Emerging Auto Retail Scenario

Arindam Bhattacharya, Vice President, Boston Consulting Group

Major developments are taking place in auto retail sector across the world. Indian Auto Industry can learn a lot from studying what is happening in the more developed markets. However, we must also make sure that we do not lose sight of some of the specific characteristics of our own market.

 
All auto analysts would agree that the Indian auto market is one of the fastest growing markets in the world. Given this growth, it seems obvious that auto retail has a very bright future in India, particularly when the penetration of organised auto retail per capita is still very low compared to developed markets like the US, which has 60 times more dealers per capita than India. But below this highly attractive set of figures, there are many challenges for auto retail.

Challenge 1: Demographic Challenge

The slide 2 shows the age profile of population for India and France in 2020.

India is an ancient country with a very young population, which is becoming younger, unlike the developed countries, which are growing older. The buyers of our vehicles are young people who have different needs, desires and buying behaviour than the older buyers in Europe and the US.

 
The western auto retail models have served their market well. Will the same models serve this very young set of Indian buyers as well, needs to be considered.

Challenge 2: Low Income Levels

The BRIC report projects Indian economy as the 3rd largest by 2050, which created quite a stir when it was released.

 
If we look at the same set of figures somewhat differently, we see that despite becoming one of the largest economies, we will still be a relatively poor country with low average income levels. This is a very different trajectory than what the western countries have seen.

What are the implications of this? It could mean that the smaller, cheaper entry-level vehicles will continue to be the mainstay of the Indian auto market. They will be used more for basic mobility rather than high margin lifestyle products, and we will need to tailor our auto retail business models and formats to this reality.

Challenge 3: Urbanisation

The next challenge is that of rapid urbanisation of India. Over the next few years, India will have the 2nd fastest urbanisation among developing countries. By 2015, we will have 3 among the largest 10 cities in the world.

 
This rapid urbanisation throws up its own challenges for auto retailing in a country like India. The availability and cost of land is likely to remain a huge challenge. Already land cost as a %age of total dealership set up cost is about 60-70%, which is among the highest in the world.

A 3-S model in highly dense urban centres may not be financially viable. Copying the western model of out of town large format multi brand dealership may not be an answer either, as our low-income economy could limit many customers accessing these outlets. We will have to come up with our own solutions to this challenge.

Challenge 4: Customer Loyalty

The growth of the industry presents a huge opportunity for the auto retail industry. However, this growth comes with a price. As the market matures, more and more models would be launched and customer choice will also increase rapidly. Just as an example, the number of small car models in India were about 15 in 1995, which is likely to increase to over 42, given the plans of the manufacturers, by 2010.

 
We all know that a loyal customer is a much more profitable customer. With this increasing model proliferation, auto retail will need to rethink and rework its strategies to ensure and maintain the loyalty of its customers.

Challenge 5: New Competitors

If we look at the developed markets, we see many new types of players. OEMs have launched their own 2nd brand for parts and service outlets. Large independent multi-brand dealership chains compete with OEM single brand franchisees. In after sales, many players have entered with different formats and business models.

 
These new formats and players are still at a nascent stage in the Indian market. But, they are emerging and have aggressive plans. For example, ICICI Bank is looking at providing more services than just auto loans. Reliance has very aggressive plans of entering auto service and parts retailing. We will only see more such players emerge.

While this may be seen as good news for customers, for the current incumbents, these new players represent a threat and strategies will have to be developed to take them on.

Conclusion

To conclude, the future is bright for the auto retail industry, but not without its challenges.

What you make of it is in your hands. To paraphrase George Bernard Shaw, we can view the future either as pessimists focusing only on the downside of the challenges, or as an optimist with opportunities to develop more innovative and India specific business models.

In spite of challenges & bumps on the road ahead, the future holds a lot of excitement and hope for the auto retail industry.