New Models Prevent Industry from Skidding

Automotive Research Team, Ernst & Young

Novelty has its value. Whether it is fashion flaunted by a celebrity or be it any gear advertised by any sportsperson, the latest always catches the eye. Attention to what is new is perhaps one of the most pervasive qualities which humans have and this has turned out to be one of the biggest advantages for some as well.

Who better than the passenger car industry would understand the benefits of the novelty factor? One of the most significant changes that automotive industry has seen was in early 80's when Maruti Udyog (now Maruti Suzuki) had come out with the legendary M800, 'the famous people's car'. Then it was Tata Motors who introduced a diesel engine in a small car through their flagship model 'Indica'. It was again Tata Motors who created global history by launching the new people's car-the iconic Nano.

However, the discussion here is not on transformational aspects like Nano but is focused towards operational perspective, which is the contribution of new model launches in the growth of car sales.

Though there is no written rule per se, but as per industry benchmarks, the novelty factor works for 12 months from the launch after which the effect starts fading away.

Coming to the present, fiscal 2009 was a difficult year and the factors responsible have already been written and talked about in great detail. The year was no different for the car industry which could just manage to post a nano growth of 0.13%, propelled by the uptick in Q4 and in achieving this number, models that have been launched recently have played an instrumental part in securing the growth in 2008.

There have been several new launches in the industry and the majority have been in the A2 segment which constitutes 57% of total passenger vehicles market. This is in addition to the various make-overs like the new City by Honda.

 
Let us look at each of the segments and the impact that the new models are having in driving growth.

A2 as a segment would have de-grown by 8% last year but managed to keep out of red by posting a 3% growth courtesy new launches.

A4 as well as utility vehicles segment had one new model launch each, which even if not sufficient to help the segments match last year's numbers, definitely helped in improving the (de) growth scenario which would have looked worse without them.

 
Maruti Suzuki's Dzire stands the tallest in terms of contributing to its segment's growth. It has helped A3 grow by additional 27%. It is a typical value-for-money product with great looks and the availability of the diesel variant makes it an even better proposition.

Apart from the tangible benefits in terms of additional sales, new launches have some latent benefits as well. They create an excitement which gives the OEM some agenda to advertise. They have significant marketing activities focused around them which help the marketplace maintain the buzz. And most of all, they bring consumers to the showrooms giving dealers an opportunity to make a sales pitch for older models as well.

Having discussed the impact and importance of new launches, it is equally important to discuss the flip side of the subject in discussion.

Before the actual launch, any new model announcement makes a consumer postpone his decision of purchase as car is still considered to be a big ticket item and the consumer would want to weigh all options before he finally pens down on one.

In addition, there are significant monetary aspects involved from conceptualization to final design and further to production and distribution not to mention the capability and efforts involved in these.

Finally, new models tend to cannibalize the older and weaker models. Consumers who are unbiased towards any particular model have the tendency to go in for a newer product taking the share of sales from its older peer. Nevertheless, inspite of the cannibalization and other disadvantages, new models are more necessary in today's market scenario to earn that extra volume in a competitive market.

 
And, OEMs very well appreciate this. No wonder, the new model launch calendar looks busy for 2009.

Starting from the iconic brand Nano that is expected to hit roads in July, we have small cars coming from international players like Honda who is bringing a variant of its Jazz platform. Fiat is also expected to increase its product bandwidth by launching Grande Punta. There has been some news on Toyota's small car which is expected to be in same segment as Polo which will be launched by European manufacturer Volkswagen.

Among bigger cars, Hyundai is expected to come out with i30 and Avante. There will also be new offerings from the stables of luxury car makers Mercedes, BMW and Audi.

It would hardly be an exaggeration to say that the consumer is getting spoilt for choice... for sure!