Looking Ahead at the Indian Automotive Scene

Sanjay Bhargava

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 centres. 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 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 centres.
▪	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 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 flavour 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.

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 labour. 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 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.

 
Note: The author is the Director of Novotech Enterprises Pvt Ltd, manufacturing Dnovo brand of accessories for two-wheelers. E-Mail: dnovo@vsnl.net.

The views expressed by the author are his own and not necessarily that of FADA.