MUMBAI Don't tell Hironori Kanayama that investing almost $500 million in a market enduring its worst slump for 12 years is a questionable business decision. Honda Motor Co's (7267.T) India head sees only one way forward: Keep calm and carry on.
Global carmakers such as General Motors Co (GM.N) and Volkswagen AG that have between them poured billions of dollars into factories, product development and marketing in India's once-booming car market are now struggling as slow economic growth, high interest rates and rising fuel prices keep their target customers from parting with their cash.
Still, automakers like Honda say they can only grit their teeth and continue to invest - or risk missing out on what experts expect to be the world's third-biggest car market by 2020 and a foothold in an emerging global small-car export hub.
"If there was any worry, we would never have done this," Kanayama 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 on April 2 - two days after the end of the worst financial year for Indian car sales since 2001 - that it was spending 25 billion rupees to double its output capacity in the country to 240,000 cars per year by 2014.
"The potential is very high here," Kanayama said. "Our investment is based on such long-term projections."
For graphic on India car sales, click link.reuters.com/ref37t
To read story -- Car sales fall 7 percent in FY13, first drop in a decade, click here
Honda is not alone in appearing to be throwing good money after bad in India's sagging automotive market.
Ford Motor Co (F.N) is spending $1 billion on a new factory even as its current plant runs at only 60 percent of capacity. Maruti Suzuki India Ltd (MRTI.NS), controlled by Japan's Suzuki Motor Corp &269.T, is spending around $750 million to add 250,000 cars annually.
Carmakers say India's huge population, low car penetration 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. Sales fell 7 percent in the last fiscal year.
"Clearly we believe the macro conditions are a short-term blip," said Nagesh Basavanahalli, managing director of Fiat SpA FIA.MI and its Chrysler unit in India.
Basavanahalli, who took the reins at the Italian and U.S. carmakers this month, has been tasked with trying to re-launch the Fiat brand and introduce its Jeep and Abarth lines in India even as well-established names like India's own Tata Motors Ltd (TAMO.NS) see sales plummet.
"Are there challenges? Yes. But are we very confident based on the product plan that we have and based on the actions we are taking? ... Absolutely yes," he said.
Not everyone is convinced.
France's Peugeot SA (PEUP.PA) last year shelved a 600 million euro plan to build a factory in India, and a senior executive at an Asian automaker not present in India told Reuters last month that the company did not think the potential returns on setting up a factory were large enough.
GLIMMER AMONG GLOOM
Importantly, Honda's investment is not just in capacity.
The Japanese carmaker launched a new sedan model last week and, like others, is in the process of adding diesel options across its range as it races against global rivals to tap market segments that are still growing as overall demand falls.
Government subsidies make diesel cheaper than petrol.
Customers hit hardest by the economic gloom have been first-time buyers and the emerging middle class which relies on bank loans for big purchases, analysts say, with sales of small cars - which account for over 70 percent of the market - falling by around 10 percent.
By contrast, demand for sports utility vehicles (SUVs) and mid-level diesel cars has risen, with models such as Maruti Suzuki's diesel Dzire and Renault's low-cost Duster SUV helping their companies outperform rivals. Honda's new Amaze sedan, which starts at 500,000 rupees, is in a segment where sales were up 21 percent last financial year.
Ford, Fiat-Chrysler, Maruti and Honda are all lining up to launch new compact SUVs.
The firms which lack models in the growth segments are suffering most. Volkswagen, whose Indian failings are a blot on its global success, built 66,699 cars in the country in the last financial year - equivalent to no more than 31 percent of capacity, according to a report by Kotak Securities.
General Motors' Indian unit, whose sales fell 20 percent in the last financial year, lost 7.46 billion rupees in the financial year ended March 2012.
Some of GM's rivals are working to increase exports from their less-than-stretched Indian production lines to offset the local slump. Volkswagen nearly tripled exports from India last year and Ford now exports almost a third of its Indian cars.
Long-term estimates vary, but almost all industry analysts expect India's annual car sales to hit 6 million by 2020, when it will trail only China and the United States. The Society of Indian Automobile Manufacturers (SIAM), the industry's primary lobby group, has estimated sales of 9 million by then.
Optimists cite a young, fast-urbanising population, rising incomes and an expected rebound in the country's economic growth, in addition to paltry ownership levels of around 12 cars per 1,000 people, according to SIAM, about a quarter of China's.
"The entire structural story of India's car potential still holds true, despite the current cyclical downturn," said Jinesh Gandhi, automotive equities analysts at brokerage Motilal Oswal in Mumbai.
"I would clearly invest in new capacities for the future rather than wait for the market to turn around." (Editing by Tony Munroe and Daniel Magnowski)
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