When you pass by Jantar Mantar in New Delhi at any given time, you ought to find some form of socio-political protest in process. But June 27 was pretty unusual. Probably for the first time in history, the Federation of Automobile Dealers Association protested against the US-based original equipment manufacturer General Motors (GM). The reason: its sudden withdrawal from India without keeping its dealers in the loop.
GM, which entered the Indian market 22 years ago, could not live up to the expectations with its small cars such as Beat, Spark and Tavera (SUV) failing to make an impact. At the end of over two decades, FY17 to be precise, it had less than 1% market share. GM shut 142 dealerships and converted its Talegaon Dabhade factory in Pune into a manufacturing hub for exports. Only two years ago, the world’s third-largest carmaker announced they would be making a $1 billon investment in India and launching 10 new models by 2020. But with monthly average sales of less than 900 vehicles, it was only a matter of time before GM would have taken the call to shut shop. It is not just GM that is finding the going tough in India, other global majors such as Volkswagen (1%), Nissan (1.9%) and Fiat (less than 1%) aren’t faring any better. Volkswagen, the world’s largest car manufacturer, sold over 10 million vehicles across the world in 2016 but barely managed to sell 50,000 vehicles in India during 2016-17 after investing more than Rs.6,000 crore over its 10-year presence.
But this stark reality is not deterring a bunch of entrants from venturing into India. A clutch of Chinese automobile companies, SAIC Motor, Changan Automobile and Beiqi Foton Motor; South Korean carmaker Kia Motors, Daihatsu (a Toyota-owned brand which sells in Asia), and French auto major Peugeot have plans to launch their cars in India over the next three years (see: New kids on the block).
So, what makes these new entrants confident that they will succeed where other international giants have failed?
There are more than a couple of reasons why global carmakers continue to flock to the tough-to-succeed Indian market. For one, sales are declining or likely to remain muted in the key automobile markets. For instance, according to Moody’s Investors Service, sales in China, the world’s largest automobile market, is expected to cool off to 2-3% as tax cuts on small passenger cars come to an end. Auto sales in the US are expected to decline in 2017 to 3.6%. In comparison, Indian car sales are expected to increase by 9% this year and by 7% in 2018. “The Indian automotive market, predicted to be the third biggest by 2020, offers significant headroom for growth,” says P Balendran, executive director, Morrison Garages (MG) Motor India (former vice president, GM India). MG Motor is the Indian arm of SAIC Motor, which bought over GM’s Halol plant and will launch its iconic MG range of cars in India in 2019.
Kia will launch the first of its three models in 2019 at a time when its sales in China are on a decline. After its foray into Mexico, the company says India is the last and most important part of its emerging markets foray. Hyundai Motor, India’s second-largest automaker, holds one-third stake in Kia.
Some global players are coming back for a second innings, hoping to find success this time around. Peugeot is all set to enter the Indian auto industry through a JV with the C K Birla Group in January 2017, after two unsuccessful attempts in the 1990s and 2011. It plans to launch a hatchback, compact sedan and SUV by 2020.
Fiat Chrysler Automobile (FCA) too has had a troubled tryst with India and claims under a half-percent market share after two decades. But the carmaker is looking at changing things around with the launch of its SUV model, Jeep. In August 2016, FCA India launched the Jeep Grand Cherokee variants and the Jeep Wrangler Unlimited as completely built-up cars. The rollout of these luxury SUVs was to establish the credibility of Jeep’s brand in India. Its first ‘made in India’ model Jeep Compass (a compact SUV) was launched in July 2017 at Rs.14.95 lakh. FCA claims to have 10,000 orders for Jeep already. It is Rs.3 lakh to Rs.4 lakh pricier than the compact SUVs such as Maruti Vitara Brezza, Renault Duster, Mahindra TUV300, but cheaper than a full scale SUV such as Mahindra’s XUV 500. Given that it’s a global aspirational brand and is attractively priced, there is already a buzz around the brand that is missing in the case of the other new debutants.
Carving a niche
The poor performance of other global automakers contrasts the dominance shown by incumbents Maruti Suzuki and Hyundai, which have continued to build on their first-mover advantage with new launches and upgrades besides a growing distribution network. Maruti has a market share of more than 50% and Hyundai is a distant second with 17%. Between these two deeply entrenched players, they have over 2,500 touch points and a strong product portfolio. This has left the rest of the players to grapple with single-digit market shares. (see: Duopoly)
But the incumbents are not taking the new competition lightly. “Yes, the network of established players is an entry barrier, but the new players are coming prepared for the next five years,” says Puneet Anand, senior vice-president and group head (marketing), Hyundai. The company is doing its bit to protect its turf. With a current portfolio of ten models, Hyundai is looking to add two new models every year. By 2020, eight new products are to be added for a total investment of Rs.5,000 crore.
Analysts predict the Indian passenger car industry to nearly double from its current size of 3 million vehicles to over 5 million cars by 2020. The market potential has always been the lure for all international auto majors but success has been elusive for most of them. That is because India is a far more complex and price-sensitive market like no other. “It is a difficult market given its sheer diversity. There is no one secret sauce to satisfy this kind of diversity. While at a broader level, customer may behave in a certain way, if you delve deeper, you discover he is far more discerning, knowledgeable, demanding, and very value oriented. ‘Cheap’ as a strategy is a mistake here. You have to continuously look at creating value for customer, across the entire value chain,” says Rahul Gautam, vice-president (marketing), Ford India. That is why the largest automobile manufacturers have failed in India when they chose to stick to their traditional product and pricing strategy rather than altering it to cater to Indian consumer demands. GM may not be the last one to leave the country. A whole of them are struggling, including Ford, Volkswagen, Mitsubishi, and Nissan, which have market shares of 3% or lesser and could well be next. As a last ditch to stay afloat, some of them are joining forces — such as Ford and M&M’s alliance for electric vehicles and Volkswagen which is now joining hands with Skoda to locally produce economical cars. Economies of scale which is a critical success factor will be a challenge for newcomers to achieve, given that two-thirds of the market is already off the table. And no market, however lucrative, has space for 15 players to thrive.
So the newbies, rather than taking the incumbents head on, are looking to find niche segments where they can cement their positions. Most of them have been studying the Indian market for more than three years. Rajeev Singh, partner, Deloitte India, who has advised automobile companies, explains, “The new players have been studying the latent needs that have not been met by existing OEMs. They are trying to get into a space, where they don’t necessarily become a me-too in the market.”
According to MG’s Balendran, their product portfolio will be their strength. “MG is one of the fastest growing brands for SAIC outside China and through this brand, we seek to provide modern and sophisticated European design and quality, along with breakthrough product features,” he says. Great product is the key strategy for the Indian market. Puneet Gupta, VP, IHS Markit feels, “By launching a British brand, SAIC is first taking care of any perception problems that customers might have with it being a Chinese company and that could work as a good entry strategy.”
An essential aspect of the new players’ strategy is offering right value. In recent years, Renault seems to have got it right with Kwid, which was launched at an attractive price of Rs.2.56 lakh in 2015. Sawhney says, “Right value can only happen if you have a high level of localisation. Kwid was the first car to have 98% localisation.” Renault entered the country through a joint venture with M&M in 2005, but didn’t make much headway with its first car, Logan. Although the JV dissolved in 2010, Renault decided to continue by itself and finally managed to garner 3.3% of the market with two successful launches Kwid (entry-level car with a market share of 20.5%) and Duster (SUV). “Any new player has to be right on five fronts – product, features, value, timing and launch strategy — and if even one is missing, it won’t work,” says Sumeet Sawhney, CEO, Renault India. As part of its marketing strategy for Kwid, Renault set up iconic installations of the car at locations such as malls and launched virtual showrooms in India to let people experience Kwid. “All this helped in building an anticipation around the launch,” adds Sawhney. Thus far 1.75 lakh Kwids have been sold, since its launch in September 2015, in a segment dominated by Maruti Alto, which sold 2.41 lakh units in FY17.
To be able to offer value, new players would have to manufacture in India. FCA has invested close to Rs.1,800 crore to upgrade its Ranjangaon plant, one of FCA’s four global plants for Jeep Compass. Kia has already signed a deal in April 2017 to invest about Rs.7,120 crore to build its first factory in Anantpur, Andhra Pradesh. Peugeot is committed to invest around Rs.700 crore to assemble cars in Tamil Nadu.
Cracking the auto-code
In the past, successful OEMs in India entered the mini-car market first and then built up on their gains. But now, thanks to increasing income levels, a lot of the Indian buyers are leapfrogging the value chain. “SUVs will be the largest segment two years from now, in value terms,” predicts Singh. Today, compact cars are the largest, both in terms of volume and value. He predicts new price points and product configurations will emerge in the SUV segment, much like what happened with compact cars. “You will have a host of price points between Rs.6 lakh and Rs.18 lakh. Probably, at every Rs.1.5 lakh you will have an offering after the entry of new players” he says.
Not surprising that the new entrants such as Kia, MG or FCA want to launch compact SUVs and sedans keeping in line with the changing industry volume mix. For instance, the entry category, which accounted for around 50% of industry volumes in FY05, declined to less than 30% in FY17 as the mid-size segment’s share increased from 30% to 46% in FY17. Over the past five years, SUV sales have increased by 16%, on an average, according to the Society of Indian Automobile Manufactures (SIAM). In FY17, SUV sales increased by a third to 762,000 units over the past year. In comparison, the overall passenger car market grew by 8% on an average over the past two years (see: On a comeback trail).
Anand of Hyundai predicts SUVs will go on to account for a significant share of the Indian market. “A couple of years ago, SUVs stood at 15% of the market and now they are one-fourth. It is one of the fastest growing segments and is still evolving in India with players like Jeep finding their sweet spot. I feel every manufacturer, old and new, will try to strengthen their position in this segment,” he says. Hyundai’s Creta is the second-largest selling SUV in the country
One of the companies that managed to get both the product and price positioning right in the SUV segment but failed to build on that advantage was Ford India. It was the first one in 2013 to create a new price point and segment (compact SUV) at Rs.5.95 lakh and it made efforts to get to 85% localisation at the time of launch of Ecosport. “We focused on several aspects — right from getting the design right to the localisation of the parts. This gave us some flexibility on pricing. Ecosport created a segment out of nothing. It was a big bet that paid off for us — because we did our homework and pitched the right product,” says Gautam. However despite its success with Ecosport, Ford India has failed to make a dent in the Indian auto industry with a market share of 2.68% (in August 2017) as it struggled to ramp up both its product offering and distribution network, despite investing over $2 billion.
Ford also had to deal with the customer bickering that its spare parts and servicing were expensive. That’s not worked to their advantage since customers in India base their decisions on how much they will have to spend over the entire life cycle of a car. Since then, Ford has worked on bringing down its spare costs. “Today our service costs are 8-12% cheaper than the industry leader. We opened up distribution of the parts a year and a half ago,” explains Gautam. So apart from getting the product and pricing, new entrants will have to keep the after sales costs under tab in India to ensure success.
The network effect
Sawhney points out that even after launching a great product, one needs to back it up with the timely network expansion. “When we launched Kwid, we were less than 200 touch points. Last year we closed at 270. This year December, we will close with more than 320 outlets. You have to make sure that there are enough dealerships and well-trained people around.”
Balendran of MG says they are still finalising their network strategy for the Indian market. But he hints, “In India, the quality of automobile dealerships is a critical component for market success, especially for a new player.” Kia, for example, is going to start with 40 dealerships only. Then gradually the number is to go up with model launches and resulting volumes. Kia happens to be an affiliate of Hyundai. Are they going to leverage Hyundai’s wide network? Anand says there are no such plans. “For us Kia is definitely one more competitor coming to India. They will manufacture from the Andhra plant and we will continue to manufacture from Chennai. Our management and all other teams are also different,” he says.
Typically, Maruti and Hyundai dealers are the most satisfied of the lot, since sales volumes are very high, and multiple models sell. The problem with car manufactures with a limited portfolio of offerings is the volumes don’t always justify the costs involved to set up and run the dealerships. Over the past couple of decades, while GM sold about a million cars in India, Maruti sold 13 million cars making the latter a far more lucrative option for dealers. So, new entrants who are entering with one or two products will have to woo dealers really hard to come on board with higher variable margins initially. Already as part of its promotional strategy, Kia has been organising roadshows for prospective dealers to showcase its product range.
Delivering winner models at regular intervals is critical for auto manufacturers to succeed in India. “At the end of the day, business is done to make money. The only thing that I know is that even if you have a clear road map, relying on a single product won’t work. New entrants need to have a business plan with regular launches that not only helps them scale up, but also improves their profitability. Otherwise, their run would be very short one,” predicts Sawhney. Every new entrant into India comes with ambitions and new strategies to win over the market but given the idiosyncrasies of the Indian buyer the odds are stacked up against the debutants.