A Case Study on the Indian Small Car Industry
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A CASE STUDY ON THE INDIAN SMALL CAR INDUSTRY Prof. Tapan Panda A Case Study on the Indian Small Car Industry A BRIEF OVERVIEW ON THE INDIAN SMALL CAR INDUSTRY If there is one big market that is forcing the global auto majors to think small, it is India. Until yesterday, all the world's auto-manufacturers expected to create success out of their mid- size products. There were as many as five players in the mid car segment and just one--the Rs 7,956-crore Maruti Udyog Ltd (MUL)--in the small car segment. Suddenly Daewoo Motors India and Hyundai Motors India--are changing lanes mid- way, making the small car market as the pivot of their marketing strategy in India. Couple that with the fact that two domestic manufacturers--the Rs 10,074-crore Tata Engineering & Locomotive Co. (TELCO) and the Rs 223-crore Kinetic Engineering--are ready with similar indigenously-designed products to compete in this market The last two years has really been the period of war in the small car market The story Behind…. The auto majors read the market wrong. Since the small segment was dominated by MUL- with a market share of 96 per cent and given that the Trans –national brands already had tried-and-tested mid-size models in Indian market, this segment was more attractive than the existing ones. This perceptual change was because of two reasons. • The clutter in the large and midsize segment due to entry of many international players. • The small segment grew faster than the mid-size one, driven by the price-sensitive customer. Both the above factors had an enormous impact on mid-size car manufacturers. Stung by a sharp 80 per cent drop in sales between April and November 1997, over the corresponding period in 1996, Daewoo Motors slashed the price of its mid-size car, Cielo, by an unbelievable 21 per cent. It was the fate of many players in the mid and large car segment in India. 2 A Case Study on the Indian Small Car Industry The Trans-nationals were also serious about developing vendors in India. India is bound to become an important destination for the global auto industry. It took the financial turmoil in South East Asia and the slowdown in the Chinese auto market to reinforce the targeting to Indian Market. The new interest in the small car segment also reflects certain amount of bullishness on the part of auto manufacturers about India ! Despite projected over capacities--and current losses, carmakers continued to queue up their investments for small car segment. To day there are 10 global auto majors--including the $13-billion Suzuki Motor (Japan), the $65-billion Daewoo (South Korea), the $147-billion Ford (US), the $47-billion Fiat (Italy), and the $168-billion General Motors (US) operating in Indian Market. The Pre 1997 Car Market As late as 1997, the auto market in India was clearly segmented. At the entry level were MUL's 800-cc car--priced between Rs 2.10-lakh and Rs 2.45 lakh--and the Omni, at Rs 1.75 lakh. At the next level were the 993-cc Zen--priced at Rs 3.70 lakh--and the 999-cc Fiat Uno (Rs 3.62 lakh). Then came the 1,300-cc Esteem models--priced between Rs 4.69 lakh and Rs 5.95 lakh--the 1,498-cc Cielo (Rs 6.20 lakh), and the 1,598-cc Opel Astra (Rs 7.52 lakh), followed by premium cars like Mercedes-Benz's E-220 (Rs 22 lakh). Changing Lanes Two events have upset the equations in the price-segmented car market. Daewoo has Changed the lanes with the Cielo, which is now priced at Rs 4.90 lakh, and competes with the Zen's top-end model (Rs 4.40 lakh) and the Esteem's lower-end version (Rs 4.69 lakh). Ceilo has created a new value segment, where the price is not proportionate to the size. Daewoo's strategic response has very clearly redefined differentiation, from price or size to value. Hyundai Motors India, a subsidiary of the $27-billion Hyundai of South Korea launched its 999-cc Santro at the Auto Expo 1998 in Delhi. The model comes in five variants, with the non-air-conditioned, manual transmission model priced at Rs 2.80 lakh, and the semi- automatic, air-conditioned GLS model priced between Rs 3.15 lakh and Rs 4 lakh. Clearly, Hyundai's strategy is aimed at taking on the market leader, Maruti Udyog Limited But by 3 A Case Study on the Indian Small Car Industry pricing the deluxe model at Rs 4 lakh, it is also bridging the gap between the small and the middle car segments. At present Maruti’s Esteem LX is priced Rs 70,000 more than the Santro GLS, while the Cielo is priced Rs 90,000 more. The further entry of new players will only blur the segments. New entrants will be involved in price war to find a foothold in the Indian market. Few of the examples include: TELCO's positioning of its 1,400-cc Indica car--launched in November, 1998 and priced close to Maruti’s 800-cc model as a small car;and Honda sneaking its 1,300-cc City into the segment vacated by the Cielo although it is an accepted fact that pricing or positioning cannot be done in isolation. In a crowded market, that must depend on the available strategic opportunities." By creating new segments, companies can broaden their market base, increase capacity utilization levels, pre-empt competitors market entry moves and importantly lower costs. While Maruti did that by launching three versions of the Esteem, TELCO accomplished it by using a common platform for the Sumo, the Estate and the Sierra models; Hyundai is also planning to come to the market with five variants in near future. At high volumes, costs can be lowered by more than 20 per cent across variants due to experience curve effect. Configuring the sticker price for a car in the market today is no more a functional decision. It has become a strategic decision as it identifies the key segment’s response elasticity to the market offer. The two key inhibiting factors for the poor response to the auto war fare in Indian Car Market are basically the low per capita income at $350 (Rs 14,000 at current prices) and the high manufacturing costs. A large part of the population expected to graduate from two wheelers to four wheelers has not responded as they were supposed to during this period of time. The domestic auto giant Maruti Udyog limited, still forces the new players to benchmark themselves against its products which roll out from a depreciated, yet high-volume plant. It enjoys the fast mover as well as the cost advantage with the higher capacity utilisation that helps him to cut costs across as more cars you make, the cheaper they get. 4 A Case Study on the Indian Small Car Industry The Protected Giant MUL MUL, which set up shop in 1984, had 10 long years of relative protection to emerge as a formidable competitor with high volume and a strong brand image in the mind of Indian customers. When the industry was deregulated in 1993, the cost barrier had become so high that new companies could not dare to look at the small car segment. Instead, they settled for the mid-size segment, where both volumes and margins were expected to be high. However, a shakeout in the Indian mid-size car segment, the slowdown in international auto sales pushed transnational auto majors into India which have now turned the tide against MUL.. The present generation small cars launched recently are more contemporary in terms of both design and technology while Maruti's small-car technology is at least a decade old. Keeping the future growth potential of Indian market in mind, the auto majors are prepared to bear losses for the next 10 years .This will help them to gain a good market share the long run and provide breathing space to counter the strategic moves of the leader. Hence, the narrowing price differential between the old and the new small cars is the first call of the auto majors against Maruti in Indian Market. If Maruti has to try and match the features of new generation small cars, it would mean additional costs. On the contrary, if Maruti decides to hold its price line and add new features, it could translate into losses or at least low profits. But MUL can still bank on at least two Suzuki models: the proposed 657-cc Cervo C and the current 996-cc Wagon R to battle its rivals in the future. The Advent of the Auto Majors Besides bracing up for losses in the initial years, auto majors like Hyundai and Daewoo are banking on exports too. At the moment export may look unattractive because of the South Asian meltdown but in the long run, low production costs and component-manufacturing skills will make India- made cars competitive at global market place. Hence they are looking India as a production base to cater to the growing Asian market by way of outsourcing from Indian manufacturing base. However many a hurdles they have to cross on the journey to profitability. 5 A Case Study on the Indian Small Car Industry The investments necessary for a large plant are simply huge. Daewoo has, so far, sunk Rs 2,700 crore in a 1.20-lakh-unit-a-year plant.