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Hyundai India can't meet demands!

Insufficient capacity is tying carmaker's hands, reports Ravi Krishnan.

india Updated: Jan 11, 2007 20:30 IST

It is a problem car companies in Detroit would love to have these days: not enough cars to meet soaring demand.

But that is exactly what is happening with Hyundai Motor India Ltd. Insufficient capacity is crimping the carmaker's ability to meet domestic demand as well as serve export markets from its Chennai plant. As a result, the car giant has to revise downward its India sales growth expectations this year to a five-year-low: down 5 percentage points compared with 18.5 per cent last year.

The Indian unit of the Korean carmaker is running at a full capacity of three lakh vehicles at its Chennai plant that makes cars for both the home and export markets. Hyundai is working on adding a second manufacturing facility in the same city that will double capacity. The only catch: the second factory will only be operational 11 months from now, in November.

"On hindsight, we have miscalculated" the demand and capacity match for the cars, said Arvind Saxena, vice president for marketing and sales at Hyundai.

Hyundai, which makes the popular Santro model in India, sells 1.86 lakh cars a year making it the No 2 seller in India. The rest of its production out of India is currently exported.

Market leader Maruti sells half of the passengers cars bought in India's 10 lakh-a-year market. This market is forecast to grow at 15 per cent to 18 per cent in 2007 with vehicle demand hitting two million units by 2010, according to the Society of Indian Automobile Manufacturers.

In a market where 2,740 cars are bought every day, the capacity bottleneck may hurt Hyundai's market share, analysts say.

"Domestic sales (for Hyundai) might get hit unless they have flexibility on export orders," said Ashutosh Goel, auto sector analyst for broking firm Edelweiss Securities.

But Hyundai uses its Indian factory to make all the Santros it sells worldwide. The company is also India's largest exporter of cars, even though the Chennai unit makes only 11.2% of the 2.6 million cars it makes globally. And Hyundai says it already has an export order backlog from Chennai of 18,000 vehicles.

So, Hyundai employees are putting extra effort to get more cars out of its existing factory.

Many Hyundai employees in India are sporting badges that say CC34, for Challenge and Change 34. The internal target: produce 3.4 lakh cars a year from a factory that is built, under normal production conditions, to produce three lakh vehicles. "We will do our best to make sure we won't lose market share" said Saxena.

While India is a strategic market for Hyundai, any decline in growth rates is likely to have a small impact on the parent company, Hyundai Motor Co. That's because India is a small part of overall sales of Hyundai globally, notes Sanjeev Rana, an analyst with Merrill Lynch in Seoul. He currently has a neutral recommendation on Seoul-based Hyundai Motor Co.

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First Published: Jan 11, 2007 20:07 IST