Cover Story: War of the Wheels

A flurry of small car launches in the next few weeks trigger the biggest ever battle for market share -- and rewrite the rules of the game.

It hasn't come down to Name calling. Just naming names. Daewoo means Great Universe and its dinky Matiz is being pitched as the car that will conquer it. Hyundai doesn't mean much these days beyond a beleaguered mega corporation but this other Korean giant's Shah Rukh Khan-blessed small car, Santro, is supposed to be so hot that it sizzles. Suzuki is a name riding on Maruti, the Indian god of speed, with a mantra of mass appeal and a reconfigured 800 cc model and reconceived Zen, deluxe, diesel and all. And Indica, with the pride and prestige of an entire nation riding on it-and certainly parent TELCO's bottomline-is potentially the biggest threat to Maruti's stranglehold.

All are small cars that deliver big: power, speed, space. Once you see them and drive them, you will be crazy about cars. Or so we are told.

Truth is, the pitch and the package of this crop of small cars, when they hit showrooms and roads in the next three months, will decide exactly which way the Indian auto market is headed. The next three years will decide who stays in the race and who falls by the wayside-a shakeup followed by a shakeout in the greatest car wars since Maruti Udyog Limited (MUL) won its no-contest battle against Hindustan Motors and Premier Automobiles almost a decade ago to emerge as a behemoth with a staggering 83 per cent share of the Rs 10,000 crore a year market.

The prize for the future is huge and will be divided up in the small car segment, which currently accounts for four-fifths of the market and operates at prices ranging between Rs 2.46 lakh, the cost of a basic Maruti 800, and Rs 5.3 lakh, the price of a diesel Zen.

In 1996 the Economist Intelligence Unit estimated that annual sale of cars would touch 8.75 lakh a year by the end of this decade, four times the volume in 1990. By 2005, it said, that figure could be up to 13 lakh a year. That would have left the field wide open for all new entrants at full capacity besides absorbing MUL's planned expansion with room to spare. However, the market isn't growing at anywhere near that speed. Industry analysts and insiders suggest that while capacities will go up to 7.5 lakh cars a year by 2001, sales at best would be about 6 lakh cars; exports would add minimally to that.

This is the backdrop for the battle of Maruti versus the rest, for tables to be turned against Maruti in a tussle that will be decided on price, technology and servicing-in that order-as other manufacturers scramble to stay, if not a step ahead, then at least definitely not a step behind in the stakes. "With more players, in times to come our marketshare will go down to 55-65 per cent," admits R.S.S.L.N. Bhaskarudu, managing director of MUL. "It all depends on what happens in the marketplace, but you must realise that it is difficult to maintain marketshares of over 80 per cent for all times to come."

It may sound like a stunning admission by a market leader but it is also a realistic one for a company that now sees rivals playing by the rules it once called its own: product innovation, pricing strategies and reaching out to the highest numbers as quickly as possible. It is also the prime reason for an unprecedented corporate blood-letting, as players strive to beat down competition in a bid to grab marketshare from Maruti and from one another.

The methods being used are anything from a snappy image to easy financing to mileage per litre that not too long ago only motorcycles would flaunt. It means less headaches with servicing because of technologically advanced engines-as with the Santro or Matiz-which means, according to one estimate, half the number of annual services compared to a Maruti model. All this also means fantastic deals for buyers.

There's a very good reason for all this. The Association of Indian Automobile Manufacturers (AIAM) places growth rates for the industry for the past year at just over one per cent, the second straight year of abysmal performance. If there is a saviour for the market, it is the small car segment. "The important trend that is emerging is that while the overall growth of the market is sluggish, that for the small car was 10-12 per cent last year," says Shripad Bhat, assistant director, AIAM, New Delhi. "And it could well be more, between 15-20 per cent a year." That's the ultimate rescue package for an industry hit by a triple whammy of a slowing economy, skewed market estimates and constant pressure to deliver more car for less money.

"The most important thing is to drive home the point that the product offers value for money," concedes Shiv Gopal Awasthi, managing director of Daewoo Motors, a company that has learnt some hard lessons in the past year. In fact, Daewoo is in more ways than one an object lesson for the new Indian car market.

First, its flagship Cielo sold far below expectations. So the company slashed prices by Rs 1.3 lakh in early 1998. After a brief trot, sales were back to a limp: in the first five months of the current financial year, according to AIAM figures, the company sold 3,813 cars, almost a fifth less than what it sold during the same period last year. Most other prestige cars in the once-glossy mid-size segment did no better. General Motors India, which rolls out the Opel Astra, recorded a drop of more than two-thirds to 1,652. Mahindra Ford's Escort dropped more than half to 1,662. Honda-siel's City, thanks to a heavy marketing splash, clocked more than 4,000 in car sales during the same period. The bets are wide open about whether it can sustain that level in a market partial to less expensive cars.

Take Mercedes' experience. Sales haven't been much to write home about. Out of the projected figure of 1,500 cars a year, Mercedes Benz has sold only 700 vehicles till now and is reconsidering its options in the country. And yes, it's all for introducing a smaller car. Says Mercedes Benz Managing Director Till Becker: "We are getting many requests to bring the small A-class car into the country." The company is researching whether it will suit Indian roads.

This is a high-end example-the A-Class could cost Rs 12 lakh, just a shade under the Tata Safari and Sumo put together. But even this segment isn't impervious to the budget bite that has spread across the spectrum, top to bottom, end to end. Says Narendra Nagpal, an automobile analyst with UTI Securities: "If these manufacturers can show that it can be run cheaply, then the small car is in for a resounding success." That is what has made Daewoo introduce the Matiz, Hyundai postpone the launch of its Accent mid-sized car in favour of the Santro and Maruti rush through cosmetic changes in its 800 model and improve the Zen without passing on the extra cost of Rs 28,000 a car to the buyer.

Carmakers from Ford to General Motors (GM) and Fiat are all considering launches of small cars to match the state-of-the-art international flavour of offerings from the competition. John Parker, managing director of Mahindra Ford India, following up with his view, that "the Indian market is quite clearly weighed in favour of the small car segment", is thinking of launching a small car based on the bubble-shaped, jazzy Fiesta model. It will probably be joined by gm's Corsa, currently undergoing road tests in India, and for certain by Fiat's hot shot model Palio a precursor to the launch of the Sienna.

It's a stage essentially for Maruti versus the rest, led as every other player is by the juggernaut's share in a stagnating market. The action will take place in this situation. Pricing will be the key. Marketing will take care of the rest. And economies of scale are crucial to it all in which, right now, Maruti is miles ahead. The average investment per car in the case of Maruti works out to under Rs 30,000, taking into consideration the depreciated value of its fixed assets of Rs 1,000 crore and its production of 3.6 lakh cars a year. For other players like Telco, Daewoo and Hyundai, the average investment per car works out to between Rs 3-4 lakh. They have made investments of between Rs 2,000-3,000 crore for capacities ranging between 70,000 and 1.2 lakh cars a year. But there is little likelihood that they can achieve full capacity soon, given current market conditions, and not end up with massive initial losses.

"The difference between Maruti's financial advantages and those of the other producers is really quite enormous, given its high volumes," says R.C. Bhargava, former managing director, MUL, and now an industry consultant. "It will take very long for the others to catch up." Equally, however, Maruti will have to factor the cost of improving its technology to match what almost all new cars will offer.

And keep another critical factor in mind. For its Japanese partner Suzuki, in international terms a relatively small corporation, the Indian venture represents handsome profits and almost two decades of participation. gm, Ford and Hyundai are all vastly larger megacorporations, their investments-losses included-are blips when turnovers are measured in amounts greater than India's total external debt. They can spend if they choose to. Period.

Staying power will decide that aspect. In the past two years, carmakers have been taking enormous losses trying to either set up their businesses or step them up. Daewoo, which has invested Rs 3,400 crore to churn out 72,000 cars a year plus engines for exports in its swank Surajpur factory in Uttar Pradesh, reported a loss of Rs 42 crore on a turnover of Rs 441 crore last year. Fiat is setting up a Rs 1,500 crore plant at Rajnandgaon in Maharashtra to produce the state-of-the-art Palio. It also plans to launch a hatchback model and a box sedan with an initial plant capacity of 36,000 cars a year at a cost of over Rs 4 lakh a car.

Mahindra Ford is planning a one lakh cars a year plant. Hyundai's new 1.2 lakh a year capacity plant in Sriperumbudur, near Chennai, needs sales of 60,000 cars a year to break even. They may have to absorb enormous initial losses for any model of car if they are to be viable in the medium to long term.

Telco, which has already invested Rs 1,900 crore in its assembly lines and marketing set-up for the Estate, Sierra, Sumo and most recently the plush Safari, will, with the Indica alone, says Executive Director V. M. Rawal, "hope to have 1.5 lakh cars on Indian roads by the end of the first year of production because we are confident this car will sell."

It probably will, but at a projected price of Rs 2.5 lakh a car-going by the company's stated policy of being competitive by providing the price of a Maruti 800 in a car with the zip of a Zen-still need to absorb losses for a few years before the line makes money. According to DSP-Merrill Lynch, Telco will acquire a fifth of the total car market in the next four-five years and this growth will primarily be driven by the Indica. But the company will have to make sure that it sells at least 80,000 cars a year to break even. It is possible, but it is a tough call, Rawal's optimism notwithstanding.

Even MUL, which posted a net profit of Rs 651 crore in 1997-98, substantially higher than the previous year, will pare itself close to the bone when it underwrites the cost of a car by a tenth of its sale price, as it is doing with the diesel version of the Zen. Already, there is talk that some of its profit may have been better utilised in investment for modernisation rather than paying large dividends to its shareholders, especially in such lean and hungry times.

While Maruti ponders its next move, officials at General Motors India are already fretting about how they should price the Corsa: below Rs 2.5 lakh to undercut Maruti 800 and Indica, or above Rs 3 lakh to undercut the Zen and every other model in that range?

The answer is way up in the air. And it's causing heartburn even among the settled and deep of pocket, leave alone the yet-to-settle-down and unsettled. Talk is flying thick and fast in a market where conventional wisdom-international style-is to offer more models to minimise risk in case any one fails to take off. "Give the consumer what he wants and not what you want," advises Alan Durante, executive director, Mahindra & Mahindra, a company which has seen a sluggish past year. "Only then will you survive." This pithy commentary underscores the reality of a market getting fussier by the day. Even as finance companies in conjunction with car companies target clients with an annual household income of as little as Rs 1 lakh a year-essentially those who are potential crossovers from two-wheelers-there is a question of how much is enough? More so because besides the pressure from rivals, there is competition from a previously unheralded quarter-the second-hand car market.

Dealers estimate that the all-India market for used cars is about 3,000 a month, half of it for premium cars, where it is possible to buy a well-maintained Esteem for the price of a new Maruti 800, a Cielo for the price of a new Zen, and where dealers have actually become choosy; they often refuse the venerable Ambassador, Premier Padmini and 800s over eight years old. Says Azim Merchant, head of the used car division of Shah & Sanghi, one of Mumbai's largest car dealers. "Customers want the second hand premium cars that are available cheap and in good condition."

The point is, used or new, buyers are increasingly taking quality for granted, which is further leading car makers to ensure they offer new technology at affordable prices and a service network that extends them instant courtesy. This gives MUL an edge, feels Bhaskarudu, with its network of 134 dealers and 992 authorised service stations countrywide. It's a reach unmatched in potential by any other carmaker barring Telco, which plans to upgrade its dealer network to 115 in three years from the 19 at present.

The public already has an aspirational feel with the mid-sized cars. Better quality and state-of-the-art are now available with practically every small car at easy-to-reach prices. Declares Andrea Simoncelli, senior vice-president and CEO of Fiat SpA: "We will provide the latest technology." Hyundai Motors India Managing Director Y.H. Kim, a taciturn type fond of flashing victory signals, says categorically that he is "not here to set off any price war". But he doesn't say he doesn't want to win. Everyone is looking for marketshare. Sit back and watch. It's time for blood-letting.

Dream Merchants

Want to buy a Santro? Just sign on the dotted line and drive home the complete family car. What, you now want a Matiz? Just park the Santro there, and take the Matiz. Oh, so you've changed your mind again. No problem. Leave the Matiz with us and the Indica's yours. As middle-class families get ready to choose between an array of small cars that are entering the market, the Industrial Credit & Investment Corporation of India (ICICI) has launched a scheme that would rid them of their indecision. Customers have the option to switch models within 45 days of the purchase. "Till now, there was just one model. Now there is a variety to choose from. So, we have to be flexible with the customer needs," concedes ICICI General Manager Kalpana Morparia.

ICICI better be. Auto finance companies are bending over backwards in the mad rush to attract prospective buyers. Touting hasslefree disbursement of loans is passe. A customer can now determine his own payback plan or decide the equated monthly instalment (EMI) he wants to pay. Says Kotak Mahindra Primus Ltd CEO Dipak: "Financing schemes only help to hasten a decision-the more attractive they are, the faster the decision."

But Kotak Mahindra can expect some hot competition. Consider the Rs 4,499 booking amount for the Santro through Countrywide and a similar monthly instalment. "For a double income family with a combined annual income of Rs 2.75 lakh, an annual outgo of less than Rs 60,000 is chickenfeed. Which family is going to refuse this offer," chortles a senior director of the finance company. Indeed, few would not be tempted to loosen their pursestrings. Countrywide has already been swamped with nearly 2,000 applications under the scheme.

Double income families are not the only ones being targeted by the financiers. "People with a annual income of Rs 1 lakh are out potential customers, which is why finance schemes have easy payment plans," says G. Suresh, head of retail banking at Standard Chartered.

Shaken by this onslaught, market leader Maruti Udyog Ltd is trying hard to retain customers. Maruti Countrywide has lowered the EMI to bring it within reach of even single income families. At an EMI of Rs 3,399 (for seven years on a loan of Rs 1.55 lakh), owning a car suddenly becomes affordable to a huge band in the middle class. Maruti Countrywide is also offering 20 per cent interest on the booking amount.

The coming boom in cars is expected to not only rev up the industry but also breathe new life into the auto finance sector. At Kotak Mahindra, volumes were down from 350 cars, the automobile industry seems to have driven out of that phase.

-Robin Abreu