Automobiles: The Big Small Race

The race for India's small-car market has begun. But only those among the big four who get all their strategies right will win this unforgiving contest. The prize: not just the largest automobile segment, but also survival in this market.

They're lined up for the last lap. With Market India becoming a minefield for the world's largest auto-makers, the Formula I has become brighter than the red lights that have stopped them in their tracks so far--only the small car will enable endurance. Bumper-to-bumper, therefore, the combatants are accelerating towards the small-car segment. Amounting to 60 per cent of the Rs 14,500-crore automobiles market, and hitherto monopolised by the Rs 8,454-crore Maruti Udyog with its Maruti 800 and Zen, it's the final frontier between survival and extinction. So far, accustomed as they are to the priorities of the customer in the developed markets, the global auto-makers have taken many wrong turns in India. Only now, after many knocks, crashes, and repair jobs, are they back on track, heading towards their destination.

But neither the road nor the end-point of their journey is wide enough for all of them. At a projected 6-lakh units by 2000, demand for cars is still 25 per cent less than the number of F-150 pick-up trucks sold by the $153.62-billion Ford Motor Co. in 1997. But the importance of India on the world auto map is strategic. With an estimated total capacity of 58 million units a year, the global auto industry is racing far a head of the demand of 45 million units. Markets in North America, Europe, and Japan--which account for 74 per cent of the demand--have become saturated. Global car-manufacturers will need to plant their feet in a low-cost, young, stable market to sell their products to create a global supply-base for cars and components.

The first wave of manufacturers simply failed to make a splash in India. They were revving up for a growth that never happened. Their entry reasoning: since India had been a small-car market for years, it was only a matter of time before it enlarged to accommodate bigger, luxury cars. That the logic was flawed has now become evident. India is still a small-car market for anyone who wants both revenues and profits.

Not surprisingly, Ford (which launched the 1,300-cc petrol and the 1,800-cc diesel Escort in 1996), the $178.17-billion General Motors (which entered with the 1,600-cc Opel Astra in 1996), and the $72-billion Daewoo Group's Rs 963.37-crore Daewoo Motors (which launched the 1,498-cc Cielo in 1995) are limping at the starting-block. None of the 3 has managed to chalk up sales of more than 18,000 units a year. Even Maruti Udyog--a joint venture between the $12.12-billion Suzuki Motor Corporation of Japan and the Government of India--has been unable to grow the luxury segment. At 18,000 units in 1997-98, its 1,300-cc Esteem luxury car's sales fell by 28 per cent. Explains B.V.R. Subbu, 43, Director (Sales & Marketing), Hyundai Motor India: "Traditional mid-car buyers are turning to small cars; they are waiting for new technologies."

True, within 8 months of the 1,468-cc City's launch in January, 1998, the $48.87-billion Honda Motor has sold 4,180 cars in the Indian market, which is more than the combined sales (3,317 units) of the Astra and the Escort. But despite Honda's initial success, the luxury-car segment has plateaued, and there seems to be room for just one player. In the past 3 years, the segment has shrunk in value, dashing car-makers' hopes of rebuilding their futures in India. Naturally, the only safe haven that remains is the small-car segment, which is 2.45 lakh units in size. And the only segment expected to grow at 15 per cent a year for the next 5 years. The new millennium cannot but belong to the small car. However, economics of upstream manufacture will only ensure survival. Sophisticated downstream skills are essential to make inroads into the tough Maruti Udyog territory.

But strategies, like cars, must feed on volumes. And how much is the sub-compact segment likely to yield in 1998-99? Maruti Udyog expects the sales of the Zen to cross the 1-lakh unit mark. Assuming that at least a third of the small-car owning population--which includes customers who have been using the Maruti 800, say, for at least 3 years--graduates to a sub-compact, that means a market for at least another 1 lakh cars. Even if the 2-lakh mark is not breached in the next 5 months, 1999-2000 will be the Year Of The Upgrade, the economy permitting.

Which is why the second wave is focused on the small segment--from the mini to the sub-compact to the small car. On that relatively stable bandwagon is perched the goliath, Maruti Udyog, 2 newcomers--the $28-billion Hyundai Motor of South Korea and the Rs 7,450.34-crore telco--and one revitalised company, Daewoo Motors. By drawing on their intrinsic strengths, each is evolving a unique strategy to overtake competition. BT test-drives the strategic responses of the second wave and assesses their chances of survival.

The product. In the Santro, nicknamed the Tall Boy because of its high ground clearance of 172 mm, Hyundai has a perfect answer to the Zen. The Tall Boy packs a powerful 999-cc 4-cylinder Epsilon engine under its bonnet, churning out 55 zBHP; its Multi-Point Fuel Injection (MPFI) system--the Zen still uses a carburettor--yields a fuel economy of 16 km to a litre. From the design, it is obvious that Hyundai has taken a lot of pains to tailor the car to Indian requirements. While the Santro scores on drivability, smoothness, and the feel factor in terms of power delivery, it is at par with the Matiz.

But, fears Dilip Chhabria, 44, a Mumbai-based car designer: "The Santro's drawback is its design and styling. It is not the cleanest of designs, and there is a chance that it will date very fast." Despite (or, perhaps, because of) its unconventional look--although it is a hatchback, much like the Zen and the Fiat Uno--the Santro is roomier, combining the spaciousness of a multi-purpose vehicle and the everyday functionality of a family car. Points out Y.S. Kim, 56, Managing Director, Hyundai Motor India: "Tall Boy is now the design norm worldwide. India cannot be an exception."

The positioning. From the day Hyundai made a mid-course correction, dumping the 1,495-cc Accent in favour of a smaller car, it was clear that its offering had to be a complete family car. Yet, given its relative obscurity in the Indian market, it had to offer tangible differentiators. That philosophy has been translated into a superior engine and a spacious interior while air-conditioning has become a standard feature in all the 5 versions of the Santro.

The Tall Boy sums up its creator's marketing strategy: load your car with unique features, but hold the priceline down. Priced between Rs 2.96 lakh (the basic variant which comes with air-conditioning) and Rs 3.66 lakh (the loaded model, which sports a power-steering, central-locking, and a defogger), the Santro is targeted at the Maruti 800-user who desires to graduate to a superior vehicle. So, it competes directly with the Zen, whose 3 models are priced between Rs 3.46 lakh and Rs 4.96 lakh. Although the Zen accounts for 25 per cent of the small cars sold, it is present in a segment that is growing at 45 per cent per annum. Explains A.P. Gandhi, 60, President, Hyundai Motor India: "India is in the initial stages of motorisation, and this juncture in its evolution favours the small car."

The downstream strategy. Hyundai does not have the advantage of experience, but that is not tempering its aggression. At present, the South Korean manufacturer has set up a network of 70 dealers besides the exclusive Hyundai Plazas in Chennai, Delhi, and Mumbai. To pre-empt breakaways, should sales belie expectations, Hyundai is not forcing its dealers to make huge investments; it is lowering their capital burden by centralising equipment purchases, leading to cost savings of Rs 22 lakh per dealer. What might prove more helpful, however, is Hyundai's unique telescoping finance scheme, where annual repayments will increase every year, instead of staying the same throughout the tenure. The idea is to increase the level of affordability by targeting that section of consumer whose members expect their income--and, by extension, their repayment capacity--to increase as they move up the career ladder or boost their businesses.

The upstream strategy. Its Rs 2,300-crore 1.30-lakh-unit-capacity manufacturing facility at Sriperambudur in Tamil Nadu is Hyundai's largest integrated unit outside South Korea. Emphasises Mong Gyu Chung, 36, Chairman, Hyundai Motor: "India is going to be our sourcing-base for engine components." Since Hyundai makes its own engines and transmissions, its costs are more controlable than those of, say, Daewoo, which will be importing Semi-Knocked Down (skd) kits for its Matiz. With an army of 60 vendors, Hyundai has already achieved a localisation level of 70 per cent compared to Daewoo's 45 per cent. Even Maruti Udyog had a localisation level of 25 per cent when it launched the 800 in 1983. Agrees K. Mahesh, the ceo of the Rs 60-crore Sundaram Brake Linings: "Localisation is critical for cost competitiveness and long-term strategy."

THE SURVIVAL PROSPECTS: Despite its clear-cut vision, Hyundai's energies are focused on tactical breakthroughs: sales of 10,000, 65,000, and 1.10 lakh units, respectively, in 1998-99, 1999-2000, and 2000-01. Is that likely? Points out Sangeeta Mehta, 28, Analyst, Kotak Securities: "A lot will depend on how (Hyundai's) competitors price their products." Given an average price-realisation per car of Rs 3 lakh, and sales of 35,000 in Year 2--which is less than the company's projections--Hyundai's revenues would be Rs 1,050 crore.

Assuming an operating margin of Rs 50,000 per car, the company's operating profits should tot up to Rs 175 crore. Given Hyundai's debt-equity ratio of 1.19:1 on its Rs 2,300-crore investment, the interest cost for Year 1 should work out to at least Rs 125 crore, and depreciation to another Rs 230 crore. The pay-out, then, will be Rs 180 crore more than the operating profits. But that's something the company has factored in. Points out Hyundai's Gandhi: "Nobody has come to India expecting profits from Year 1."

Neither will exports buttress sales in the initial 2 years, since the focus will be solely on the domestic market. But, eventually, Hyundai is targeting 30 per cent of its sales from exports. Given the low volumes, will it be able to justify its investment? Hyundai needs a sales level of 71,000 units to break even. And that's the number it is expecting in Year 2. By Year 3, the cash profits are expected to turn into net profits. Will they? Points out Hyundai's Subbu: "If we achieve our sales targets, there should be no problem."

The Source Strategies

Hyundai: With a sound localisation gameplan--which has already tiered the suppliers--Hyundai is all set to reap economies of scale, so critical in the small car business. The South Korean manufacturer's vendor-development programme will help it control both cost and quality.

Daewoo: Its weakest link in the value-chain, sourcing could prove to be the other South Korean giant's Achilles' Heel. At an indigenisation level of 45 per cent, Daewoo is unable to become price-competitive. For, the cost of its imports hinge on the value of the Korean won.

TELCO: A newcomer to the world of the cars, India's No. 1 truck-manufacturer is still in the process of developing its supplier base. Although the company has strong engineering skills, volumes are critical to the success of the Indica's upstream strategy. And so is quality.

Maruti Udyog: The marketleader has already moved up the learning curve with 14 years of experience behind it. Unlike its newer competitors, it neither has to invest in vendor development, nor scout for global suppliers. Besides, its vendors are assured of sales.