Foreign automakers' hopes of a booming Indian car market are fading fast as a brutal second wave of COVID-19 infections and limited government room for more stimulus spending suggest a recovery could lag far behind China and the United States.
Carmakers that saw nearly a decade of Indian sales growth wiped out in 2020 are expecting a bounce back in demand this year. But it is likely to be led by small, affordable cars - a sector dominated by homegrown leader Maruti Suzuki and rival Hyundai - rather than the premium models churned out by most foreign manufacturers, industry executives and analysts say.
With their Indian factories running well below capacity and sales far behind original hopes, firms like Ford, Honda, Nissan, Skoda and Volkswagen face difficult decisions about future investments.
"It is a survival issue," said one senior executive with a Western automaker who declined to be named.
"Choosing to remain in India depends on the cost benefit analysis of other international markets," the executive added, forecasting that, if the outlook remains grim, the number of automakers in the country could fall.
India has already seen General Motors and Harley-Davidson shut up shop last year.
Anurag Mehrotra, managing director at Ford India, told Reuters the car market had not grown as projected and COVID had made matters worse, hurting domestic sales and exports.
"The uncertainty in the long-term growth prospects of the auto industry and economy have resulted in serious challenges, including capacity utilisation," Mehrotra said.
He said the pandemic demanded "agile solutions and tough decisions," but did not give details of Ford's plans. The U.S. automaker has said previously it is working on a new plan for India.
Volkswagen, which revised its India strategy in 2018 putting its sister company Skoda in charge, reiterated its plan to invest $1.2 billion to corner 5% of the market by 2025 with new launches, starting with two SUVs this year.
The ambition is to continue building and reinforcing the group's position in the Indian market, a spokesperson for the local unit, Skoda Auto Volkswagen India, said.
Honda and Nissan did not respond to emails seeking comment.
A decade ago, India was widely tipped to be the world's third-largest car market by 2020, lagging only the United States and industry leader China, as car ownership per capita among its 1.3 billion people caught up with more mature markets.
Instead, years of high taxes on large cars and SUVs that disproportionately affect foreign automakers, an economic slowdown in 2019 and the pandemic have held it back at No. 5.
The purchasing power of Indian consumers remains far below those in the West, with the weighted average price of a car just $10,000 compared with $38,000 in the United States, according to Ravi Bhatia at consultancy JATO Dynamics.
The long-term potential remains, analysts say, with India home to only around 27 cars per 1,000 people.
Consultant LMC Automotive expects Indian car sales to surge 35% this year to 3.17 million from almost a decade-low of 2.35 million in 2020.
But that would still be a fraction of the top markets. LMC sees sales in China rising 7% to 22 million vehicles this year, and climbing 21% in the United States to 13.5 million.
While both China and the United States are putting the pandemic behind them, India is still recovering from a deadly second wave and has fully vaccinated only about 5% of adults.
The extra pressure on public finances has also left India at risk of losing its investment credit rating, limiting its scope for the sort of additional stimulus measures that have helped to boost U.S. and Chinese auto markets.
It is a grim prospect for foreign manufacturers at a time when they are having to invest in electric vehicles and future technologies in more mature, profitable markets.
According to the Society of Indian Automobile Manufacturers (SIAM), Ford, Honda, Skoda and Volkswagen saw sales in India drop 20%-28% last fiscal year through March 31, more than twice the decline at Maruti Suzuki and Hyundai.
Utilisation levels have fallen below 30% at some foreign manufacturers' factories, data from SIAM showed.
That is a far cry from their initial goals.
Nissan had hoped for 5% share of India's car market by 2020 but has less than 1% today.
Honda told Reuters in 2018 that to be a "meaningful player" it needed 10% market share. Its share has fallen to 3% from 5% back then, and it has closed one of two plants in the country.
And Ford, which has invested over $2 billion in India, has less than a 2% share.
To compete in India companies need a steady stream of new products, which needs more investment, said LMC's Ammar Master.
"Automakers with an aged product range face an uphill battle and are at a greater risk of losing sales and market share," he said, adding companies like Ford, Nissan and Honda do not currently have strong product pipelines.
A lack of clarity on export policies and other regulatory hurdles are complicating matters for global carmakers, executives at two of them said.
India last year withdrew its export incentive scheme - crucial for companies like Ford and Volkswagen that ship out more cars than they sell locally - and is yet to finalise a new one.
The absence of free trade agreements between India and export nations is also putting it at a cost disadvantage compared with places like Thailand and Vietnam that have such deals, the executives added.
"India needs to offset its associated risks that hold back multinational automakers from scaling up or investing further," said former Ford India executive Vinay Piparsania.