Automobiles: The Big Small Race , Pg 2

The Product. One manufacturer who can leverage its experience at building small cars is Daewoo. While Santro is Hyundai's second small car (the Atos was the first), the flatter and compact Italy-designed Matiz is Daewoo's third. Unlike the Santro, however, the Matiz runs on the older Tico--Daewoo's first small car--engine although it has been modified at Daewoo's British Technical Centre. Neither is the Matiz the most powerful; it has a 796-cc engine, which is comparable to Maruti 800's, but generates more power at 52 bhp as against the latter's 39 BHP.

But like the Santro--and unlike the Maruti 800--it employs a fuel-efficient MPFI system than can stretch a litre of petrol to 16 km. Matiz's only handicap is that it has 3 cylinders compared to Santro's 4, which, while maintaining parity in performance and power, pinch smoothness. This could, however, make the Matiz slightly more fuel-efficient. Ideally, if the Matiz is priced about Rs 20,000 to Rs 30,000 lower than the Santro's Rs 2.99 lakh, it could well become an excellent Value-For-Money (V-F-M) proposition.

The positioning. Billed the "big small wonder," the Matiz conforms to the aesthetic taste of customers. Daewoo's creation looks more like a fusion of the Maruti 800 and the Zen. What might blur its differentiation pitch is the fact that it is a Korean car with Japanese pretentions, and loosely wedged between the Maruti 800 and the Zen, with a likely sticker-price between Rs 2.50 lakh and Rs 3.50 lakh. Points out S.G. Awasthi, 54, ceo, Daewoo Motors India: "We are creating a new category between the Maruti 800 and the Zen. It will be our effort to gain marketshares from both ends." While a technology-conscious customer would easily prefer the Santro to the Matiz, she may pick the Matiz over the Maruti 800. The product's sticker-price could, clearly, be the key to its success in the sub-compact segment.
the downstream strategy. Realising that selling in a crowded market will not be easy, Daewoo is pinning its hopes on direct marketing. It has tied up with 6 non-banking finance companies for car finance schemes, and set up finance counters at each of its 110 dealerships. Simultaneously, the South Korean manufacturer is building distribution muscle in smaller cities and semi-urban areas which, it believes, will drive growth tomorrow.

The upstream strategy. When Daewoo entered India in 1993, it had looked at the country as a global sourcing-base. Now it turns out that its indigenisation efforts--particularly of engines--may have been wasted on the wrong car. For, mid-car sales may not pick up for another 2 years, preventing optimum utilisation of the engine shop. To liquidate the unforeseen surplus, Daewoo is exporting cylinder blocks to its plants in Eastern Europe. But that doesn't quite help its key product, the Matiz.

What could throw a spanner in the Matiz's works is the low level of localisation. Perceived as a direct competitor to the Maruti 800, it is under tremendous pressure to match the mini's priceline. But Daewoo may not be able to achieve that without hurting its bottomline. A weak won will make imports--which account for 60 per cent of its cost of production--cheaper, but it is unlikely to neutralise Maruti Udyog and Hyundai's localisation advantage or guarantee long-term competitiveness.

THE SURVIVAL PROSPECTS: The first transnational car-manufacturer of a liberalised India, Daewoo is driving on a wing and hope. It has Rs 2,700 crore of investments on ground at Shahjahanpur (Uttar Pradesh), but only losses to write home about. Its flagship product, the 1,498-cc Cielo, has been hit hard by the recession in the luxury segment. Its sales of 16,866 units in 1996-97 slumped to 10,108 in 1997-98, and in the first 4 months of this fiscal, it managed just 3,404.

Daewoo's hopes of turning the corner now hinge on the Matiz, the 796-cc challenger to the Maruti 800. Sure, its recent launch, the City Bus, may add some revenues; but with heavy commercial vehicle sales reporting negative growth, the bus is more likely to be a drag on its resources.Daewoo's hopes for the Matiz hinge on the value-conscious--not the price- sensitive--customer. Agrees Awasthi: "We believe people are as value-sensitive as they are price-driven. We will provide them the best value for our category." So, Daewoo expects the Matiz to sell 40,000 and 60,000 cars, respectively, in Years 1 and 2. But without a localisation level of at least 70 per cent--which Daewoo hopes to reach in Year 2--to begin with, the Matiz's future hinges on the value of the won. In any case sales of 60,000 will be difficult in a market with as many as 4 small cars. Agrees R. Santhanam, 44, the Executive Vice-President of the Rs 1,304-crore Hindustan Motors: "Car-manufacturers will have to carve out competitive niches in order to survive."

The Marketing Strategies

Hyundai: It has clearly picked a leaf out of Honda Motor's book. Not only is Hyundai building a string of exclusive car shops around the country, it is centralising equipment purchases to lower dealer costs. The plan: creating car-care centres across the country.

Daewoo: The Matiz's marketing strategy could fall between 2 stools. While Daewoo wants to differentiate its product on the basis of technology, it is also keen on building distribution muscle in smaller towns. That would lead a head-on collision with the Maruti 800.

TELCO: Taking a cue from the highly-successful General Motors' Saturn project--which sought to create separate strategies for its new car--TELCO plans to have exclusive Indica distribution and service cells. But that will lower the already-thin margins.

Maruti Udyog: With 5 labels, Maruti Udyog has truly built a one-stop shop for the customer--a feat that no newcomer will be able to emulate even in the next 3 years. The downside: volumes create a lot of traffic at the sales and service points, and result in customer dissatisfaction.

The products: In the last 14 years that the Maruti 800 has been around, its perception has been diluted from being a popular car to that of just a 4-wheeler. The shift has been rapid in the last 5 years because the Zen filled a much-felt vacuum between the Maruti 800 and the Maruti 1000. Today, value to an enlightened customer has come to mean a technology like the Zen's. A pointer: while the Maruti 800's sales growth is slowing down, that of the Zen is clipping at a healthy 45 per cent per annum. Points out Jagdish Khattar, 53, Joint Managing Director, Maruti Udyog: "The demand for the Zen is so strong that we have to free our capacities to produce it."

Maruti Udyog's Achilles' Heel is, however, technology. While the Maruti 800 embodied a revolutionary technology when it was introduced in 1984, that's hardly the case today. The Zen, one of the most popular jelly-bean cars, still rides on a carburettor system. In India, Suzuki's strategy has been limited to effecting periodic cosmetic changes in its cars. The heat of competition is bound to make these shortcomings visible.
the positioning. To counter competition, Maruti Udyog aims to straddle the small-car price spectrum, from Rs 1.97 lakh (the price of the Maruti Omni E) to Rs 4.96 lakh (the price of the loaded Zen D). Apart from the 600- to 1,000-cc range Wagon R, which is slated to be launched by 2000, Maruti Udyog will introduce 2 models between the Maruti 800 and the Zen to price out rival labels. The company's future offerings will be differentiated along price-lines, not just on engine capacity. Points out Khattar: "Our eventual strategy is to have models at price-gaps of Rs 50,000." Agrees Santhanam: "The splitting up of the small-car spectrum is inevitable. And car-manufacturers are realising that."

The Downstream strategy. During the last 14 years, Maruti Udyog has systematically built a 140-dealer-strong distribution and service network, which sells 5 products--the Maruti 800, the Omni, the Zen, the Gypsy, and the Esteem. The company's marketing structure has almost become a one-stop car shop. Agrees Sripad Bhat, 35, Assistant Director, Association of Indian Automobile Manufacturers (AIAM): "Undoubtedly, Maruti Udyog offers the widest choice to customers today." The manufacturer has bolstered the enviable infrastructure by setting up car-financing facilities--through tie-ups with Citibank and Countrywide Finance, to spur sales. Indeed, half the cars sold by Maruti Udyog in 1997-98 were financed.

The upstream strategy. Standing atop a fully-depreciated plant, churning out 3.75 lakh cars a year, Maruti Udyog has the potential to make mincemeat of the competition. The reason? Costs. There's simply no other car-manufacturer in India today which can match Maruti Udyog's economies across the value-chain. It has 365 vendors, 140 dealers, and 1,150 workshops in 460 cities. New models, then, can be rolled out quickly and cost-effectively.

THE SURVIVAL PROSPECTS: Maruti Udyog's success hinges on its ability to upset its competitors' sub-compact strategies. Its parent has tremendous cost-cutting capability, a critical attribute in the tough Japanese market, and one that will ensure that rivals cannot outprice Maruti Udyog. For instance, the cost of components for the Matiz could work out to Rs 1.50 lakh per car, thanks to imports of Rs 80,000 and locally-sourced materials worth Rs 70,000. Factor in a conversion cost of Rs 25,000, interest and depreciation charges of another Rs 20,000, excise duty of 40 per cent (Rs 78,000), and a sales tax of 10 per cent (Rs 27,300), and the sticker-price works out to nearly Rs 3 lakh without a margin. telco's plight is similar, although the company will have a local content of nearly 80 per cent to begin with.

If the global economic situation worsens, Maruti Udyog will find exports--which account for 7.88 per cent of the manufacturer's sales--difficult, and, consequently, throw all its weight behind domestic sales. That will spell bad news for its competitors, who may not be able to endure in a price war. For, their cost of capital per car is substantially higher. Hyundai's, for instance, is Rs 1.77 lakh compared to Maruti Udyog's Rs 48,994. The marketleader will leverage every conceivable strength that it has to elbow the competition out of the market.

The product. With a 1,400-cc engine, the Indica is definitely closer to the mid-segment than the Zen. But at a proposed price-tag of around Rs 3 lakh, it will give the small cars a run for their money. Designed by an Italian company, i.d.e.a., this 5-door hatchback is much bigger than either the Santro or the Matiz. Funnily enough, the Indica and the Palio look like twins, and TELCO is probably the imitator. Explains Chhabria: "Designwise, its sheer form and proportions are just right, and not overtly fussy."

However, TELCO has made sure that the Indica--which will be powered by a petrol or a diesel engine pumping 65 BHP from a 4-cylinder engine--does not lack in ruggedness. But unlike Hyundai and Daewoo, this is TELCO's first attempt at making a car. Points out Richard D'Souza, 27, Analyst, Alchemy Share & Stock Brokers: "TELCO must ensure that the quality of its components is absolutely perfect. Even the smallest lapse could have a negative impact."

The positioning. When Project Indica was launched, TELCO's CEO Ratan Tata's brief to his designers and engineers was simple: make a car that has the spaciousness of an Ambassador and the price of a Maruti 800. If the product is priced below Rs 3 lakh when it is launched in December, 1998, it will compete with almost every car in the market. Points out AIAM's Bhat: "TELCO has strong engineering skills, which it can use to offer a different product to consumers."

The Downstream Strategy. If there is one thing that the Indica can rely on, it is parent TELCO's distribution muscle. With 90 sales- and 290 service-points around the country, the Light Commercial Vehicle (LCV) and Heavy Commercial Vehicle (HCV) manufacturer has already erected a big barrier for new entrants. Explains Alchemy's D'Souza: "TELCO reaches even remote villages. A new entrant cannot duplicate such a network and be viable." Only by piggybacking on TELCO's sales infrastructure can the Indica hope to gain the cost advantage in the small car segment. That is critical since TELCO proposes to price the Indica as close to the Maruti 800 as possible.

The upstream strategy. With an investment of Rs 1,700 crore, the Year 1 financial costs will be huge: Rs 85 crore of interest payments (assuming a debt-equity ratio of 1:1 and an interest charge of 10 per cent), and a depreciation charge of Rs 170 crore (at a rate of 10 per cent). Assuming a material cost per car of Rs 1.25 lakh, conversion cost of Rs 30,000, depreciation and interest charges of Rs 51,000, excise duty of Rs 82,400 (40 per cent), and a sales tax of Rs 28,800 (10 per cent), the cost of the Indica would work out to Rs 3.17 lakh.

To be sure, TELCO has several strengths: tremendous in-house engineering skills which, even if not strictly comparable to the competition's, are good enough to deliver a sturdy, V F M car. But TELCO faces the challenge of image and positioning. Everybody knows it as an HCV- and LCV-maker, not a car-manufacturer. To acquire a pedigree, it cannot afford to offer a basic model, sell the product through mass channels, or bank on its rugged strengths. It needs to re-invent manufacturing and marketing to differentiate its product.

By managing costs downstream and differentiating upstream, the truck-manufacturer hopes to stamp the Indica with differentiation. TELCO's subsidiary for sourcing components, Tata Automotive Components (TACO), is helping it to slash its raw material costs. Although figures are not available from the company, industry experts estimate the cost savings to be between 20 and 25 per cent. How hard a bargain Taco is able to drive will depend on the Indica's initial sales. In small cars, margins are tied to the sales figures.

THE SURVIVAL PROSPECTS: To break even, Indica must sell 75,000 cars a year. To achieve that, TELCO is imitating GM's Saturn strategy--creating a company within a company--and has kept the Indica project independent of the parent's operations, even creating a new distribution channel. It has tied up with the Hong Kong-based car dealership, Concorde, a member of the Jardine Matheson Group, to set up world-class distribution outlets across the country. Still, distribution could prove to be TELCO's biggest hurdle.

Already, the company has picked up a 26 per cent stake in Concorde; but with just 7 Concorde outlets operational, and only 11 more on the anvil, TELCO, obviously, has to bank on its own dealer network. While exclusive channels would truly differentiate the Indica, they would slim TELCO's margins. Agrees an ex-TELCO senior executive: "A showroom today could cost anything between Rs 50 lakh and Rs 5 crore. The returns are always long-term."

Just imagine the burden such a strategy might put on the recession-battered TELCO, which reported losses of Rs 36 crore in the first quarter of 1998-99 against profits of Rs 91 crore the previous year. Its medium and heavy vehicle sales have halved: it sold just 11,810 vehicles between April and July, 1998 against 31,538 in the corresponding period of 1997. Naturally, that can only make TELCO's task tougher.

Which way will the small-car battle go? In terms of the product offering, nobody is taking any chances. Each has a clutch of variants to offer: the no-frills version (with the air-conditioner), the semi-frills version (with the power windows), and the frills version (with a power transmission thrown in). And while that may force an upgrade from the Maruti 800, preventing India's most popular small car from being the best v-f-m proposition, that alone will not win the war for any of the new players.

For, the lure of technology and the sophistication of the customer are creating a new world, where cars will no longer be just four-wheelers, where a ride is associated with performance, where comforts come in surprise packages, and where the customer is loaded with a choice of specs and financing options. Her needs, therefore, are multiplying rapidly. Only by gearing their entire value-chain to fulfil the complete needs-set of the customer can the sub-compact samurai hope to unseat the leader. And stay on the road to sustainable success.

The Product Strategies

Hyundai: With 3 variants, and a model flexible enough to be turned into a van or a sports utility vehicle, Hyundai is ahead of the small-car pack. Another ace up its sleeve: the Accent, a mid-size car which would initially subsidise the sales of its entry-level models.

Daewoo: Its multi-product strategy has been dented by the poor performance of the Cielo. Not only will the Matiz have to subsidise the Cielo's failure as long as it is there, it will also have to chase volumes to break even. A tall order for the small car.

TELCO: The Indica gameplan rests on TELCO's ability to make a success out of its diesel variant. Even if the model notches up a sales volume of 30,000-40,000 units initially, it will be a big boost to the petrol model, whose margins will have to be thinned to appeal to the entry-level customer.

Maruti Udyog: This is one player that can flaunt its economies of scale. With 3 large-selling lables--the 800, the Zen, and the Esteem--in its portfolio, Maruti Udyog can easily resort to cross-subsidisation. A recent instance: the Zen VX, a loaded model, which is available at no extra cost.