Rising Competition: Threat to Profitability than Market Share of Incumbent Passenger Vehicle Industry leaders

CARE Research

India is the most sought after destination by the global automobile majors. Ease of raw material availability, reasonably well established auto ancillary industry, abundance of low cost labour and 100 per cent FDI in the sector over and above the low penetration level has made India, a fast growing economy, an attractive market for producing and selling passenger vehicles.

 
Three players - Maruti Suzuki, Hyundai Motors and Tata Motors - have been controlling the Indian passenger vehicle market. These three industry bell-weathers have been cumulatively garnering around 75 per cent share in domestic market for long.

Global majors like Ford, GM, Honda, Toyota and Volkswagen (through its subsidiary Skoda) have been in the Indian market for a considerable length of time. Nevertheless, they have not managed to make a mark in the domestic market, except for strong brand name. Some of the important reasons for the same are:

▪	These players marked their entry in India by offering sedans, as against more than 70 per cent of cars sold being cheaper hatchbacks. Thus, these players managed to target only 8 to 10 per cent of addressable population and in turn not being able to garner meaningful market share.
▪	These costlier sedans fail to offer attractive fuel economy, the key parameter that influences the buying decision of majority of the Indian families.
▪	These sedans call for higher maintenance costs in the light of costly spare parts and their difficulty in quick availability.

 
With weak demand outlook in developed regions like US, Europe and Japan, the global car manufacturers are hunting for their fortunes in the fast growing Indian market. Renault and Nissan are the new additions to the list of fortune-seekers in India. As per CARE Research, between 2009-10 and 2013-14, around 7.8 million additional households are likely to afford owning a car. Of this, around 6 million households would be affording to buy a 'small car' only. In this light, the domestic passenger vehicle sales are likely to grow at compounded annual growth rate (CAGR) of 11.4 per cent from 1.55 million in 2008-09 to 2.98 million in 2013-14. The growth of small car sales is expected to be higher at CAGR of 15.8 per cent from 0.94 million in 2008-09 to 1.95 million in 2013-14. Thus, the opportunity is humungous, but primarily restricted to small car segment. This fact is well acknowledged by the car manufacturers, including most of the .global majors that are struggling to garner meaningful share in India's passenger vehicle market.

 
Today, the Indian customer has 20 models to opt from in the small car segment within a price of up to Rs. 6 lacs. Of these, 8 models were unveiled only in the last 2 years itself. The competition has increased significantly; but it does not end here. Few more 'small car' models are in the pipeline, to be unveiled in the near future. While Nissan is expected to launch 'Micra' very soon, Maruti Suzuki is planning to introduce 'Cervo', a budget car in place of its model '800' to compete with Tata's 'Nano'. Toyota and Honda, which primarily focused on costlier sedans, are too planning to launch small cars soon. Thus, the competition is all set to intensify further, especially in the small car segment that accounts for more than 70 per cent sales.

 
Nevertheless, CARE Research is of the opinion that rising competition, from global majors would not have materially significant impact on the market position of the incumbent leaders on account of the following:

▪	The incumbent leaders have substantial dealership network, which is difficult to replicate. This is of great advantage to the existing big boys like Maruti Suzuki, Tata Motors and Hyundai.
▪	Making spare parts easily available at cheaper cost also remains a challenge for newer players. As mentioned, many of the existing smaller players have not been able to gain market share on account of their costly spare parts.
▪	The existing leaders are also aggressively responding to the increasing competition by frequent launches and capacity expansions.

 
Maruti Suzuki has launched two compact cars - Ritz and A-Star - and a budget multi-purpose van (MPV) - Eeco. It is planning to launch another small car 'Cervo', a budget personal transport vehicle. Hyundai too launched 'i-20', in addition to 'i-10', 'Getz' and 'Santro', the other successful models in the small car segment. Hyundai too plans to come up with a budget car for the Indian market. Similarly, Tata Motors has also launched 'Nano' to capture the huge potential offered by the mid-income masses, especially in the non-metro Tier I and Tier II cities.

 
While Maruti Suzuki is planning to expand its capacities from 1 million cars to 1.25 million cars per annum by investing Rs. 45 billion, Tata Motors is putting up green-field capacity to manufacture 250,000 units of 'Nano' in Gujarat, which would be operational shortly. Hyundai Motors had expanded its capacity to 600,000 units in 2008 from 300,000 units earlier.

Thus, the aggressive stance of the incumbent leaders would not allow the smaller and newer players to make any significant impact on their market share.

However, CARE Research is of the opinion that the pressure on profitability is inevitable due to increasing competition.

▪	The commodity prices have started climbing up on the back of global economic recovery and CARE Research expects the uptrend to continue. Thus, the cost of inputs like steel, aluminium, natural rubber, plastics, etc. is set to go up. However, stiff competition would not allow complete pass-through of rising input costs.
▪	Increasing level of competition would also translate into higher selling and distribution costs in terms of higher advertisement and promotion costs, discounts to buyers as well as probable higher dealer commissions. Though many dealers would prefer sticking to industry leaders that assures them higher volumes, the smaller players would try to attract them with higher commissions in a bid to expand their sales network.

 
CARE Research foresees the operating margins of the industry leaders to come down by 200-300 basis points from 15-16 per cent in 2009-10 to 13-14 per cent in 2011-12.