Competition
Intensity the Key Challenge in Small Car Market
CRISIL Research
The increasing number of new models and the entry of
global players, attracted by the size and growth potential
of India's car market, has intensified competition in small
cars. Cost pressure is mounting on small car manufacturers
as they attempt to maintain market share through frequent
model introductions, in response to competition intensity.
To maintain their margins, CRISIL Research believes that
small car manufacturers would need to increase sales
volumes per model rather than introduce more models in the
segment that will diminish the benefits of scale efficiency.
Competition Intensifies in Small Cars with the Increase
in Number of Models
The level of competition in India's small car market, particularly
the A2 segment, has increased significantly as its size
and growth potential has attracted several global car manufacturers.
We expect the entry of new global players or models to continue
over the medium term. This will intensify competition in
the segment further.
Sales Volume per Model will Continue to Decline
as Competition Intensifies
CRISIL Research expects the A2 segment to grow 11-13 per
cent in 2010-11 compared with that of 10-12 per cent for
the industry as a whole (excluding sales volumes of Tata
Nano). However, sales volumes per model in the A2 segment
will decline in 2010-11, as there have been a number of
model introductions. Sales volumes per model have been declining
in the segment since the third quarter of 2006-07, although
the total sales volume has increased.
 |
 |
Cost Pressures Increase with the Increase in the Number
of Models
While the introduction of several models over the past few
years has enabled car manufacturers to increase sales volumes,
their costs have increased significantly. This has exerted
pressure on their profitability. The higher costs are mainly
due to:
|
| ▪ |
Increase
in product development activity.
|
|
|
| ▪ |
Higher
marketing and selling cost per unit of sales.
|
|
|
| ▪ |
Additional
value added features (such as power windows, high-end
music systems), without a commensurate increase
in realisations.
|
Model Introductions Increase Players' Product Development
and Selling Expenses
CRISIL Research estimates that the introduction of car models
over the years has significantly increased car manufacturers'
product development/royalty expenditure and marketing &
selling expenses per unit of sales.
For instance, selling expenses per unit of sales have increased
at 11 per cent CAGR over the past four years up to 2008-09.
This indicates car manufacturers are under greater pressure
to attract and retain customers in order to maintain market
share.
Our estimation is based on a study of the number of car
models launched and costs per unit of sales (product development
and marketing & selling expenses) for a leading car manufacturer
over the past few years.
 |
Higher Value Offerings without Commensurate Increase
in Realisation
The competition intensity has prompted players to offer
more value added features (such as power windows, high-end
music systems). However, the average realisation (adjusted
for inflation) has declined 32 per cent over the past five
years up to 2009-10.
Players will Need to Increase Sales Volumes per Model
to Maintain Margins
To maintain their margins, CRISIL Research believes that
small car manufacturers would need to increase sales volumes
per model rather than introduce more models in the A2 segment,
which will diminish the benefits of scale efficiency.
(Please note that the views expressed here are those
of CRISIL Research and not of CRISIL's Ratings division.
CRISIL Research operates independently of and does not have
access to information obtained by CRISIL's Ratings Division.)
|
| |
|
