Indian Auto Boom Gets Bubbly

The chronic disease of the biggest auto markets in the world–overcapacity–could spread to India sooner than most people think.

As everyone from Hyundai to Honda spends billions to rapidly ramp up their production here, sooner or later they will be making more cars than they can sell, say some experts.

“I see overcapacity even in the BRICs countries,” Dieter Becker, global chair of automotive coverage at KPMG consulting told India Real Time. “The number of players (in India) has increased dramatically.” The BRICs countries are Brazil, Russia, India and China.

That might seem hard to believe with car and commercial vehicle sales climbing to a record highof around 2.5 million in the year ended March 31, and in a country where just 12 people in 1,000 own a car or utility vehicle.

But it’s an opinion that even some car manufacturers hold—around one-third of the 200 auto executives who responded to a KPMG survey out earlier this year predicted India would be struggling with overcapacity in the auto sector within the next five years.

It’s still a minority view—and hardly the 20% to 35% overcapacity companies are already dealing with in the U.S., Japan and Europe–but it’s something Indian auto executives (as well as investors and car buyers) should think about as they tune-up their plans in India.

“Now there are 50 players [in India] and they are still building capacity,” said Mr. Becker.

But auto executives and analysts said that if the prices and products are right, India will have no trouble boosting passenger car and commercial vehicle sales. The KPMG survey showed that 40% of respondents expect sales to climb to more than four million by 2014.

The real problem for auto companies in the not-too-distant future could be the lack of roads and parking spaces and possible rising fuel prices said, Paul Blokland, director of auto research company Segment Y.

“If you look five years from now then it may be impossible for people to use their cars or park their cars,” he said. “That will be more of an issue than capacity.”