Last Updated 28 Jun 2021

Forecasting Compact Car Market in India

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Forecasting Compact Car Market in India

Problem Statement KIA has decided to enter Compact Car market in India. KIA proposes to introduce cars in the range of 5-8 Lacks that will compete with Maruti Dzire, Hundai Accent, Maruti SX4 rtc. The current size of market for cars in this range is : Quantity of cars produced in this range is: Current Market Share of various cars in this market From the Supply perspective KIA expectsFixed Costs as: Marginal Costs as: Average variable costs as. We need to assume something here based of any other company cost structure : for example say KIA need to spend 3. 5 lacks per car to produce at quantity 2000 nos per yesr> The objective of this study is to find out based on market and competitor analysis number of cars Kia need to produce to recover their investment in 5 years.

1. Demand Analysis

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The Law of Demand states that the relationship between a good’s price and the quantity demanded of that good is negative. This is referred to as a “change in quantity demanded”. Own-price changes cause movements along a given demand curve. The demand for automobiles for is dependent of certain factors: The demand function for X: XD = f (PX, Ps, Pc, I, T&P, Pop, A, O, PPP, R, SP, Av, In, Tr, F) Where: XD = quantity demanded PX = X’s price; the price of a car Ps = the price of substitutes Pc = the price of complements PPP=Purchasing Power parity of the consumers R= Rising income level of the consumer I= Inflation of the country A=after sales service cost T&P=tastes and preferences Pop=population in market or market size O=Oil prices SP= Price of Spare Parts Av= Availability of nearby service stationIn=Lack of proper roads Tr= Traffic Condition on the Roads F=Financing options available in the market Demand Curve 2009 Price vs Quantity analysis of Sedan Cars in India <Add Demand Curve analysis here> Shift In Demand Curve Changes in these shift the demand curve:

Number of buyers

Tastes and preferences

Income of the consumers

Purchasing Power Parity

Change in Fuel Prices

Change in Financing Options

After sales servicing cost

Availability of spare parts

Lack of Infrastructure Facilities like Roads, etc.

Price of substitutes or complements

Expectation of future prices

Number of buyers Demand is originating from new segments of the market; Apart from the usual clientele like industrialists, film stars and chairpersons of companies, an increasing number of young professionals like doctors, chartered accountants, lawyers and software professionals owning start-ups do not mind splurging on our cars. Tastes and preferences The surge in demand for compressed natural gas (CNG) and liquid petroleum gas (LPG) vehicles in India is driven by the increasing price of petrol and diesel, as well as by the fact that CNG prices are relatively low compared to prices for more traditional fuels. Demand is driven by growing environmental concern and the Indian government's proactive measures to implement Euro-II emission norms. Price of substitutes or complements Substitutes: Goods that can serve as replacements for one another: when the price of one increases, demand for the other goes up. When the price of a Honda city goes up, the demand for its substitute the Hyundai car goes up.

Complements/complementary goods:

Goods that “go together”, i. e. a decrease in the price of one results in an increase in demand for the other.If the price of petrol increases, the demand for car and its complementary good will fall. if the price of Cars were to rise dramatically, less people would chose to buy and use cars, switching perhaps to public transport - trains perhaps. It follows that under these circumstances the demand for the complementary good - Petrol - would also decrease. Expectations of future Price Changes Just as an actual increase in the price of a product may reduce demand, so the expectation that prices are about to rise will increase demand, as people buy more now, in order to avoid paying a higher price latter.

For example if price of automobiles is expected to increase after the budget the people would prefer buying their vehicles before the budget is put to effect in anticipation of high prices in future. Changes in income There are two ways an increase in the level of income can affect the demand of cars. On the demand side, typically an increase in income would mean an increase for the demand of cars. However, this may not apply to low end cars such a maruti. Since people have more money, they most likely would buy a nicer car, so low-end cars may see a decrease in demand.

Purchasing Power Parity

Though there is increase in income level of the consumers but that does not mean that his purchasing power has increased. Due to the rising inflation prevailing in the country the value of the money decreases and that decrease the purchasing power of the consumers.

This will affect the demand of the cars in country. Rising fuel Price As we know that when the fuel prices increases the sales of premium vehicles decreases as Fuel Prices and Cars arecomple me nta ry goods. In the case of complementary goods the price of one product affects the demand of other complementary good.So there has to be a proper decision in the price of complementary goods. Lack of infrastructure facilities: Lack of infrastructure facilities also affects the buying decision of the consumers. Since there is no proper infrastructure facility like roads, so due to this there can occur traffic jams, so consumer in that condition postpone their decision to buy a new car and that decreases the demand for the automobiles. 2.

SupPly Analysis The Law of Supply states that the relationship between a good’s price and the quantity supplied of the good is positive.Own-price changes cause movements along a given supply curve. The supply of cars e. g. Honda city is dependent on certain factors. The supply function for X: XS = g (PX, Pfop, Poc, S;amp;T, N) Where: XS = quantity supplied PX = X’s price Pfop = prices of factors of production Poc = opportunity costs (alternatives in productions) S;amp;T = science and technology R= Price of raw materials like Steel, tyre, plastics for making dashboards, etc. N = number of firms in the market.

A movement along the supply curve for X would be caused by a change in Px. ?

When price increases, the quantity supplied by suppliers rises at every price and when price decreases, the quantity supplied by suppliers falls at every price. Example: When price increases from $1000 to $5000, the quantity supplied rises from 3 units of cars to 5 units of cars. ?Changes in these shift the supply curve:

  1. Price of resources (labor, land, Capital, Raw materials)
  2. Management skills
  3. Technology Marketing
  4. Production techniques


1. Price of other commodities

There are two types

Competitive supply-If a producer switches from producing A to producing B, the price of A will fall and hence the supply will fall because it's less profitable to make A. Example- if the car producers switches from producing luxury car, Honda city to producing small segment car, the price of Honda city will fall and hence the supply will fall because it is less profitable to make Honda city. Joint supply-A rise in one product may cause a rise in another.

Example- a rise in the price of cars may cause a rise in the price of car accessories and car gear.This means supply of car accessories and car gear will rise because it is more profitable.

  1. Costs of production-If production costs rise, supply will fall because the manufacture of the product in question will become less profitable.
  2. Change in availability of resources-If steel becomes scarce; fewer cars can be made, so supply will fall.
  3. Research and Development: cost increases the price of the vehicles, regular products
  4. Forecasting model
  5. Cost/Profit Analysis for KIa

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Forecasting Compact Car Market in India. (2018, Dec 22). Retrieved from

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