Demand Creation – A Challenge and key to Auto Industry Growth

Edited Text of the Presentation made by Ravi Kant, Vice President, SIAM & Managing Director, Tata Motors Ltd at the Inaugural Session of 4th Auto Sumit on 14 th January 2006.

If we were to structure the evolution of auto industry in India, we find that in phase one, there were shortages and there were huge waiting lists and premiums that the customer had to endure.

Then came the phase two spanning mid 80's and early 90's, when the market started opening up and many new vehicle manufacturers entered the Indian market. The customers began to have a few options that were good and met, somewhat, the aspirations of the people. OEMs had to respond to the changes quickly in order to stay in the business.

 
The phase that we are going to see or rather we should be contributing to make it happen, is really how to make India an automobile hub. How to make India a real powerhouse in automotive industry? And the key thing, in my view, is going to be demand creation. So, this is the only thing that will ensure that India becomes an extremely powerful place for vehicle manufacturing and retailing.

I do agree that we need to protect margins, provide service of the level matching the ever increasing expectation of the customers and ensure the customer satisfaction and delight. In nutshell, the customer should be at the centre of all our business plans. However, we should equally focus on demand creation, as otherwise all our plans will go haywire. So, I would like to share some thoughts on this key determinant, focusing on how to create demand and how we can help in making it happen.

Ravi Kant Ravi Kant is the Managing Director of Tata Motors Ltd, India's largest automobile manufacturing company. Before taking over as MD, he was Executive Director of the Commercial Vehicle Business Unit of Tata Motors. Ravi Kant has had an extensive experience in consumer durables and automobile industry. Prior to joining Tata Motors Ltd in 1999, Ravi Kant was Director, Phillips India Limited looking after consumer electronics. He contributed significantly in turning around an ailing scooter manufacturer and in launching Titan, now India's leading watch brand. He is the Chairman of Tata Daewoo Commercial Vehicles, S Korea and Hispano-Carrocera, Spain. He is also the Chairman of Tata Cummins Limited, a joint venture with Cummins, USA and Chairman of Tata Holset Ltd, a joint venture with Holset Engineering Company, UK. He is on the Board of Voltas Limited, an air conditioning engineering company of Tata Group and TAL Manufacturing Solutions Limited. Ravi Kant had his education at Mayo College, Ajmer; Indian Institute of Technology, Kharagpur; and Aston University, Birmingham, UK from where he did his Masters in Management in Industry. Ravi Kant takes great interest in Marketing and Industry related activities. He is on the Governing Board of National Institute of Design and is the Vice President of Society of Indian Automobile Manufacturers. He has also been the Chairman of Audit Bureau of Circulations, National Readership Studies Council and The Advertising Standards Council of India.

 
Indian auto industry has seen significant growth in the last five years from 5 million in 2001 to 6 million in 2003 to 9 million in 2005, which is a fantastic growth and this includes all two-wheelers and four-wheelers. The projections estimate that the auto industry volumes will be more than 36 millions in the next 10 years.

 
Going forward, the Road Development Programme would be the single most important factor in ensuring the growth of auto industry. Broadly, there are three kinds of road development programmes going on in the country. Number one is the National Highway Development Programme (NHDP), what is popularly known as the Golden Quadrilateral and the North-South East-West Corridors that are hub-to-hub express highways. The second level is the regional roads and the State roads of economic & interstate importance, where big towns get connected with each other and with the big roads under NHDP. The third major programme which is going to be the most important is the Pradhan Mantri Grameen Sadak Yojana, which is connecting all villages in plains having a population of 1000 persons and all villages in hills having population of 500 persons, with all weather roads.

These road development programmes will change the whole paradigm of transportation both in the goods and passenger segments, more so in the passenger transportation. Therefore, by understanding and predicting the kind of change that is going to happen, we need to come up with our response and plans that are pertinent to India.

The experience has shown that road development gives a kick-start to the economy. We have seen this in USA and Germany; we are seeing this in China; and we are going to see this in India in the next five to seven years. This is going to be the force, which will be so powerful that it will change the entire paradigm of economy. We, therefore, must analyse the unfolding scenario and see what kind of role we can play in this.

When the road infrastructure is in place, goods transportation will witness a quantum jump, but passenger transportation is going to see a bigger change and grow at a greater pace because a number of factors are at work simultaneously, which are going to fuel that qualitative and quantitative change. Increase in income levels and decline in tax & interest rates have led to increase in personal disposable income. Explosive growth in communication has led to urbanisation of rural consumer attitude and propensity to spend; two million cell phone connections are being added every month in the country. We have entertainment industry that is going places, which is creating the kind of a desire amongst the people never witnessed before. The kind of road infrastructure that is coming up will give a new look to the economy; people will tend to travel more frequently that will give a big boost to the growth of buses and personal vehicles.

 
In India, even a modest change in the road density can bring about a dramatic impact in truck penetration. With a massive road development programme going on presently, we are going to witness a huge growth in goods commercial vehicles in the next five to seven years. We, therefore, need to be prepared for this dramatic rise in truck penetration.

 
India, as we all know, is the youngest nation in the world as the median age of India is 25 years that is going to remain, more or less, at the same level, i.e. 25-30 years for next 10-15 years. That means that we have people who are young and more experimentative, who would like to spend money for improving the quality of their life. This is one of the key factors, which is going to drive the demand creation.

 
GDP growth, at present, is hovering around 6 to 8 per cent. With policy initiatives taken by the Government and various developmental programmes gathering pace, GDP growth is expected to go up from 8 to 10 per cent that will provide a great momentum to the economy including automobile sector.

Entry of global players would help in expansion of the market, and manufacturers will develop appropriate products for the 'bottom of the pyramid'. This is a key factor as far as India is concerned. Premium or high-end products are not going to get the numbers. We need to concentrate on value for money products that have propelled phenomenal growth in various sectors of economy. Automobile industry is no exception to this pattern.

So, if we want to really go to the masses and if we want to take advantage of the pace at which developments are going to take place in the next five to seven years, we need to think outside the box and even think of entering new geographies for growth beyond domestic market.

What we have seen in the past may not be comparable to what we are going to see in the future. The next 10 years may witness almost a four-fold growth. It is the duty of the auto industry to make sure that this happens. If auto industry's contribution in India's GDP has to be what it is in the emerging countries or developed countries, then it has to double from the current four per cent to nearly eight per cent. That will call for a major expansion in demand. While it will be easy to set up factories, creation of demand to absorb those numbers is going to be the key.

Decline in interest rates have really made vehicles more affordable for the people. Therefore, huge opportunity awaits us.

 
75% of our population lives in the rural India; the question, therefore, is going to be, how can we touch the rural population that largely remains untapped? How do we reach those people? How do we ensure that financing or micro-credit or low cost vehicles can reach those people? That is something, which is very challenging, very seducing and very difficult. And, therefore, one thing that we have got to do is to extend our reach and penetration by adopting innovative concepts in auto retailing. There are a whole lot of ideas that we need to be working on, whether it is in sales, financing, service and spare parts.

 
It would be possible to tap the huge untapped market, if we create ‘rural lean touch points’? OEMs and channel partners, therefore, need to rethink the whole system of distribution and retailing to meet the growing needs of not just urban but also rural India. As the size and level of these touch points will naturally be small, the immediate question arises is how do we get our profitability? However, for making sure that we take advantage of the huge opportunity that lies ahead, it is imperative that we anticipate and take proactive measures.

We will have to think in somewhat longer term and start working towards our long-term goal right away.

E-solutions, CRMs and connectivity are going to play an important role. We need to find a solution or a basket of solutions that will enable us to keep our cost low and yet extend our reach. Auto retailing chain needs to adopt and invest in appropriate technologies and IT enabled flexible solutions and systems to enhance and improve customer satisfaction & retention, performance, service levels, competitiveness, cost effectiveness, technical competence and reach.

 
There are thousands of dealerships in US, UK and Italy. In US, there are nearly 21,000 dealerships; in UK, 5,000; and in Italy there are 4,000 dealers of just passenger cars, while in India, there are just 700 dealerships of passenger cars in total. Now, if we want to make India an auto industry hub, then we really need to think in terms of thousands of touch points for the customers. The challenge with us is how to create those thousands of touch points for the customers. We should work together to create those thousands of touch points and get connected to a vast majority of people who have not had the experience or the opportunity to be associated with the kind of growth and development that we are talking about.