Industry Analysis : Indian Automobile Industry Bharat Sagathiya (41) 1 Introduction: The modern day passenger car is a modern economy's draught animal, driving the growth of upstream industries like steel, iron, aluminum, rubber, plastics, glass, and electronics and down stream industries like advertising and marketing, transport and insurance. The car industry generates large amount of employment opportunities in the economy. The world car production has increased from 44.66mn in 1996 to an estimated 48.3mn cars in 1999. Japan, Canada and USA brought about the major increase, which contribute to 53% of the world's car production. The USA and Japan are the leaders with around 42% of the total world market. However, since the last two to three years, the international passenger car industry has been witnessing an over capacity of more than 30%. The trend suggests that industry volumes may grow by just 2% or around 10mn vehicles per year. If this situation continues for the next few years the world car market may witness shakeout in the near future. Already signs towards this are being observed as the phenomenon of mergers catches on. As per industry experts the number of major players in the world car market may come down from present level of 30 to 5 in next ten to fifteen years. The recent mergers in the international car market are Ford-Volvo, Renault-Nissan, and Daimler-Chrysler. A few more players are expected to join the fray in the next few years so as to strengthen their hold in the world market. Among the top car manufacturing companies General Motors and Ford Motors group of USA lead with a contribution of 15.8% and 11.6%, of world car production, respectively. Volkswagen and Toyota stand third and fourth with more than 9% contribution each to the world car production. Until a decade ago, the auto sector in India had been a relatively protected industry limiting the entry of foreign companies with high tariffs against imports. Today, as part of a broader move to liberalize its economy, India has opened up the sector to Foreign Direct Investments, and since then has also progressively relaxed trade barriers. Today, almost all of the major global companies are present in India producing two-wheelers and passenger cars in almost all segments. India produced over 7.6 million two-wheelers, 1.3 million passenger cars and utility vehicles in 2005-06. India is a global major in the two-wheeler industry and primarily produces motorcycles, scooters and mopeds of engine capacities below 200cc. It ranks second in the world in the production of two-wheelers and 13th in the production of passenger cars. Among the commercial vehicle makers, Tata figures at number six among the ten largest global manufacturers. The two-wheeler industry in India has grown at a compounded annual growth rate of more than 10 per cent during the last five years and has also witnessed a shift in the demand mix, with sales of motorcycles showing an increasing trend. Indian two-wheelers comply with some of the most stringent emission standards worldwide.
This document has been a report on Indian Auto Industry, carried out by me in 2007 as an assignment in Marketing Management under regular MBA programme. You can drop me an email at [email protected] if you have any comment/query on that.
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Industry Analysis : Indian Automobile Industry
Bharat Sagathiya (41)
1
Introduction:
The modern day passenger car is a modern economy's draught animal, driving the
growth of upstream industries like steel, iron, aluminum, rubber, plastics, glass, and
electronics and down stream industries like advertising and marketing, transport and
insurance. The car industry generates large amount of employment opportunities in the
economy.
The world car production has increased from 44.66mn in 1996 to an estimated
48.3mn cars in 1999. Japan, Canada and USA brought about the major increase, which
contribute to 53% of the world's car production.
The USA and Japan are the leaders with around 42% of the total world market.
However, since the last two to three years, the international passenger car industry has
been witnessing an over capacity of more than 30%. The trend suggests that industry
volumes may grow by just 2% or around 10mn vehicles per year. If this situation continues
for the next few years the world car market may witness shakeout in the near future.
Already signs towards this are being observed as the phenomenon of mergers catches on.
As per industry experts the number of major players in the world car market may come
down from present level of 30 to 5 in next ten to fifteen years. The recent mergers in the
international car market are Ford-Volvo, Renault-Nissan, and Daimler-Chrysler. A few more
players are expected to join the fray in the next few years so as to strengthen their hold in
the world market.
Among the top car manufacturing companies General Motors and Ford Motors
group of USA lead with a contribution of 15.8% and 11.6%, of world car production,
respectively. Volkswagen and Toyota stand third and fourth with more than 9% contribution
each to the world car production.
Until a decade ago, the auto sector in India had been a relatively protected industry
limiting the entry of foreign companies with high tariffs against imports. Today, as part of a
broader move to liberalize its economy, India has opened up the sector to Foreign Direct
Investments, and since then has also progressively relaxed trade barriers. Today, almost all
of the major global companies are present in India producing two-wheelers and passenger
cars in almost all segments.
India produced over 7.6 million two-wheelers, 1.3 million passenger cars and utility
vehicles in 2005-06. India is a global major in the two-wheeler industry and primarily
produces motorcycles, scooters and mopeds of engine capacities below 200cc. It ranks
second in the world in the production of two-wheelers and 13th in the production of
passenger cars. Among the commercial vehicle makers, Tata figures at number six among
the ten largest global manufacturers.
The two-wheeler industry in India has grown at a compounded annual growth rate of
more than 10 per cent during the last five years and has also witnessed a shift in the
demand mix, with sales of motorcycles showing an increasing trend. Indian two-wheelers
comply with some of the most stringent emission standards worldwide.
Industry Analysis : Indian Automobile Industry
Bharat Sagathiya (41)
2
For the passenger car market, this segment has been growing at a rapid pace - from
over 650,000 vehicles sold during 2001 to over a million vehicles sold during 2004-05.
To analyze an industry, various factors are to be taken into account. These factors
can be divided into two major types: industry wide and competition wise. These two types
have many other factors. Let’s take a look at each of them:
A. Industry Wide: This type of factors consists of general aspects or features or basic conditions of the
industry. Now the question that arises here is: what are the general aspects? The answer is:
these factors are: demand details, growth rate, nature of demand, demand trends, and a
few other aspects. Let’s probe them one after another.
1. General Aspects/ General Features / Basic Conditions of the Industry: (A) Demand Details:
The demand for cars is dependent on a number of factors. the key variables are per
capita income, introduction of new models, availability & cost of car financing schemes,
price of cars, incidence of duties and taxes, depreciation norms, fuel cost and its
subsidization, public transportation facilities etc. the first four factors have a positive
relationship with the demand whereas others have an inverse relationship with demand of
cars.
In India, a few major factors have affected the demand of cars. These factors are as
below:
Rising PFCE:
India's Private Final Consumption Expenditure (PFCE) on transport was estimated at
around Rs. 3,124 billion in FY2005, accounting for around 16.5% of total PFCE. This
comprises three categories: personal transport equipment, operation of personal transport
equipment, and purchase of transport services.
In terms of PFCE, the share of transport in total PFCE has witnessed rapid growth
since the mid-1980s. By comparison, the share remained at around 3-5% till the mid-1980s.
The Table below shows comparison between various segments of PCFE in Transportation in India (Source:
FADA)
Rs. Billion
Calendar Year 2000 2001 2002 2003 2004 2005
Value at Constant Prices—Rs. Billion 1,499.86 1686.83 1769.11 1976.47 2211.59 2473.08
Personal Transport Equipment 91.78
91.09 94.11 107.83 122.46 127.35
Operation of Personal Transport Equipment 470.81 547.81 592.39 674.58 770.55 882.06
Purchase of Transport Service 937.29 1047.93 1082.61 1194.06 1318.58 1463.67
Value at Current Price—Rs. Billion 1499.86 1768.61 1923.41 2236.01 2631.68 3124.19
Personal Transport Equipment 91.78 96.72 102.05 102.05 133.40 145.68
Operation of Personal Transport Equipment 470.81 568.77 630.84 630.84 917.47 1173.39
Purchase of Transport Service 937.27 1103.12 1190.52 1190.52 1580.81 1805.12
Industry Analysis : Indian Automobile Industry
Bharat Sagathiya (41)
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Rising middle class:
Expansion of population between the age group of 25 to 50 years, increasing
affluence of the Indian middle class and heightened competition amongst automobile
manufacturers, resulting in improved quality offerings is a major factor for demand of cars
and it will continue to be the key drivers for the industry in terms of both market size and
production capacities.
Young Indians:
The proportion of young people, who are economically active, is rising in the overall
population. This has led to increasing urbanization and the need for mobility which
translates into a higher demand for two and four wheelers in India.
Increasing exports:
The Indian auto industry has emerged as an export hub, on account of its low cost
technical manpower and increasing focus on quality. To give a perspective, in the last five
years, volume exports of Indian automobiles has increased by 39% CAGR, led by passenger
cars (CAGR of 62%). This development has led to domestic players increasing their share of
exports in the overall pie. The following chart shows the export of Automobiles from India in the year 2005-06
The table on the next page shows the export trends of Indian Vehicles during the period of FY 2001-02 to
2005-06 (Source: Society of Indian Automobile Manufacturers (SIAM))
Category 2001-02 2002-03 2003-04 2004-05 2005-06
M&HCVs 4824 5638 8188 13474 14096
LCVs 7046 6617 9244 16466 26485
Total CVs 11870 12255 17432 29940 40581
Passenger Cars 49273 70263 125320 160670 170193
Utility Vehicles 3077 1177 3049 4505 4486
MPVs 815 565 922 1227 1093
Total Passenger Vehicles 53165 72005 129291 166402 175772
Scooters 28332 32566 53687 60699 83873
Industry Analysis : Indian Automobile Industry
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Motorcycles 56880 123725 187287 277123 386202
Mopeds 18971 23391 24078 28585 43181
Total Two Wheelers 104183 179682 265052 366407 513256
Three Wheelers 15462 43366 68144 66795 76885
Grand Total 184680 307308 479919 629544 806494
Infrastructure thrust:
Improvement in road infrastructure has led to increased movement of goods
through roadways. Around 65% of all the goods movement in the country takes place by
roads as opposed to 55% a decade ago. Also, owing to the fact that an estimated 45% of CVs
plying on the roads are 10 years old, demand for HCVs is expected to grow by a steady rate
in the long term.
Low interest rate regime:
Close to 80% of the new vehicles being purchased in the country are financed, thus
underlying the importance of a low interest rate regime to the fortunes of the industry.
Though we believe that interest rates have bottomed out and are going to rise going
forward, given that the quantum of the rise would not be significant, we expect the
buoyancy in auto sales to continue over the medium term.
Environment led benefits:
Implementation of pollution norms like restriction on the age of the vehicle plying on
the road and overloading of commercial vehicles would seemingly aid higher volume growth
of this segment. However, we do not expect any significant increase in the demand in the
medium term from this source, as in our opinion much of the replacement demand has
already taken place.
The passenger car penetration in India is at 8.5 vehicles per thousand people
absolute terms. It is among the lowest in the world. As per capita GDP of a society grows,
mobility needs for its population rapidly increase.
India's competitiveness has enabled it to make a steady foray in International
markets with passenger car exports crossing the 100,000 mark in 2004. Multinationals use
India as a manufacturing hub for small cars in addition to growing exports from indigenous
makers such as Tata Motors and furthermore, India's two-wheeler manufacturers have also
stepped up their export plans and apart from export, have also announced CKD operations
in many new markets outside India.
As India forges free trade agreements (FTA) with Thailand, MERCOSUR and other
trading blocs, the industry has the potential to emerge even stronger. However, against this
optimism, the industry has felt the effects of cost pressure.
The global movement of oil prices has dealt a setback to the country's economic
policy. While the threat of inflation seems to have been temporarily brought under control,
sustained fuel price hikes and the consequent hike in operating costs for vehicle owners can
cause a depression in demand.
Industry Analysis : Indian Automobile Industry
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5
The past two years have also seen considerable pressure for the industry from input
costs. Prices of steel, which is a primary input for the industry, have doubled over the last
three years. The situation has forced players to resort to innovative ways to control costs
whilst meeting rising customer expectations.
(a) Growth rate: India registered the fastest growth among the top 15 passenger car producing
countries in the world in 2004. As per latest rankings by the International Organization of
Motor Vehicle Manufacturers, OICA, India's car production grew 30 per cent in 2004 while
Brazil was the second with 17 per cent growth.
India is also just a tad away from being among the top 10 automobile producing
countries in the world. It jumped two places to the 11th position in 2004.The 86-year-old
Paris-based OICA is also the governing body of international auto shows. India grabbed
Italy's position, whose ranking slipped to 14th from 11th in 2003. The country produced a
total of 11.78 Lakh cars in 2004 while Italy produced 8.33 Lakh units, with its growth rate
declining by 19 per cent over 2003.
Though China's growth rate was lower at 15 per cent, it still managed to hold on to
its seventh position with production of 23.16 Lakh cars in 2004. In 2003, it grew by 83 per
cent. The top three passenger car producing nations maintained their rankings. Japan,
ranked first, produced 87.2 Lakh cars posting a growth of 3 per cent. In 2003, its growth
declined by 2 per cent. The number two on the list, Germany, produced 51.92 Lakh units,
growing by a mere 1 per cent. The US, ranked third, produced 42.29 Lakh cars. Its growth
declined by 6 per cent compared with a 10 per cent decline in growth in 2003.
Global consultancy firm AT Kearney's automobile consultant, Nagi Palle, struck a
cautious note about India's performance. "India is still a very lean market with 75 per cent of
the cars sold being below $10,000. If India achieves a per capita GDP of $1,000, it will trigger
off mass motorization. For China it is around $1,200," Nagi Palle said. Though China's growth
is slowing down, its small car market is bigger than all of India's car market, he said.
Toyota Kirloskar Motor's Director for Marketing, T. Ino, however, said the growth of
the industry is a reflection of the strong fundamental growth of the Indian economy.
"Toyota believes that India will be one of the biggest markets in the world in this century,"
Ino said.
The Ford India Managing Director and President, David Friedman, said a higher
global ranking reaffirms that India represents one of the fastest growing auto markets in the
world. "Factors driving this growth are more affordable vehicles due to increased
localization, reduction in excise and import duties and lower interest rates," Friedman said.
Sales of passenger vehicles in India are likely to grow at 14.9 per cent each year to touch the
2.1 million mark by 2010.
The automobile industry missed the Budget (2007) bogey as its demand for across-
the-board excise duty structure of 16 per cent was not met. Small cars already enjoy 16 per
cent excise while the same for big cars is 24 per cent. But, it may not be an impediment
Industry Analysis : Indian Automobile Industry
Bharat Sagathiya (41)
6
enough to pull back the Indian automobile industry, which posted the highest ever annual
growth of 20 per cent in passenger vehicle sales.
The Indian car market is dominated by small cars. Three companies — Maruti Udyog,
Tata Motors and Hyundai — have the biggest share of the small car market, leaving global
majors such as General Motors, Ford, Toyota and Honda with only a marginal market pie. To
grab a bigger pie of the Indian car market, all companies are eyeing the small car segment.
Toyota, Ford, Honda, Mitsubishi and General Motors will launch their small cars in the next
three years.
This is expected to take Indian passenger vehicle sales to 2.1 million units by the end
of March 31, 2010. According to Frost & Sullivan, sales of passenger vehicles in India are
likely to grow at 14.9 per cent each year to reach the 2.1 million mark. The US-based
consultancy Keystone, a subsidiary of LaSalle Consulting Associates, has forecast that India
will become the world’s third largest automobile market by 2030, behind only to China and
the US. The size of the Indian vehicle market is forecast to cross the 2.1 million by 2010
(assuming a consistent GDP growth rate of 6 per cent) from the 1.1 million vehicles
expected to sell in 2006-07.
Even though the Indian economy grew 9.1 per cent in the six months ended
September 30 2006, the fastest semi-annual growth in 15 years, vehicle penetration was
only 8.5 in 1,000, the lowest among developing countries. According to industry experts,
currently the passenger vehicle demand outstrips supply. In the next fiscal, about 50 new
cars are likely to be introduced in the Indian market. While the majority of these would be
variants, some new models will also hit the road. The following chart shows the pattern of growth of Indian Automotive Industry from 1995-96 to 2005-
06 and projected pattern for 2009-10 (Source: Federation of Automobile Dealers Association (FADA))
(b) Nature of demand:
Industry Analysis : Indian Automobile Industry
Bharat Sagathiya (41)
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When the industry was deregulated in 1993, the global carmakers chose to operate
in the high price-high value segment. However, the strategy did not work as the market for
premium and luxury vehicles in India was not large enough. MUL was entrenched in the low
price-low value segment, and given its scale economies, it could not be dislodged. In the
latter half of the 1990s, foreign car manufacturers changed their strategy. It was still difficult
to remove MUL from its market leadership in the dominant low price-low value segment as
scale economies formed the basis of competition in this segment.
Thus, the global players changed the price-value equation by offering superior value
at a price that was still higher than that of the Maruti 800 and Omni, but significantly lower
than of the cars in the high price-high value segment. The process gained momentum in
FY2000 when the growth in the car market was led by the Compact segment.
Although the compact segment now accounts for 65% of domestic sales of
passenger cars, in recent years, the mid-size segment has captured a rising share of the
market, and since 2004, sales in the mid-size segment have exceeded sales in the mini-
segment.
The growth in this segment has been led by new launches, lower prices, and the
significant success of four models - MUL's Esteem, Honda's City, HMIL's Accent, and TML's
Indigo. Introduction of stripped down versions of the vehicles in the Mid-size segment,
attractive pricing by manufacturers (who also offer sales incentives) coupled with lower rate
of interests and easy availability of finance have facilitated the growth of this segment.
Low Penetration Levels:
Although India’s four wheelers sales have increased in recent years, penetration
levels are low at around 0.9%. Till the last decode, the industry was considered low priority
as cars were thought of as 'unaffordable luxury', and treated as such through Government
policies. Although reduction in excise duties, favorable Government policies, and lower
prices have resulted in significant increase in penetration, India's passenger car penetration
is low by global standards-1.3% in China, 59% in EU, and 81% in the US. Estimates from
Notional Sample Survey 58th Round (2002) indicates that ownership of four-wheelers (car
or jeep) is restricted to about 4.4% of urban households, and 0.6% of rural households.
During 2002-03, ownership of cars/jeeps was restricted to around 0.9 million households in
rural areas, and 2.57 million households in urban areas. Car penetration is high in
Chandigarh, Delhi, Goa, and Kerala. However, penetration is extremely low in the eastern
states of Bihar, West Bengal, Orissa; and central states such as Madhya Pradesh and
Chhattisgarh. The table below shows the share of domestic passenger car sales in India (Source: FADA)
(%)
Fiscal Year 2002 2003 2004 2005 2006 Jan-March
2007
Mini (<3400 MM) 28.4 26.5 24.1 14.2 10.1 8.3
Compact (3400–
4000MM)
54.1 55.3 53.1 60.5 64.9 68.1
Mid-size (4001- 16.5 17.1 20.0 21.5 21.6 20.3
Industry Analysis : Indian Automobile Industry
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4500MM)
Executive (4501-
4700MM)
0.2 0.4 2.1 3.1 2.6 2.7
Premium (4701-
5000MM)
0.9 0.8 6.8 0.7 0.7 0.6
Luxury (>7500MM) 0.0 0.0 0.0 0.0 0.0 0.0
Total 100 100 100 100 100 100
The table below shows the sales of MUVs in India (Source: FADA)
Total 106,028 165,707 205,943 241,393 260,943 64,536 16.3
There are three sub-segments of the UV / MUV segment: the hard-top, soft-top and
pick-up. The hard-top version consists of the higher-end Sports Utility Vehicles (SUVs) that have
been present in the Indian markets since FY1999. Following the success of the higher-end SUVs,
the share of the hard top segment in total MUV sales has registered an increase. Soft-top
MUVs, which are largely dependent on sales in the rural and semi-urban markets where the
vehicles serve as modes of mass transportation (maxi taxi), have witnessed a contraction in
volumes in recent years. The declining share of the soft-top sub-segment is attributable largely
to the increasing acceptance of SUVs as an alternative to soft-tops (and even higher end-cars).
Those apart, soft-top sales have also been affected by a decline in rural income, increase in
Industry Analysis : Indian Automobile Industry
Bharat Sagathiya (41)
10
sales tax in some states, increase in diesel prices, enforcement of strict emission control norms,
and restraints on the issue of licenses to use soft-top vehicles as rural taxis. The table below shows the domestic sales pattern of vehicles in India during FY 2001-02 to 2005-006 (Source:
DF = 1.2 (CO, HC, NOx) for Gasoline and Gas; 1.1 (CO), 1.0 (NOx, HC+NOx), 1.2 (PM) for Diesel
TABLE - 3C
Diesel Vehicles with GVW exceeding 3500 kgs
Limit values for TA & COP
Engine Steady State cycle test Engine Load response test
CO(g/kWh) HC (g/kWh) NOx (g/kWh) PM (g/kWh) Smoke(m-1)
2.1 0.66 5.0 0.10/013 0.8
Fitted with after treatment devices like De-NOx catalyst and particulate trap
(Engine Transient Cycle)
5.45 0.78 5.0 0.16/0.21
SIAM members have been extending a voluntary emission warranty for new vehicles
for up to 80,000 km for cars and 30,000 km for 2 wheelers fitted with catalytic converters.
This warranty is subject to the provision that the vehicle owners follow a prescribed service
schedule and procedure. A preliminary survey carried out by SIAM showed that a significant
percentage of new vehicle owners do not come back to the dealership or authorized service
Industry Analysis : Indian Automobile Industry
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57
centre for such "free" service. In some cases, the percentage that came back was only 15-
20% and was further reduced as we moved from the first free service to the second and
third. This low percentage was based on the perception that authorized service stations
charge higher rates than neighborhood service outfits with no added value! Thus, the
warranty does not serve its purpose!
Extended Warranty:
Another service being provided by some manufacturers and dealers is the concept of
extended warranty. There is a need for a Quick Service Facility (QSF). Under this, a vehicle
owner can avail of a quick service or maintenance check where minor repairs would be
taken care of within 5 to 15 minutes. QSF would encourage a shift of customers from
unauthorized centers and direct a significant percentage of the 60 million vehicles on the
road to your networks.
There is a need to set up procedures and systems by which customers are tracked
and educated' to bring back their vehicles for service and also for after-sales care. Not only
is there a need for telephone calls, provision of driver services and tracking but equally
important is the need for prompt and efficient service and also dispelling the notion that
there is a higher cost of service. Start by targeting to double the percentage that comes back
to you at each stage of service.
Initiatives in this area could bring a significant percentage of the 60 million vehicle
owners into the dealer network. Perhaps a loyalty programme with service points may not
be out of place.
A major initiative to ensure this would be to create a database of vehicle owners.
While SIAM member companies have data relating to where a vehicle was dispatched, given
the nature of sales and distribution, complete registration records do not exist for the
country.
Tracing vehicles or determining the owner of a vehicle often becomes difficult and
expensive. While the government initiates action to computerize the RTOs and link them to
a central server, or address the issue through smart cards, as being done in Delhi, there
could be an initiative taken by FADA. SIAM could explore partnering in such an initiative.
Another use of this network would be to help and trace stolen vehicles or vehicles
involved in accidents. Imagine customer delight when they learn that the dealer network
has helped in the recovery of a stolen vehicle.
Anti-Theft Devices:
A related value added service would be to provide and install anti-theft devices in
vehicles. The Police Departments of many states are making a request to proactively install
such devices to deter theft. While a statutory standards on anti- theft devices AIS - 074 (2&3
wheelers) and AIS - 075 (4 wheelers) are enacted w.e.f. 1st October 2005, dealers are best
placed to advise customers on the need and necessity to spend a little more to safeguard
their vehicle against theft. In fact, many customers do not know that installation of such
devices may result in the lowering of the insurance premium that they would have to pay
Industry Analysis : Indian Automobile Industry
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58
and thus the device would pay for itself over a period of few years. Not to talk of peace of
mind.
There is a national regulation that mandates the wearing of helmets by two wheeler
riders. Many State Governments have not mandated this. One view that could be taken is
that since there is no mandate, why do anything. Another would be, that even in the
absence of legislation, there could be a move by all of us to educate the customer on the
need for riders to use helmets. A practice by some Asian countries is a voluntary movement
to provide 2 helmets with every vehicle sold or rented out. In addition, there is a poster and
education campaign, communicating the need to wear helmets - of the right kind - even
though there is no regulation in place.
Seat Belts:
India is a young country. Many of first time cars owners have young children but are
unaware of the possible safety measures for children travelling in the car. In many
countries, children can only travel in the back and not in the front seat, in others; it is
mandated to use special child seats. Again, using that immense persuasive power that most
of you possess and the innovating marketing skills that you have, it would be a huge
contribution to society if you promote this campaign “Children in the Back” - “Use Child
Seats”.
Some would ask the question whether this responsibility lies with the manufacturers
or with the dealerships, or should it be made mandatory? It is a personal view that
mandating never helps, and since possibly not all cars owners would require this, it would
be better to encourage a pull and push from the dealers than a push by the manufacturers.
Driving Schools:
It is said that 60-70 % of accidents are caused by driver's error. Yet, there are very
few driver training schools or programmes for existing drivers. Many State Government
surveys have brought out deficiencies in driving schools. In many of the SIAM conducted
training programmes, drivers have indicated that they have never been through a proper
driving school before they acquired a driving license. Most have never been through a
refresher course. Some states like Delhi have mandated the need to go through such
courses before licenses are issued or renewed while others are in the process of doing so
but find facilities inadequate. Many SIAM members have opened driving schools.
An initiative from dealers to set up driving schools and strengthening the training
infrastructure in the country would not be charity. It would be a sustainable business
proposition and a significant service that you could provide to both existing and new
customers. Not to talk of the employment opportunity it would provide for many young
people in the country. Dealers are an important link in the chain to promote safety and safe
driving habits. It demonstrates that we care.
While manufacturers and service centers have to follow and strive to exceed the
requirements of existing environment, safety and pollution norms, there is more that could
be done to reach out and touch the lives of the 1.2 billion stakeholders in the country. SIAM
has been conducting driver training, safety awareness and pollution awareness programmes
Industry Analysis : Indian Automobile Industry
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59
and camps across the country. Yet, there is a strong feeling among some sections of society
that not enough is being done. A few vehicles that leave a trail of thick smoke bring to
naught the extensive work that is being done by the manufacturers. There is a strong but
often untrue perception that vehicles are the principal contributors to environment
pollution. Sometimes, this is translated into “we do not care”.
Getting closer to 60 million vehicle owners through such programmes would not only
insulate against any future downturn in the industry, but would also be a key for survival in
the event that sales and distribution networks change in the future.
There is need to demonstrate leadership to take proactive measures to dispel this
perception. The frequency of such programmes needs to be increased and they have to
become more meaningful and visible to the stakeholders. This is a win-win partnership for
the manufacturers and dealers. What is more is that we would have over 1.2 billion
stakeholders who would value this initiative and would be involved and alive to our
concerns. The time to do it is now. The new regulations on 1st Oct'04 and 1st Apr'05 provide
a window of opportunity.
Job Reservation in Private Sector
Job reservation in the private sector has once again been brought to fore both at the
Central and State levels. In fact, in Maharashtra, a Bill has already been passed and a circular
sent to many industries advising them to implement the provisions of the Bill.
Skill Formation and Human Capital Upgradation
� The pathetic conditions in the area of human capital and skill development are
reflected in the high school drop-out rates and low seat utilization ratio in vocational
training. Table-1 shows that the problem of drop-out is not only more serious among
SCs and STs, but it gets worse at higher levels of schooling.
Drop out rates among SCs, STs & Total Population (Source: 10th
five year plan 2002-07)
Industry Analysis : Indian Automobile Industry
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� Moreover, if we look at the SC/ST-participation rate in various streams of vocational
training, the picture is equally dismal.
� Obviously, this requires radical improvement. The Government and private sector
together need to draw up a definite plan on human capital upgradation for SCs and
STs. Clearly, the medium-to-long term priority should be on raising the educational
level – both at school and university levels, as well as skill development though
effective vocational training among disadvantaged sections of the society. Through
this, they would be able to equip themselves with right kind of education/sill, and
thus keep pace with the changing need of employment market.
Seat utilization ratio for SCs & STs in vocational training (%) (As of 30th
June 2002)
Type
SCs STs
% of total seats
available
% of reserved
category seats
% of total seats
available
% of reserved
category seats
Total
Apprentices
8.9 59.7 3.5 46.4
Graduate,
technician,
technician
(vocational)
apprentices
3.0
19.7
0.4
5.4
Develop 'Entrepreneurship' Among the Vulnerables:
There is a need to have a well-defined affirmative action policy for financial
institutions to supply adequate capital to such target groups for setting up businesses. Let us
look at the global experience. US Government has several such schemes targeted towards
minority businesses, for instance:
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� 7(a) and 504 Loan Programmes that provide loan guarantees to small businesses;
� Community Express Programme which combined small business loan guarantees
with targeted leading by select banks; and
� Capital Access Programme (CAP) which allows a leading bank to make slightly higher
risk loans than conventional underwriting.
These schemes have proved very effective in improving the capital availability and
accessibility for minority businesses in USA.
To encourage entrepreneurship among disadvantaged groups, one option is
awarding to Government licenses and contracts to them. In fact, instead of “price-
preference” to public sector undertakings, preferential terms can be extended to SCs and
STs, which would go a long way to promote entrepreneurship among them.
Complement Affirmative Actions with Incentivisation
As a complementary measure, FICCI suggests the following:
� Instead of forcing private sector units to compulsorily reserve jobs for the above
target groups, Government can offer substantive incentives (for instance, tax-breaks,
preference in Government procurement) to business enterprises that have certain
prescribed degree of representation of the disadvantaged communities in their
workforce.
� Here also, the US experience is quite useful. There are certain direct tax incentives
available to US – employers for hiring the disabled and jobless people. Section 51 of
the internal revenue code, 26 USC 51, provides for a Work Opportunity Tax Credit for
employers who hire members of targeted groups having particularly high
unemployment rate or other special employment need.
� It would be left to the companies to voluntarily decide if employing the designation
percentage of SCs/STs is worth the incentives or not. Fiscal incentives have the
advantage that they avoid the legislated interference and undue regulation any
mandatory reservation would involve. From the efficiency point of view, incentives
which are any day far better option than a quota reservation system, would not only
be instrumental in achieving the socio-economic mobility of the target groups, but at
the same time still leave the industry with enough room for flexibility and autonomy
of business operations.
Industry growth: In the major economies of the world, auto industry is both a driver as well as a
reflector of the general economic growth of country. In the Indian scenario, the auto
industry is on the upswing, the like of which has not been witnessed for a long time. It has
been a major factor not only for the overall growth but also for instilling a sense of
confidence that has been generated in the country - a change in the mental make-up or
mindset and, that one may use the word "inferiority complex" into a feeling that we can do
anything and everything better than anyone else in the world. In line with the general
upswing in the economy, Indian auto industry is benefiting from the surging economic
growth and in turn boosting that growth. All segments of the industry are benefiting from
this, starting from 2- wheelers to the commercial vehicles. Exports are also surging.
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This is really a time for optimism because what we are seeing could only be tip of the
iceberg as far as the general growth is concerned. The macro economic environment could
not be rosier.
The fact that automotive sector is benefited a great deal is quite obvious. How an
industry can contribute to nation building in this environment is a question to be addressed.
It is quite understandable that nobody invests for incurring loss; profit has to be there. How
one makes himself profitable certainly needs to be discussed and thought of. There is
tremendous scope of profit and, side-by-side; there is tremendous scope for national service
and a firm's contribution to the nation's development. If the two can he harmonized, it will
be an ideal situation.
The government has received requests about excise duty and other issues affecting
the automotive industry. The Government is committed to simplify all procedures and to
remove the inspector raj. The government has been working on various things. But a nation
cannot move from bullock age to a jet age overnight. There are stages. Everybody is doing
his best and, if, all do their best, there can be nothing better than their best. Therefore, they
have to do their best keeping in mind what is good for the nation and that when the nation
benefits, along with the nation the firm also get benefited. It is as simple as that if there are
better facilities of electricity, travel, water, health, then as a common citizen, all get
benefited. All this means harmonization of various interests and sacrifices for the common
good.
Another point which is that the manufacturers, dealers, financiers, insurance
companies & other like interests should adopt a joint work approach, because if they work
jointly they will come to a better solution, cheaper arrangement and more user friendly
approach. And, therefore if they could synergize their efforts, there will be tremendous
benefits to all of them, which individually they may not be able to reap.
� Need for harmonization of national and business interests.
� There are tremendous all-round benefits of infrastructure development.
� India has a burgeoning middleclass who could be used for increasing the volumes.
� Reliability and confidence in our maintenance & quality will also encourage the
common user to go in for the product.
� Manufacturers, dealers, financiers, insurers and other like interests should adopt a
joint work approach, because if you work jointly, you will come to a better solution,
cheaper arrangement and more user-friendly approach.
There are few issues, such as, uniformity in all State taxes, life of vehicles, etc. In
government's set up, there are many areas, which are left to the States for implementation.
Regarding vehicles, the Central Government governs and administers the Motor Vehicles
Act and the rules made thereunder, but the implementation is totally with the States, and
there are difficulties in some of these matters. These are some of the areas, including life of
vehicles and uniformity in registration fees, which the government has tried discussing with
the transport ministers, but States have their own view, and probably their own interest,
and sometimes the government cannot bring them round to the common structure. Every
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time during the meet of Transport Ministers, they have this point as an item of discussion.
They arrive to some conclusions, they agree there in the meetings. However, when they go
back they find difficulties in implementation. This is one area, which certainly needs
attention.
As far as life of vehicle is concerned, it is again a State subject and there are a lot of
problems. Courts are now fixing life of vehicles in some States. At the moment, the users'
views have been accepted. However, as far as the Central Government is concerned, the
view is that the pollution level has to be within the permissible limits. If the vehicle life is
one year and it is not fit as per pollution norms, it cannot be on road. If the vehicle is fifteen
year old and is still fit within the emission norms, the government has no objection. But this
is an issue, which is now with the courts.
Basic determinants of demand: Domestic Demand
One of the strong drivers for the growth of the Indian automotive industry has been
the strong domestic market. The market has graduated over the last few years, not just in
terms of sales volume, but also in the offerings which are available to the customers. Even
about a decade and a half back, there were only a handful of options which a person could
look at, whereas today there are over seventy models of passenger cars and utility vehicles
which are on offer from over twenty manufacturers. Of these, about fifteen have a
manufacturing base in India. The others are imports and sold through their authorized
dealerships. In the two-wheeler market, there are over forty models which are on offer from
nine key two-wheeler manufacturers. Even in the commercial vehicle segment we are
seeing more models being offered by companies like Tata Motors, Ashok Leyland, Eicher
Motors and Volvo.
This trend is not just about vehicle manufacturers trying to sell more products in the
market. Rather, it is about vehicle manufacturers having to offer products which meet
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specific requirements of the customer. Rise in income levels, greater availability of finances,
reduction in excise duties and frequent launch of vehicles targeted at specific consumer
needs have led this market to boom over the last few years. The past few years have been
among the best for vehicle manufacturers in the country. Passenger cars and multi-utility
vehicles together grew by 27 per cent and 17 per cent in the years 2003-04 and 2004-05.
Commercial vehicles grew by 36 per cent and 22 per cent during the same period. Two
wheelers, weighed by a significantly higher base grew by 11.5 per cent and 15.7 per cent
during the same period.
Some of the key drivers for the market include:
� Rise in disposable income
� High penetration of finance schemes
� Improved highways
� New launches increasing options for the customer
� Key restraints of the market currently are:
� Increasing fuel costs
� Growth of mass transport
� Choking infrastructure in the metros
� Growth in sale of used vehicles
Market Trends:
A very significant trend in the Indian automotive industry is the increasing propensity
to purchase vehicles with better performance, safety and comfort. In the year 2004-05,
compact segment (A2) accounted for 60 per cent of the passenger car market, an increase
from 53 per cent during the previous year and the A3 (executive) segment witnessed a 57
per cent growth in the year 2004-05. Similar patterns can be drawn in the motorcycle
segment where the executive (over 150cc) segment has seen a surge in demand. Customers
see more value in buying a hatchback which has safety features like ABS and air bags than
spending the same money on a sedan which is relatively less equipped. With volumes
becoming substantial, companies are looking at feeding the market with India specific
models rather than looking at it as a last bout of life for their ageing products.
Another key trend is the increasing popularity of diesel vehicles in the personal
transport segment. This could be attributed to diesel being a cheaper fuel and also the
launch of new age diesel cars, which match their gasoline counterparts on performance and
maintenance. Alternate fuels like CNG, LPG & bio diesels are beginning to be used widely
across vehicle segments. While CNG is mainly used in the west and the north, LPG is used in
the east and the southern regions. This is mainly due to availability constraints and
inadequate infrastructure to transport these fuels.
Export Focus:
Buoyed by the increasing acceptance of India as a low cost-manufacturing hub for
auto components and automobiles, exports have taken a giant leap in the last few years. In
fact, for some large businesses it has become a mainstay business focus. Passenger car
manufacturers have taken the lead in making India a global small car hub - Hyundai has
made India its global hub for small cars, Tata Motors exported about 20,000 units last year
and Maruti Suzuki exports small cars to Europe from India. With the revision in excise duties
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from 24 per cent to 16 per cent, export of small cars will definitely get a boost in the years
to come. The trend though, is not limited just too small cars. Skoda is increasing its capacity
in India with plans to export cars to the Asian region.
Likely future pattern: Buoyed by recent performance, many manufacturers have rolled out plans for
increasing capacity. Prominent among them, Maruti, Hyundai and Tata - the passenger car
makers - have announced plans for substantial scaling up of vehicle and engine production.
Among two-wheelers, companies such as Honda and Suzuki have embarked on their own
production facilities for scooters and motorcycles, separate from the activities from their
current or erstwhile partners. Daimler-Chrysler and MAN have announced plans for small
volume assembly of Heavy Commercial Vehicles in the country.
India is also emerging as a credible hub for R&D and vehicle development. Global
majors (among OEMs) and several global Tier One suppliers have scaled up operations of
their Indian technical centers and the quality and value of development in India is
witnessing noticeable improvement. However, at this time, the most critical vehicle
integration activities remain limited to the home centers of these overseas manufacturers.
As infrastructure improves, both the government and industry will need to pay even
greater attention to road safety. The safety record of India, as far as fatalities and serious
injury is concerned is dismal. This will need to be addressed at all points: products,
infrastructure and user behavior.
Top manufacturers like Honda, Toyota, Maruti and Hyundai have already begun
capacity expansion operations in India. Volkswagen, BMW, Renault and Nissan have
announced definite plans to set shop on Indian shores. In the commercial vehicle segment,
global majors like MAN, Vectra and Mercedes Benz have inked ventures with Indian
partners to cater to the Indian market. The following table shows the past, current and future projections of passenger cars and MUVs growth in
million units (Source: FADA)
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Market estimates prove that there is enough room for all of them and more.
Passenger cars are expected to grow at a CAGR of 11.36 per cent between 2005-06 and
2009-2010; commercial vehicles at a CAGR of 12 per cent; and two wheelers at a CAGR of
14.2 per cent. Exports are also set to rise with specific focus by the government and the
industry in capitalizing on India's advantage of being a low cost, high quality manufacturing
location. With world leading economic growth, rising levels of GDP and a market brimming
with options, India is sure on its way to being among the top automotive markets in the
world.
Industry Performance: During the period 2005-06, sale of passenger vehicles in India registered a growth of
7.7 per cent. Continuing the tempo of explosive growth, two-wheelers registered a robust
growth of 13.6 per cent. Within the segment, scooters registered a decline of 1.6 per cent,
and motorcycles - a growth of 17 per cent, reflecting a continued movement from scooters
to motorcycles. At the same time, the moped segment continues to see a shift from urban
markets to rural markets and has grown by a modest 3%.
The health of the commercial vehicle industry has also improved with the total
industry reporting a growth of 10 per cent for this period. While the industry continues to
see some structural trends with larger growth at the lower tonnage segments and the high
tonnage segments, the Medium Commercial Vehicle (MCV) segment has been witnessing a
decline. This is attributed to a migration to 'hub and spoke' patterns for freight movement
and increasing competitiveness for road haulage even for longer distances compared to rail.
A consequence has been a large increase in sales of vehicles with payload capacities of one-
half to one tonn. At the opposite end of the product spectrum, a number of players
including Tata, Volvo, Daimler-Chrysler and MAN have announced plans for new modern
generation Heavy Commercial Vehicles, anticipating increased growth of large tonnage, and
long-haul movement with the new highways.
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While the industry, particularly, the commercial vehicle segment, has been known to
be cyclical, the secular trends for the industry are positive, bolstered by the overall growth
of the Indian economy. The past couple of years of healthy demand have seen the industry
players post positive financial results and by and large this is reflected in the stock market
movement of the listed companies.
With environmental concerns gaining momentum in Indian society, a long-term
roadmap has been charted by the Mashelkar committee, to drive the country faster down
the road to low emission vehicles. With this, from 1st April 2005, all eleven major cities
require to comply with the more restrictive Bharat Stage III (BS III) emission standards. At
the same time, the rest of the country advanced from BS I to BS II levels of norms.
Best Practices Index (BPI): Over the past few years, the Indian Auto industry has become fiercely competitive.
With the entry of global players, consumer choice has increased and they are being wooed
aggressively by OEMs and dealers. With intense competition and declining margins on sales,
the business has moved from vehicle sales to ownership of the customer through the
vehicle life cycle. Hence, the need for the OEM and dealer to work together as a
partnership, in today's environment, is imperative.
A well-managed dealer network is now a critical differentiator and extremely
important for the OEMs' success. Each OEM is acutely aware of this and several studies have
already been done to measure customer and dealer satisfaction. These satisfaction
measures reflect the results of underlying systems and processes that are required on the
part of OEMs to manage and build a sense of partnership with the channel. For the first
time, an attempt has been made to study these systems, processes and practices across
OEMs and vehicle categories (cars, two-wheelers and trucks) and develop benchmarks and
best practices on this account. Avalon Consulting has evolved a Best Practices Index (BPI) for
OEMs in managing automotive dealerships.
Approach and Methodology:
Raison d’être
The exercise was conceived to be comprehensive in its coverage of systems and
processes for managing dealerships. Hence these were classified along four dimensions -
sales, service, parts and relationship management. Within each of these dimensions,
parameters and sub-parameters were identified for understanding the manner in which
OEMs manage dealerships. For example, within sales practices - product development and
launch, stocking, sales support, etc. were covered as distinct processes. Specific emphasis
was laid on service - especially post warranty - as this is an aspect which is increasingly
becoming paramount in the 'ownership of customers'. A total of more than 75 specific
issues have been benchmarked across these various processes as part of the exercise.
The exercise was executed through interviews with 320 dealer-owners across 99
locations all across the country representing 20 major OEMs. Representations across small,
medium and large towns were ensured for each OEM, depending on the spread of their
network.
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The responses have been analyzed to arrive at Best Practices possible (a score of
100) on each parameter and indices have been developed for each OEM on these
parameters vis-a-vis the Best Practices. The indices for each OEM on every parameter have
been aggregated to arrive at a score for the OEM for each practice - sales, service, parts and
relationship - and at an overall level. These indices have been compared across OEMs within
the vehicle category (e.g. Cars) to arrive at the Best Practices Index from among these OEMs
at the parameter, practice and overall management level.
Thus, the exercise provides a clear perspective for each OEM on where it stands on
every important parameter dealing with managing of dealerships, vis-a-vis its competitors,
not just within its vehicle category but across the automobile industry in the country.
Insights are available on important issues like:
• Are dealers' views sought by the principal in any new product development?
• What kind of support does the principal provide to help finance dealers stocks?
• Does the principal help the dealers realize additional revenue streams?
• How much of the parts order placed by dealer is generally supplied?
• What specific efforts is the principal taking to counter spurious parts?
• Does the principal leverage scale benefits to help reduce the cost of showroom
fixtures / workshop infrastructure?
• Does the principal formally communicate best practices among its dealers?
Results
Cars and UVs
Honda and Toyota have the highest BPI followed closely by Hyundai and Maruti. The
scores of most of the players lie in a narrow band. However, the absolute scores are far
lower than those encountered in satisfaction studies.
The following chart shows the overall BPI in Indian Car OEM (Source: FADA)
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Tata Motors is the leader in Sales BPI, followed by M&M making it an Indian OEMs
club at the top. Leaders in overall BPI like Toyota, Honda, Hyundai and Maruti have to catch
up in terms of their sales BPI. The table below shows the Sales wise BPI in Indian Car OEM (Source: FADA)
Within the sales processes, most OEMs have low indices in areas like ensuring price
uniformity and combating discounting pressures, financing support to dealers and assisting
them in generating additional revenue streams.
Maruti is the leader in Service BPI followed by Honda. The industry average is lowest
in Service BPI due to the poor performance of most OEMs on Post Warranty parameters
poor focus on this aspect of the business, no marketing support, no or inadequately
designed service products, poor customer handling, etc. Besides, even on the warranty side,
there is an urgent need to focus on processes to empower dealers to take faster decisions
on warranty claims settlement. The table below shows the Service wise BPI in Indian Car OEM (Source: FADA)
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Hyundai and Toyota are the leaders in Parts BPI. However, there is a wide variation
between the lowest and the highest scorer with Maruti being a significant under-performer. The table below shows the Parts Wise BPI for Indian Car OEMs (Source: FADA)
None of the OEMs have a formal parts return policy – a phenomenon common in
other parts of the world. Processes to control stock levels and not forcing supplies on
dealers is an issue with most OEMs,
Two Wheelers
Hero Honda has the highest BPI, followed closely by Honda, and TVS. The top 4
players – Hero Honda, Honda, TVS and Kinetic, have nearly similar scores while the rest are
lagging. The table below shows the Overall BPI for Indian Two Wheeler OEMs (Source: FADA)
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Kinetic is the leader in Sales BPI followed closely by TVS. Hero Honda and Honda
have some catching up to do in this area. The table below shows the Sales Wise BPI for Indian Two Wheeler OEMs (Source: FADA)
Hero Honda is the leader in Service BPI (with a score of 59) but the absolute scores
of most OEMs is low, driven by their poor practices on Post-Warranty Service. The areas of
improvement are similar as in the case of cars - warranty rate and empowerment and post
warranty.
Honda Scooters is the leader in Parts practices, followed closely by Bajaj Auto. There
is a significant difference in scores of the top performers and the rest of the industry with
even leaders in other areas like TVS and Kinetic needing to improve significantly. The table below shows the Parts Wise BPI of Two Wheeler OEMs in India (Source: FADA)
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Even in the case of two-wheelers, none of the OEMs have a parts return policy and
stocks are thrust down the channel.
Honda Scooters is the clear leader in relationship management processes, followed
by Hero Honda. All others score less than 60 on this account.
Commercial Vehicles
Ashok Leyland has emerged with the highest BPI, but the difference in scores across
players is low.
Ashok Leyland also has the best sales practices, but lags behind Eicher in Service BPI.
Absolute scores across all the BPI for commercial vehicles are lower than the other two
product categories. Issues impacting the score, apart from the parameters in cars and two-
wheelers, also encompass reimbursing warranty payments on time, no parts return policy,
combating spurious parts, etc.
Commercial Vehicle OEMs in India (Source: FADA)
Emerging Trends in the Industry:
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Major developments are taking place in auto retail sector across the world. Indian
Auto Industry can learn a lot from studying what is happening in the more developed
markets. However, we must also make sure that we do not lose sight of some of the specific
characteristics of our own market.
The graph on the next page shows the momentum of Indian Automotive Industry (Source: SIAM)
All auto analysts would agree that the Indian auto market is one of the fastest
growing markets in the world. Given this growth, it seems obvious that auto retail has a very
bright future in India, particularly when the penetration of organized auto retail per capita is
still very low compared to developed markets like the US, which has 60 times more dealers
per capita than India. But below this highly attractive set of figures, there are many
challenges for auto retail.
Challenge 1: Demographic Challenge
India is an ancient country with a very young population, which is becoming younger,
unlike the developed countries, which are growing older. The buyers of our vehicles are
young people who have different needs, desires and buying behavior than the older buyers
in Europe and the US. The western auto retail models have served their market well. Will
the same models serve this very young set of Indian buyers as well, needs to be considered.
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Challenge 2: Low Income Levels
The BRIC report projects Indian economy as the 3rd largest by 2050, which created
quite a stir when it was released.
If we look at the same set of figures somewhat differently, we see that despite
becoming one of the largest economies, we will still be a relatively poor country with low
average income levels. This is a very different trajectory than what the western countries
have seen.
What are the implications of this? It could mean that the smaller, cheaper entry-level
vehicles will continue to be the mainstay of the Indian auto market. They will be used more
for basic mobility rather than high margin lifestyle products, and we will need to tailor our
auto retail business models and formats to this reality.
Challenge 3: Urbanization
The next challenge is that of rapid urbanization of India. Over the next few years,
India will have the 2nd fastest urbanization among developing countries. By 2015, we will
have 3 among the largest 10 cities in the world.
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This rapid urbanization throws up its own challenges for auto retailing in a country like India.
The availability and cost of land is likely to remain a huge challenge. Already land cost as a
%age of total dealership set up cost is about 60-70%, which is among the highest in the
world.
A 3-S model in highly dense urban centers may not be financially viable. Copying the
western model of out of town large format multi brand dealership may not be an answer
either, as our low-income economy could limit many customers accessing these outlets. We
will have to come up with our own solutions to this challenge.
Challenge 4: Customer Loyalty
The growth of the industry presents a huge opportunity for the auto retail industry.
However, this growth comes with a price. As the market matures, more and more models
would be launched and customer choice will also increase rapidly. Just as an example, the
number of small car models in India was about 15 in 1995, which is likely to increase to over
42, given the plans of the manufacturers, by 2010.
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We all know that a loyal customer is a much more profitable customer. With this
increasing model proliferation, auto retail will need to rethink and rework its strategies to
ensure and maintain the loyalty of its customers.
Challenge 5: New Competitors
If we look at the developed markets, we see many new types of players. OEMs have
launched their own 2nd brand for parts and service outlets. Large independent multi-brand
dealership chains compete with OEM single brand franchisees. In after sales, many players
have entered with different formats and business models.
These new formats and players are still at a nascent stage in the Indian market. But,
they are emerging and have aggressive plans. For example, ICICI Bank is looking at providing
more services than just auto loans. Reliance has very aggressive plans of entering auto
service and parts retailing. We will only see more such players emerge.
While this may be seen as good news for customers, for the current incumbents,
these new players represent a threat and strategies will have to be developed to take them
on.
Vision 2015: The Future of Auto Industry
We have seen some good times
In the last few years, we have seen good times marked by growth explosion, growing
consumerism and consumer expectations. While finance has been a major factor driving the
sale of vehicles in the last five years, today, it is more of desire and emotion that rules in the
purchase of new cars and motorcycles.
But one thing's is for sure
The one thing that we know as we go forward is that change is the constant and that
the rate of change is accelerating. Competition is intense and is going to be more intense
not only for manufacturers but also for dealers with shrinking margins & territories and
addition of more dealers in the same territory. Customers today are savvier and becoming
more demanding. Manufacturers, dealers and, for that matter, other players in the
automotive business, most importantly finance companies, are becoming even more
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aggressive. Similarly, new technologies are creating new challenges. However, there are
many more exciting opportunities that are opening up at the same time.
The 'third wave' is upon us bringing along new challenges & opportunities
There have been three waves since India became independent and started its
industrial progress. The first wave was the closed markets of the fifties, sixties and
seventies, when we had three cars, namely, Ambassador, Premier and Standard Motors.
And, if you wanted a scooter, it was mostly the Bajaj for which one had to wait for at least
seven years. There was always a premium; supply decided the size of industry and the pace
of growth, and the choice was very limited. From there, we went to the second phase that
saw the advent of Maruti, Hero Honda, TVS, and Yamaha, bringing in new technologies,
greater choice and finance availability. But, we still had a fairly limited market range till
about five years ago. The 2000 dawned not only a new millennium but a new world of
consumerism in India. We are really seeing today young people with money in their pockets
to spend, driving new products, new styles and new fashions. The best international brands
are present in India today.
Learn, unlearn and relearn
It is really a very different world that we would not have even visualized ten years
ago. Telecommunication has radically changed the landscape, broadband has arrived and
the internet is quite commonly used. To cap it all, India and China have emerged as great
manufacturing powers in the world. There is a small quotation by Alvin Toffler that the
future belongs to those who are willing to learn, and also willing to unlearn and relearn. It is
not for those who want to be fixed in their ways and thoughts.
“The illiterate of the 21st
century will not be those who cannot read
and write, but those who cannot learn, unlearn and relearn”
The leap of scale
We have seen a huge boom in automotive business; sustained 7-8% growth of GDP
has made India one of the most vibrant economies of the world, which is not much
dependent on the monsoon. At the same time, India is one of the least penetrated markets
in the world and therefore, a big leap in scales of production & sales is imminent. There are
many new players, the market is becoming finer and finer in its segmentation, and
opportunities are for those who can read and understand the minds of the young and more
enlightened consumers. This is the new challenge for all of us as manufacturers, and for all
of you dealers as the people who are the front line and the last mile connectivity with those
consumers. We are going to see a phenomenal expansion of dealership network covering
The Future Won’t be Like The Past:
� Thinning Margins,
� New & More Intense Competition,
� Savvier Customers,
� Rise of the F.I.’s,
� Radical New Technology,
� And many more new & existing opportunities
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even small towns, villages and rural areas. Rural financing is going to be a great tool to open
up and tap the rural markets that are underserved today. And, most importantly, no longer
can we wait for the customer to come; we need to go where the customer lives and where
he/she works.
The leap to address new segments
There is a need to address new segments; India has got one of the lowest usages of
two-wheelers by women, whereas in Indonesia, you will find that outside Jakarta, forty per
cent of two-wheelers are used by women. Indian women's lifestyle and needs are not very
different. So, why is it that we have such a low usage of motorcycles or two-wheelers by
women? Are dealers equipped to deal with the requirements and demands that women will
make, the sensitivity that is required to deal with them, and the environment in which they
shop? Automobiles are no longer commuting products or transportation products, but
fashion statements. Indian consumer is very rapidly changing to demand contemporary
products. Today, Indian consumer demands that he pays the price of a Maruti and gets the
excellence of a Mercedes Benz or a Rolls Royce. That is the real world of India where we
want extraordinary value by paying very ordinary prices, which is a very great challenge for
all of us.
Other finer segments that are emerging are the youth, the rich 'hobby riders' and the
senior citizens. The youth today believes in individualism and individuality and, therefore,
demands customization at levels that we have not seen till now. We have not yet seen the
real burst of individual expression in terms of cruiser biking or SUV clubs. In the next five to
ten years, these would be the kind of things that would happen in this country just as it has
happened everywhere in the world. It will come about much quicker and faster than we can
ever believe.
The leap to meet new expectations
In this era of service economy, people are demanding service at exceptional levels. It
is not far away when automobile dealers will have to serve people at their doorstep. Late
night service stations or after-office-hours service offered by dealerships is still a rarity. With
their exposure to international levels of excellence, customers in future are going to be
unforgiving and no longer tolerant of shoddy service, or poor manufacture, or any kind of
delay that they have been used to in the past.
The leap in IT
We are going to witness a big leap in the use of IT in dealership operations and
customer service relations. We still haven't seen IT and Internet usage in purchase of
vehicles and dealership management in the same degrees that we see in other countries.
We have not yet seen completely automated dealerships, the dealer management systems
and customer relation management programmes. These things are going to change the way
we do business. It is going to change our response and improve our costs. When these
linkages come and connectivity between dealers and the production planning takes place at
the levels seen in other countries, it is going to lower dealers' inventory and inventory costs,
improve logistics costs and cash flows. Companies also stand to benefit from the reduction
in cost of capital and work in progress. The real time information flow from dealers to the
manufacturers will certainly improve the way we design products, the way we respond to
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changes in the market and the speed at which variants are launched as the customers'
demand and expectation change. It will also change the way our dealerships look. I think
dealerships are going to look like NASA outpost and less like ordinary dealerships today.
Dealerships are going to have Internet booths in their premises or at other places, where
customers can surf and see what the company has to offer. Customers don't even have to
talk to salesman, who will be simply there to assist the customer in making up his/her mind.
The leap in retail experience
The face of retail will change radically in future as products & features will
increasingly converge. Retail experience will become a crucial differentiator and an
important part of the overall brand package & experience, not just the vehicle and not just
the services alone. Customers today surf the Internet and then decide where to go and
finally make their purchases. So, there is a lot of pre-determination that is taking place from
the home, and we have not yet seen the dealers having websites and competing on the
Internet.
The leap in technology
There is going to be a big leap in vehicle technology. For example, it is not far away
when you will have engines with electro magnetic valves, where a chip can change
significantly your fuel injection system and your engine timing and give you a completely
different performance just at the click of a switch or change of the chip. With the kind of
connectivity that is going to take place in not too distant future, simply by punching the
chassis number, an engineer in any part of the country will be able to know the history of a
vehicle. Similarly, 24x7 service stations, online reservations of service time or appointments
will become the order of the day.
The leap in manufacturing
We are already witnessing a slew of new models being launched at greater
frequency. 2015 will see a significantly wider product range and variety including hybrids,
alternate fuel operated and fuel cell driven vehicles, which will increase complexities of
dealership operations because the technical capacity and the knowledge capacity at
dealerships will also have to improve to cope with this challenge.
The leap in after sales service
Dealerships are going to assume the role of last mile manufacturing in view of the
increasing level of customization demanded by the customers. It is a likely scenario that the
dealers will be receiving unpainted panels and will deliver to the customer a scooter or a
motorcycle painted at the dealership in the color that the customer wants, with the graphics
that he/she demands and with a lot of customization of horns, handgrips, side panels and
host of other fixtures.
The leap in financing
There is no gainsaying that auto finance has played a major role in not only driving
the growth in vehicle sales in the last 6-7 years but also increasing the revenues of
automobile dealerships. However, when we envision 2015, there is a tantalizing possibility
that finance companies, which are paying to sell vehicles; may open one stop durable shops
with different brands and models of two-wheelers, cars, TVs and other white goods under
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one roof. Such a scenario can create a completely new paradigm, although it looks like a
remote possibility. It may not happen to high-end brands but the possibility of it happening
in the case of lower end products that are more or less generic or mass products, cannot be
ruled out.
The leap to Organized Seconds
Indian market is poised for a big leap in used vehicle business with ownership/
replacement cycle getting shortened and a vast population of 2-wheeler owners waiting in
the wings to graduate to owning cars. All of us are missing a huge opportunity on used
vehicles. Used vehicles provide with two opportunities: (a) It helps dealerships make extra
money; and (b) it obviates the cash flow problem even when new car sales are not doing
well. Automobile dealers must grab this opportunity and should not treat it as a hassle. By
not getting into this activity, automobile dealers are giving away a value addition stream to
the brokers in unorganized sector and doing a disservice to the nation and the customers.
This business activity offers a great opportunity and, at times, brings in more money given
the low margins on new cars, new trucks, and new two wheelers; value may be smaller but
the gross margins are much higher.
The leap in retail formats
Finally, we are going to witness a revolution and big leap in retail formats. We can
very well imagine Auto Malls and Auto Zones coming up. These exclusive Malls/Zones will
be equipped with facilities of test track, dirt track, go-cart for small children, entertainment,
etc. It could be a single brand or a multi-brand mall, having, say, a Bajaj outlet, a TVS outlet,
a Hero Honda outlet, a Yamaha outlet, or a Suzuki outlet. These things will make it easier for
customers to come to one place, compare various vehicles and models and also have a great
family experience in buying vehicles. We would, as well see specialized retail outlets, such as
sports bike showroom, SUV outlet and the like. So, there are many ways things can change.
Just like the banks went the ATMs way, automobile dealerships of the future will be hub and
spokes model in view of the expanding urbanization and city limits.
New Challenges, New Threats & New Great Opportunities
All I would like to say is that there are new challenges and new threats, but there are
new great opportunities. And, those opportunities are going to remain opportunities only
for those who can see the change happening and those who are going to unlearn and learn
and reinvent themselves. It is going to be a costly threat to the rest of us who are not willing
to change. These are some of the scenarios that could take place in our retailing
environment in the future.
Detariffication of Insurance Sector – Opportunities & Challenges for Auto
Retail:
Opening New Vistas - Detariffication
In January 2007, the first phase of detariffication has set to kick in 'detariffed motor
insurance regime' wherein the premiums will move from tariff based to risk based. Tariff
free Insurance regime is expected to open up new opportunities and to present new
challenges for both Insurer and Automobile Dealer. Quite a few interesting changes are
going to take place in the market post detariffication.
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Two major developments that de-tariffication is set to bring about are:
1. Transition from administered pricing to risk based pricing: meaning that the
premium rating will be based on features of the vehicle and the person driving it.
And we anticipate increased participation from customers in rating a risk. As is the
case in developed markets, the information provided by the customer will become
crucial in deciding the pricing. In the case of motor insurance, a combination of a
host of factors including the make, model, location, driver's age & experience,
security features of the car and usage will all have an impact on the final premium
that the customer will shell out.
2. 'Product Differentiation': which will probably represent the second phase of the de-
tariff process. Insurers will be able to provide products packaged to meet a
customer's unique requirements, and price them according to customer profile and
product features.
Basis of Premium Rating:
The present method of calculation of motor insurance is based on sum insured and
other rating parameters like engine capacity, age of vehicle and geographical location. But,
in the tariff free market, the customer will be paying the premium based on his/her risk
profile. The premium rating from being based on the vehicle will now shift to being based on
the driver. Thus, insurance will move from insuring a car to insuring the customer. To put it
simple, a customer with a higher risk profile will pay a higher premium than a customer
having a lower risk profile. In other words, customers who are prone to accidents would
have to pay more and safe drivers will pay lower premiums.
The opening up of the market will not only impact the insurance companies but also
the Auto Dealer fraternity, directly or indirectly. Since insurance will be moving from
insuring a car to insuring the customer, for providing better products and services, there will
be the need to augment knowledge about customers. Only then will one be in a position to
offer a valuable proposition to our customers.
Therefore, it is very important for the dealer to ensure that proposal forms are
properly documented and that the customer provides all relevant information. In the tariff
free regime, premiums will also be based on various other factors like driving habits, as well
as driver/owner details like the age of driver, past claims experience, occupation, usage of
the vehicle, the vehicle parking areas, safety features of the car, etc. All these details are
necessary, since any improper disclosure would compromise the claim and also impact the
premiums charged.
What's more, if the repair or replacement cost is high, the premium will also be high.
Premium for theft prone vehicles may be higher too. If the claims experience keeps moving
up, insurance premium at the time of renewal will go up. However, if the Manufacturers,
Dealers and Insurers come together, the problem can be identified and better remedial
measures taken up immediately, which can result in superior customer service. Claims
happen due to various reasons, but most are linked to driving abilities. It is important to
understand that reduced accidents mean reduced outgo for repairs and insurance.
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Giving Benefit to the Customers:
The moot point is that most customers are likely to benefit in the tariff free market.
The premium is likely to drop for some segments, while it may increase in other segments or
covers. Customers will definitely get low rates if they follow a few preventive measures to
mitigate the risks involved. Safe driving is one of the best ways to keep the motor insurance
premium low. It will be imperative to park vehicles in a secured parking lot and to install
vehicle safety equipments like anti-theft alarms, smart chips that de-mobilize the engine,
anti-lock braking systems, seat belts, etc. to lower the insurance premium.
Today, Auto Dealers provide a one-stop shop facility to their customers, offering
easy access to a variety of services like Finance, insurance, Repair & Servicing, Accessories,
Spare Parts, etc, which helps in earning additional revenues. Apart from the above, dealers
can also join hands with Insurance companies to provide additional services like Roadside
Assistance for towing, Courtesy Car Breakdown Assistance, providing an ambulance for
shifting the injured to the hospital and the like. All these "value- additions" can very easily
be bundled into the insurance policy for the customer and yield additional revenue to the
dealers. Furthermore, dealers may offer Annual Maintenance Contract (AMC) facilities to
their customers with one of the likelihood being - it may be discounted in the insurance
premium. This would help the dealer in selling more policies as well as earn additional
revenue through AMC charges.
Policy Renewals:
Handling renewals of insurance policies is yet another source of income for the
automobile dealers. Studies reveal that there are several vehicles plying on our roads
without insurance cover, offering a wonderful opportunity to chase renewals! Over here,
the database of customers needs to be looked into to track the renewal dates of these
vehicles, using smart Management Information System besides 1-2 more resources for
follow-up action to convert these opportunities into actual insurance policies.
Other avenues of Insurance:
Another opportunity for enhancing your revenues could be cross-selling other
Insurance products like Health and Home to your customer base. Health Insurance presents
a sizeable opportunity for growth followed by Home Insurance. The escalating cost of
medical treatment today can put a big dent in bank balances of consumers leading to the
demand for health insurance. Similarly, disasters such as the Chennai and Mumbai floods of
last year will lead to people seeking insurance cover for damage against their home and
assets.
Other Emerging Challenges for Automotive Players in India Automotive industry in India has evolved over the last few decades into a thriving
industry with a host of new challenges emerging along. While managing product
development and manufacturing is critical in the supply chain, the key to market success lies
in the successful customer acquisition and more importantly retention. Automotive dealers
are the most significant part of any brand representation in the market place. A company or
brand is as good as its representation in the market. Establishing a well-planned dealership
network is a bare essential to market products successfully. Importance of sustaining quality
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of 'customer touch points' was never felt so relevant before. Hence, in the current scenario,
performance of dealers is an indication of performance of brand itself and vice versa.
A three-wheeled business: How does it balance?
A Three Wheeler Manufacturer
Sales Service Spares
Automotive dealers business can be compared to a three-wheeler. The three wheels
of the business are sales, after-sales service and spares. A sale is like front wheel. A dealer
principal on the driving seat always likes to steer this wheel to give direction to his/her
business. However, many a time, the following two wheels are ignored: the rear two wheels
are the ones, which take the maximum load of passengers (customers) who ultimately pay
for the ride while sales give direction. These are the changing rules of the automotive
dealership business with the change in the distribution channel structure over period of
time. Chart 1 below indicates how automotive distribution structure has changed in the past
few decades.
The distribution has changed from a single channel to multiple channel of contact,
for both sales and after-sales services offered to the customer. With the multiplying of
channels, the competition has also grown multifold. Multi-brand showrooms are emerging
to offer convenience to the customer in comparing and evaluating various brands under
single roof and take faster decisions.
The earlier competition, only from small time local garages, is evolving into a larger
organized independent service provider.
In the given situation, the business model of automotive dealers is clearly under
tremendous pressure from all the business angles. The forces acting on the dealer business
are indicated in the Chart 2.
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Bargaining power of OEMs is making dealers increasingly invest into the
infrastructure to enhance the customer experience. On the other hand, customers are
getting savvier and the bar of minimum service expectation is rising day by day. There is
increasing threat of new entrants as OEMs are appointing more and more distribution
points to enhance reach and penetration.
The competition amongst dealers of competing brands as well as within same brand
is crossing boundaries. Discounts and freebies are not a seasonal affair anymore. All this has
lead to drastic shrinking of margins in the new vehicle sales business. Some progressive
dealers confronted these challenges and worked their way to sustain bottom lines through
increased focus on after-sales business.
However, the sole support of after-sales service business itself is under threat of
substitutes in the form of organized (branded) franchised service network. Companies
supplying automotive related products in the aftermarket like oil, lubricants, auto
components and auto accessories are entering the lucrative automotive service business.
This will be the biggest ever challenge faced by the automotive dealers in India. The
automotive dealer's business was redefined from selling vehicles to servicing customers in
the late nineties with the entry of multinationals in India. However, this new definition of
the business itself is under threat with the newly emerging competition.
A word of caution
Well-known brands in the market like TVS, Cummins, Bosch, Castrol, Gulf Oil, and
Reliance have already forayed into the after sales business in some way and many more are
on the verge of entry. With fast pace of new vehicle sales, dealers cannot ignore the sales
function (even though it may not add much to bottom line or sometimes negatively impact
it). However, if the focus of dealership remains only on sales, the opportunity to earn from
growing after-sales service business would be exploited by the independent service
providers.
Any car owner evaluates a type of service centre on 4 Ps of service channel selection.
The 4 Ps are:
1. Price of Parts
2. Price of Labor
3. Proximity and
4. Promptness of service
Authorized dealer workshops are always likely to have higher price of parts and labor
than the independent after-market, given the higher overhead costs. However, proximity
and promptness of service are the two key criteria on which they need to work in order to
retain the customer within their fold and earn their lifetime value. There are very few
options left with the automotive dealers of this era. They either change themselves and
their systems to be more customers focused or concede the business to others.
Market share:
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The chart below shows the relative market shares of various OEMs in Indian
automobile industry:
Conclusion: The Indian market is a very interesting market, because it is defying global trends.
But for how long? And if it aligns with global trends, many an apple cart would be upset. On
the other hand, we may find a new way.
Firstly, we are a two-wheeler market rather than a car market, as befits our per
capita income. And, for the next 10 years we may remain so. But cars will gain in importance
even in this period. This is aided by the skewed development of the Indian economy,
wherein IT jobs are growing faster than manufacturing jobs.
Secondly, we are a mid-sized truck market rather than a large truck market. This too,
is changing with both development of roads and consolidation in the logistics market. But,
the change is likely to be slower than the car/2w changeover.
The global production of cars was 49 million in 2002. It grew by 4% over 2001, but
fell by 1% in Europe, 5% in Latin America and 9% in rest of the world. The US and Asia were
the only growth centers. Europe, NA and Asia now produce 14-17 million cars each. Global
production of commercial vehicles was 8 million, 5 million of which was in Asia.
There were 30 million 2-wheelers sold in the world. Of these over 70% were sold in
Asia. Large markets were China-10 million, India-5 million, Indonesia & Vietnam - 2 million,
Thailand, Japan, Taiwan- 1 million each and EU-2 million. The SE Asian market is essentially a
step-through motorcycle, like Street, market, which has failed in India. Unless Indian
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producers make this animal for export, they will not be able to make any significant dent in
Asian markets.
The car industry is topped by GM that produces over 8 million units, Toyota and Ford
around 6 million units, Volkswagen 5 million, Daimler-Chrysler 4 million, Honda, Nissan &
Peugeot around 3 million and Renault & Fiat around 2 million. Hyundai brings up the rear
with 1.7 million units. BMW, which is a niche player, is another 1 million. These companies
account for 45 million, or almost the total production of cars in the world.
Honda dominates the 2-wheeler industry with 8 million units. Yamaha is a distant
second with 2.5 million, and Suzuki, Bajaj are around 1.5 million units. TVS Motors at 1
million brings up the rear of the big league. There are numerous Chinese producers but all
are smaller than Indian producers now. Piaggio is a spent force in 2-wheelers, with its
scooter bias. Having made losses continually in the recent past, it has recently been taken
over by a takeover artist, who will want to sell it eventually.
There are three important things happening in the 2-wheeler business. Japanese
producers are slowly but surely taking control of the Chinese market. The Chinese are
exporting 3 million units per year. And, of course, the very aggressive growth of Honda.
Honda has doubled its volume from 4 million in 2000 to 8 million in 2003, adding a
Bajaj Auto every year to its volume. With a change of strategy from premium pricing to
using the low costs of India & China to meet the local competition head on, the Japanese
producers, especially, Honda, are posting significant growth. This is likely to continue.
In the car & 2W market most global players are already in our market. Of the major
car manufacturers, only Renault/Nissan and Peugeot remain unrepresented. With the hash
it made of its venture with Premier, Peugeot is unlikely to be in a hurry to re-enter. Nissan,
which participated in the recent Auto Expo, should be expected to test the waters.
� Indian automotive market is a very interesting one, because it is defying global
trends.
� India is a two-wheeler market rather than a car market and a mid-sized truck market
rather than a large truck market.
� Global production of cars was 49 million in 2002. The US and Asia were the only
growth centers.
� Global production of commercial vehicles was 8 million, 5 million of which was in
Asia.
� Honda with 8 million units dominates 2-wheeler industry.
� Japanese 2-wheeler producers are slowly but surely taking control of the. Chinese
market. The Chinese are exporting 3 million units of 2-wheelers per year.
� The car industry is a very peculiar industry. Despite its size, it's a very unprofitable
industry.
The car industry is a very peculiar industry. Despite its size, it's a very unprofitable
industry. Other than Toyota and Honda, almost every carmaker has been in the red for at
least a year in the last 10 years. Of these, FIAT is still fighting for its life and Ford is still to get
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its act right. Even the largest, GM, during 2003, is almost making a loss in North America,
and a loss in Europe and Latin America. Only Asia Pacific and its finance company are
keeping it out of the red.
With there being significant over capacity in North America and Europe, this anemia
amongst car producers is not surprising. In 2003, Toyota has ousted Ford from the number 2
position. With its targeted 15% market share by 2010, its undeclared ambition is to be No.1.
GM currently has around 15% of the world market.
China has been the flavor of the season. In 2003, with 4 million+ vehicles sold, it has
become the 4th largest market for vehicles in the world after the US, Japan & Germany. It
has been growing at a blistering pace of 30% + per annum.
The Indian car market is actually ripe for change. Despite Suzuki taking it over,
Maruti is fumbling forward. After Maruti 800, Suzuki has not had a real winner. It lacks the
balance of product and price attractiveness. Attractive prices are not enough. Cars are
status statements; with the customer continually buying one that is higher than his current
income really permits. Hyundai's success has been precisely getting this balance right, but it
has its own limitations. Shall we continue to see this steady splintering of market shares?
Almost 10 years ago, I had predicted in an article for "Car & Bike" that the low
volume, high value car model strategy of global producers would not work in India. The
market size would be too small to sustain them. Progressive lowering of customs duties and
free trade agreements may entice them to be in the trading mode, as all barring Hyundai &
Ford amongst the new foreign entrants are today; but ultimately they will run out of dealers
interested in operating in that mode. They already suffer a higher chum. Talera Motors at
Pune is a good case. It started with being a Ford dealer, was a Mercedes Benz dealer for a
while. Now it is (or is it?) a dealer for GM.
In 2-wheelers; two major events will happen. Suzuki will re-enter the market and
Honda will come in via HMSI into the motorcycle market. As far as dealers are concerned,
these two events are going to cause a lot of ripples. Historically, most Indian dealers have
car & 2-wheeler dealerships, if not a CV dealership, thrown in for ample measure. With
Suzuki coming on its own, will it willy-nilly force Maruti dealers to choose between their car
and 2W dealerships? As Honda indirectly weakens Hero Honda and therefore Hero Honda
dealerships, how will the over capacity of Honda dealerships be resolved?
The profitability of auto dealerships has always been an issue. The issue was
obfuscated by the premia earlier and the eagerness of those in building trade to get into
auto dealerships. Now, however, given the stark realities, we are witnessing a churn first
amongst weaker company's dealerships. A number of 2W & CV companies are unable to
attract or retain good dealerships. There is a throughput required in each dealership. For
example, unless you are selling 300 2-wheelers a month, you are not viable. That means
that a company selling less than 90,000 2Ws a month is not going to be viable from purely a
dealership angle. The number also ties up with the volumes required to generate profits to
develop new products in pace with the market. No prizes for guessing which companies I
believe are headed towards decline! There will be a similar calculus in the car sector.
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Will this lead to multi brand outlets? In most countries of the world, for brands other
than Honda, 2-wheelers are sold through multi brand outlets. After a protracted fight even
car manufacturers in Europe will have to agree to multi-brand outlets. In India, legally, there
is no bar, but in practice there is. For companies not able to provide economical volumes to
their dealers, there may be no other way forward. In Mumbai and elsewhere, "informal"
multi-brand outlets have started to take roots.
� China has become the fourth largest market for vehicles in the world after the US,
Japan & Germany.
� Low volume, high value car model strategy of global producers would not work in
India. The market size would be too small to sustain them and ultimately they will
run out of dealers interested in operating in that mode.
� Two events in 2-wheelets, viz, re-entry of Suzuki and that of Honda via HMSI into the
motorcycle market are going to cause a lot of ripples in the market.
� The profitability of auto dealerships has always been an issue. A number of 2W & CV
companies are unable to attract or retain good dealerships.
� In most countries of the world, for brands other than Honda, 2-wheelers are sold
through multi brand outlets.
� In India, legally, there is no bar on multi-branding, but in Practice there is. For
companies not able to provide economical volumes to their dealers, there may be no
other way forward.
As products get complicated, one can expect that there will be greater drive-ins at
the dealers' workshops. In cars, this has happened with fuel injection and computer engine
controls. Fuel Injection on 2-wheelers is round the corner. My educated guess about the
Honda bike is that it will be fuel injected, because, Honda has already announced that all its
scooters would be fuel injected by 2010. So, dealers who are services oriented - most
dealers in the country are not-should stand to gain. Or, dealers should work hard to improve
the service end of their operations; and that is largely a matter of attitude & culture.
Another paradox to be sorted out will be the choice between owner managed and
manager-managed dealerships. It is a truism the world over that owner managed
dealerships work best. However, as the finance and scale of dealerships increase, it
becomes increasingly difficult for owners to function as managers. On top of that is our
antipathy for dignity of labor. A lot of dealers feel it is below their dignity to run their
dealerships. A large number of manager-managed dealerships have been mismanaged
because of poor quality of managers, inadequate delegation to them or the managers
becoming corrupt.
Lower interest rates, (compared to earlier; in my view, they are unlikely to go down
further; a risk of interest rates going up is quite likely), better finance availability in smaller
towns and a more open economy will continue to generate a decent growth rate in the
industry. Attendant hazards would be that competition will intensify further and company
and dealer performances will get increasingly uneven as unviable players get squeezed.
Dealers would have to be both - lucky to be with the right producer(s) and be first-rate
operators to be profitable. We have yet to adjust to a global reality that loss is the natural
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result of a business. Profit comes to the exceptional performers. As the ad for the Indian
Army said "Do you have it in you?"
In this scenario, what is the future of Indian producers?
In CV s, they are under the least pressure for the moment. In Cars, we have only Tata
Motors in the fray. It has done commendably in the face of both financial adversity and
public skepticism. But it will take very deft management because the odds are still against it.
The much tom-tommed MG Rover deal does not speak of competent strategy. MG Rover is
a loss making company, in permanent decline, with a dubious management currently under
parliamentary enquiry for poor if not fraudulent corporate governance practices.
In the domestic market, overall Hyundai Motors seems to be the best placed. It has
struck the best balance between product and price attractiveness, backed by sensible
marketing. Maruti, though now free to decide, is at best, making a move forward.
Toyota is the dark horse. After the unqualified success of the Qualis, it has
surprisingly chosen to stay away from the mass car market. But, it has a history of being a
quiet builder of market position.
2-wheelers market awaits the HMSI bike with bated breath. If Activa with which they
became a No.1 in scooters in almost no time, is any indication; Honda is going to create
ripples in the Indian market. Honda is playing the end game of its India strategy and, like an
efficient chess player, squeezing the opposition into a comer. But are its opponents right
now Bajaj & TVS or Hero? Bajaj & TVS have shown grit and used the absence of a Splendor
upgrade to create space for themselves, but there is not much margin for error and they
have been error prone.
� Dealers who are services oriented - most dealers in the country are not - should
stand to gain.
� It is a truism the world over that owner managed dealerships work best. However, as
the finance and scale of dealerships increase, it becomes increasingly difficult for
owners to function as managers.
� Lower interest rates, better finance availability in smaller towns and a more open
economy will continue to generate a decent growth rate in the industry. Attendant
hazards would be that competition will intensify further and company and dealer
performances will get increasingly uneven as unviable players get squeezed.
� In CVs, Indian producers are under the least pressure for the moment.
� Honda is playing the end game of its India strategy and, like an efficient chess player,
squeezing the opposition into a corner.
The growing mobility needs of the people in India augur well for two and four
wheeler industry. The cost advantage that India offers with respect to product development
is fast establishing the country as an R&D hub. In addition, the credibility that India has
gained as a cost effective manufacturing base for both small cars and two-wheelers is
fuelling creation of capacities by all major manufacturers in the country. Likewise, economic
growth and the Golden Quadrilateral project will also increase demand for road freight
movement and this is bound to sustain the commercial vehicle industry's growth.
Industry Analysis : Indian Automobile Industry
Bharat Sagathiya (41)
90
The two-wheeler segments are expected to grow to 12 million units and passenger
car segment to 2 million units by the end of this decade. However, this industry cannot be
insulated from global trends where the state of industry provides pointers for caution. In
conclusion, to survive and grow, the Indian Auto industry has to ensure product innovation
and overall cost competitiveness.
Finally, the customer will reign supreme and the success of OEMs and dealers in this
department will spell the difference between success and failure.