable personal wealth behind the venture, using his own money when institutional funding was difficult to obtain. Without Musk’s calculated gamble, Tesla wouldn’t have survived.

There are other ways of entering the industry. I met Dilip Chhabria, the founder of automotive design firm DC Design, at an event organized by IIM Calcutta last week and he said the time was right for investors to form a consortium to acquire the rights to rebuild and redesign the Ambassador, an iconic car produced by Hindustan Motors, the one-time market leader that is now struggling financially.

One should remember that while the precedents which are the basis of the negativity about automotive startups are from abroad, the Indian context and market represent a new dynamic – and that can make all the difference. The structural factors driving the growth of India’s automotive market are not going away anytime soon. Rather than facing a headwind, there will be a tailwind assisting those venturing into the Indian automotive industry.

While this doesn’t imply that any automotive startup will do well, high capital requirements should not be a deterrent to investing in the opportunity presented by the Indian auto sector at this stage of India’s growth cycle.

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