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Compact Combat 2010
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The voice on the long-distance ISD call is barely audible, but the enthusiasm is unmistakable, as the caller wishes everyone a merry Christmas and a happy new year. But Nigel Wark, executive director for sales, marketing and service at Ford India, has more than just the year-end season’s cheer to feel bright and happy about. Wark’s company, after more than a decade on the fringes, is finally priming itself for a shot at the core of India’s car market with its hatchback, Figo. “Figo is going to be the game changer for Ford in India, as we are entering the volume market for the first time,” he says, with barely concealed expectancy.
Wark’s feelings would be shared by a host of other, big global car makers, namely Volkswagen, General Motors (GM), Nissan and Toyota. All of them — barring Toyota, which will drive in its small car in early 2011 — will begin a battle in 2010 with heavyweight incumbents Maruti Suzuki, Hyundai and Tata Motors to grab a share of India’s hatchback segment. Comprising almost 80 per cent of the Indian car market, the segment is the primary driver behind the country being counted among the fastest-growing car markets globally. GM, of course, has been there with its Rs 3-lakh-and-thereabouts bestseller Spark, and the higher-priced Aveo U-VA, which has not done too well. Now, though, GM will launch another hatchback, and the others their first, that will be priced upwards of Rs 4 lakh.
Sounds too high for comfort? Not really. Take, for instance, the costliest hatchback in India at present, Honda’s Jazz. Priced upwards of Rs 7 lakh — Rs 2.5 lakh higher than many sedans — the car was universally dismissed as a no-hoper when it was launched this June. But in six months, Jazz has notched up sales of almost 6,000 units, according to Society of Indian Automobile Manufacturers (SIAM), a respectable number by any measure. “We are on course as far as targets are concerned,” says Jnaneswar Sen, vice-president of marketing at Honda Siel Cars, who, however, laments, “We had 50,000 enquiries in the initial days. We could have done better.”
Or, take Fortuner, the Rs 18-lakh sports utility vehicle (SUV) from Toyota. When bookings opened this August, Toyota officials were taken aback by the response. Buyers queued up at booking centres, and within three months, the Fortuner racked up 9,000 bookings, forcing the company to stop taking further orders. Or take Honda’s top-selling sedan City. Its third generation, priced Rs 1.5 lakh higher than the previous version, has performed better, helping the company grow more than 30 per cent this fiscal (April-November), compared to a slide of over 15 per cent in all of 2008-09.
But more than SUVs and sedans, similar trends in the small car segment augur well for wannabes Volkswagen, Ford, GM and Nissan, who are about to unleash their modern, made-for-India but world-class hatchbacks — Polo, Figo, Beat, and Micra, respectively. For variety, there will be electric vehicles from Reva Electric Car Company, which will introduce the three-door, four-seater Reva NXR in 2010. Reva’s president, R. Chandramouli, is betting on consumers’ increasing penchant for green products to beat the mainstream companies.
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The onrush seems timed just right. In April-November 2009, the overall market (including SUVs) has grown more than 21 per cent, according to SIAM. And the hatchback segment (comprising SIAM’s mini and compact segments), propelled by new launches such as Maruti’s Ritz, Hyundai’s i20, Honda’s Jazz and Fiat’s Grande Punto, has grown about 27 per cent. That seems the perfect setting for the newcomers, which are also coming in with sizeable production capacities and distribution networks, and with an eye out for greater share of local parts. The incumbents, meanwhile, are not yielding an inch, making for a grand face-off.
The Shifting Centre Of Gravity
There is a distinct sense of shift in the centre of gravity of the hatchback market. Within the segment, two distinct sub-segments have emerged: the sub Rs 4-lakh cars and the Rs 4-lakh-plus cars. The low-priced segment still has a bigger share of the market, but the higher one has almost caught up and is growing faster.
Numbers provided by J.D. Power and Associates show that in 2007 (January-November), the share of the Rs 4-lakh-plus cars of the overall small-car market was 29.2 per cent. In 2008, it moved up to 39.2 per cent in the same period. This is despite the fact that in 2008 the second half saw the auto industry taking the full brunt of the economic slowdown. In 2009, the share has crossed 43 per cent. And in 2010, the share of the Rs 4 lakh-plus cars could cross 50 per cent of the overall small car market. There is a plausible reasoning behind that. In the second half of 2008, the auto industry took body blows from the economic slowdown. Now with the economy stabilising, it could well be argued that consumers would not mind stretching their purses a little and going in for a high-priced hatchback.
That should be good news for the challengers. Volkswagen and GM will be off the starting blocks first, flaunting their vehicles at the forthcoming New Delhi Auto Expo. Ford has already displayed its Figo — so it won’t be at the Expo — though commercial launch will happen early next year. Nissan is holding back its Micra for a launch in May, and Toyota is working on its still unnamed cutie and will launch it in early 2011. All of these global majors, small-timers in India so far in terms of market share, are leaving nothing to chance in ensuring that this time, India works for them.
The Five Pillars
The India moves by the biggies are very much part of their global strategy, which a Deloitte report called a recalibration of the automotive industry value chain, and a move to shift much of the production to low-cost, high-growth markets such as India and China. Naturally, the resilience and growth of the Indian car market has helped. “This market has shown signs of recovery faster than others, and is getting stronger,” says Kiminobu Tokuyama, managing director of Nissan Motor India.
In India, their strategy will revolve around five pillars — right cars, right price, appropriate production capacities, sizeable distribution network, and adequate share of local parts in vehicles. Despite having deep pockets, none of the global majors might play a price war game yet. “We are entering the small segment for the first time in India. We lack the experience,” says Neeraj Garg, director at Volkswagen India, which has invested e580 million in a new facility at Chakan near Pune to make 110,000 small cars. “We have to learn customer expectations first.” The company has 40 dealers now, and is expanding. Its Polo will be made available in both petrol and diesel variants, and is being benchmarked on price and features to the leaders of the upper end of the segment, Maruti Swift and Hyundai i20 (more than Rs 4.4 lakh).
The most experienced of the five in India currently, GM India, is placing its Chevrolet Beat a tier lower in terms of price, against the Rs 4-5 lakh priced Hyundai i10 and Maruti Ritz. Clearly, experience has taught GM the value of aggressive pricing in India. “It is not about the absolute price for most customers, but the package for one’s money,” says Karl Slym, managing director of GM India. The company has also increased its sales and service points to 195 since early 2008, and is targeting 250 by March 2010. It can produce 250,000 cars annually.
Ford India, meanwhile, has put $500 million into a new 100,000 units-a-year line in Chennai. “Figo will be offered bang in the middle of the small car market with an attractive cost of ownership,” says Wark.
Total cost of ownership (TCO), in fact, has become a watchword. “Ticket price was more important earlier,” says Jagdish Khattar, former head of Maruti Suzuki, who now runs Carnation Auto, a car service company. “TCO is coming now.” Maturing Indian consumers are not willing to fall for an attractive price alone, and consider service and spare parts expenses, as well as resale values, before buying a car.
Meanwhile, steady starters Nissan and Toyota are formidable competitors in affordable cars world over. According to Deepak Chopra, group CEO of Anand Automotive, a key vendor to Nissan, Micra has the makings of a winner among the new cars. World No. 1 Toyota currently sells people-carrier Innova, as also upmarket sedans Corolla and Camry in India. “Apart from the product (small car) itself, our after-sales will be extensive,” says Sandeep Singh, deputy managing director, marketing and sales. The company is banking on the small car to raise its market share in the overall car market in India from 3 per cent to 10 per cent by 2015. Also joining the fray later will be Honda. “We are planning to bring in a new car smaller than the Jazz in 2-3 years,” says Masahiro Takedagawa, president and CEO. “It will be a premium car having all the values Honda stands for.”
Localisation of content is another area that all the companies are working on. It is here relatively new entrants such as Skoda Auto have struggled. Skoda’s Fabia, one of the best hatchbacks around, has suffered low sales largely because servicing and replacement of spare parts is expensive. Its 5,087-unit sales during January-November 2009 could have been higher if that were addressed. But the company still sounds positive. “It is a good volume for a car that is still low on local content — about 10-12 per cent,” says Ashutosh Dixit, chief general manager for sales and marketing. Dixit expects the local content to go up to 50 per cent in 3-4 years.
Companies such as Ford and GM have an advantage in this area, as they have been around in India for long and have had time to develop long-term supplier relationships. Ford’s Figo will have local content of 85 per cent, enough to give it significant pricing leverage. GM’s Beat is starting with 60 per cent local content, with the company shooting for 80 per cent in about six months. Volkswagen’s Polo will come to the market with 50 per cent local content. These big firms will need all their resources, pluck and some luck to break the fort of Indian auto’s holy triad, Maruti, Hyundai and Tata Motors.
The three incumbents dominate the hatchback market in India. So far this fiscal (April-November), market leader Maruti Suzuki has 57 per cent market share of the 750,928-unit segment, Hyundai has 24 per cent, and Tata Motors, 12 per cent. Maruti, which had anticipated the world-class competition, had sounded the bugle in late 2008, launching A-star. It followed that up with the Ritz in May 2009. Although A-star has had lukewarm success, Ritz has done well, and is already among India’s 10 highest-selling cars. The company also launched a spate of variants, and upgrades, such as Zen Estilo. The company, clearly, will keep up the pressure. But it knows the days of holding more than 50 per cent market share may end. “We do not intend to share our piece of cake with anybody,” says Mayank Pareek, executive officer for marketing and sales. “But I won’t lose sleep over maintaining a more than 50 per cent market share.”
Maruti still plans to launch two new cars every year. While that should help keep competition at bay, the company is feeling the margin squeeze because of long-running discounts and rising input prices. But Pareek is reluctant to let go. “Our first attempt would be to absorb the cost increases for as long as we can,” he says.
Maruti has strategies to keep all three types of buyers: first-time buyers, those buying an additional car, and those looking to replace their old car. Keeping most first-time buyers, who are one-third of all buyers, should be relatively easier for Maruti as many of them come from smaller towns where the newcomers will take time to reach. “Assurance is vital for the first-time buyer and easily-accessible and cheap service and spares are crucial to him,” says Pareek. Maruti plans to expand its presence to over 1,700 towns from the present 1,200-odd.
The battle will be harder for the remaining two-thirds of the customers, the repeat buyers, who would typically be urban. For them, Pareek is consolidating the programmes to buy back old vehicles. Already, about 20 per cent of Maruti’s sales are against such buy-backs. While GM and Ford have small used-car purchase programmes, Volkswagen, Toyota and Nissan will need time to do it.
India’s second biggest car maker by sales, Hyundai, is relying on its reputation for bringing to India the best and the latest small car. “What we brought with i10 a year and half ago, others are bringing now — the double-overhead camshaft K-series engine, adjustable steering, two-tone beige interiors with the option of sunroof, and airbags that were not part of the small car segment earlier,” says Arvind Saxena, vice-president for marketing and sales. The Tata-Fiat combine too has fired its pre-emptive shots by launching Vista and Punto, respectively, in 2009. “We will have the first-mover advantage,” says Tata Motors’ spokesperson. Fiat sees Punto sales doubling to 5,000 a month in 2010 as it piggy-backs Tata’s expanding dealer network.
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The Challenge Of Too Many Cars
The entry of so many new cars and the increase in production capacity is going to create significant overcapacity. An estimate puts on-ground capacity of the overall industry at 2.8 million units by end-2009-10. And assuming sales growth (including cars, SUVs and luxury vehicles) maintains the pace of 21 per cent achieved so far, demand is set to close at about 1.9 million units from the 1.55 million of 2008-09. That creates capacity one-third higher than demand.
That will put all companies under pressure to generate volumes quickly. Despite the 27 per cent growth for the hatchback segment since April, the consensus growth rate for the segment over the next 3-4 years is 15-20 per cent. Increasing input prices are also a concern.
Pareek says that input prices have risen by almost double-digit percentages, and the mandatory upgrade of all cars to BS4 emission norms by 1 April 2010 will add about 10-15 per cent additional cost. “There will be a dip in sales in April. Price rise is a matter of time now,” he says. However, as competition increases, companies are likely to hold on to lower prices.
That will only intensify the battle. “The cake is only one size,” quips GM’s Slym. “If you add up everybody’s business plans, it adds up to more than 100 per cent. Not everybody is going to achieve their aspirations.” Others, such as Ravi Santhanam, managing director of Hindustan Motors, feel that the new cars could increase the market’s size by bringing in new customers. Hyundai’s Saxena, too, is optimistic. “The market can absorb 750,000 more cars a year,” he says.
All segments taken together, next year will see the launch of more than 30 new cars, and more than 100 variants. That would increase the number of car options (models and their variants) from about 400 to more than 500. But in that mass, 2010 could well be remembered as the year that sexy, high-priced hatchbacks came of age in a market ruled by low-cost small cars.
(This story was published in Businessworld Issue Dated 11-01-2010)
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