EU carmakers face tough India market even after trade deal

India and the European Union are set to sign a trade deal on Tuesday, including slashing tariffs on imports of EU-made cars to 40% from as high as 110%, the biggest opening yet of India's vast market for Volkswagen (VOWG.DE) and Renault (RENA.PA).

The move, however, only edges the door open, analysts said, with local car brands and Asian rivals Suzuki Motor (7269.T) and Hyundai (005380.KS) dominating the market, with hot-selling models like the Maruti Suzuki Wagon R kei car - a class of pint-sized, affordable vehicles smaller than a Mini Cooper.

"It's a start. When we talk about exports from Europe, it's only about premium cars. For the volume sector it is difficult," said Stefan Bratzel of German auto research group CAM, who said Suzuki and Hyundai had better understood the market.

"In India it's about cheap, reliable, stable cars. The Volkswagen Group cars have been too expensive. Suzuki has benefited from the kei cars which are highly popular in Japan."

EU carmakers have less than 3% share of the market

With a modest production footprint and annual sales still in the tens of thousands of cars, European brands have huge room to expand after losing market share in the last decade.

European carmakers hold under a 3% share of India's car market, Indian automobile industry data shows.

The South Asian country's market is dominated by Suzuki Motor and homegrown brands Mahindra (MAHM.NS) and Tata, which together hold two-thirds.

India has the world's third-largest car industry after the U.S. and China, but its 4.4 million-vehicles-a-year domestic auto market has been one of the most protected, with current levies of 70% and 110% on imported cars.

"India is a dynamically growing market and of considerable strategic importance to the Volkswagen Group," a spokesperson for the carmaker which controls Audi, Porsche (P911_p.DE) and Skoda said, adding it would look at the business impact from the trade deal.

Mercedes-Benz (MBGn.DE) said reduced tariffs should boost carmakers from both regions. BMW declined to comment.

Warburg Research analyst Fabio Hoelscher said a cut to 40% would make luxury European carmakers more competitive.

"The biggest winners versus before are brands like Porsche who import their entire portfolio as completely built units," he said, though he cautioned the move would take time to boost profits, while ongoing U.S. uncertainty would temper shares.

"After that, in the medium term, there is potential to expand local manufacturing."

India car market has big potential for growth

High U.S. import tariffs and a cut-throat market in China have pushed many automakers to consider new growth markets such as India, where the market is expected to grow by over a third to 6 million vehicles a year by 2030.

Prime Minister Narendra Modi's government has agreed to cut the tariff rate on a limited number of cars from the 27-nation bloc with an import price of more than 15,000 euros ($17,739), two sources briefed on the talks told Reuters.

This will be further lowered to 10% over time, they added.

ING Research analyst Rico Luman was bullish, saying that an EU-India trade deal "could turn into a significant opportunity for European car makers" in the medium run.

"The Indian car market is still in the early stages of maturing, which means there is substantial growth potential," Luman said.