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Honda forced to slash prices as competition zooms ahead

Honda forced to slash prices as competition zooms ahead
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First Published: Thu, Aug 18 2011. 11 51 PM IST
Updated: Thu, Aug 18 2011. 11 51 PM IST
New Delhi : The new version of the HondaJazz that was introduced on Thursday costs about Rs1.65 lakh less than its predecessor. And it has more features than the model it’s replacing. That’s the extent to which Honda Siel Cars India Ltd (HSCI) has been forced to acknowledge the market reality as it seeks to revive sales amid slowing numbers and a competition that’s fighting for every customer.
Take Shubhodeep Banerjee, now 39. Two years ago, the self-employed Banerjee owned a Honda City and his phone was a Nokia E72. His sentiment at the time—both are great companies with a great product portfolio and unmatched customer loyalty.
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Today Banerjee drives a VolkswagenVento diesel and uses a BlackBerry Torch. He doesn’t endorse any particular brand any more, but looks for value for money.
His reasoning was thus —Nokia was not fast enough to counter the influx of Chinese mobiles at the lower end and smartphones at the top end. Honda didn’t take the competition seriously and banked heavily on its brand equity to drive volume growth. Diesel variants meanwhile are still a distant reality.
This is despite Honda’s brand equity in India.
“Brand Honda has a huge following in India. A fuss-free ownership experience is guaranteed,” said Banerjee. “But you cannot depend on your brand forever. Product and pricing are more important to strengthen the equity of a brand. And, don’t forget, Volkswagen is as global and as big a brand as Honda and they also have a diesel engine in their portfolio.”
Till 2007, Honda was the fifth largest manufacturer in India, selling 60,000 cars a year, ahead of Toyota Kirloskar Motor Pvt. Ltd, Ford India Pvt. Ltd and General Motors India. Honda’s entire sedan range—the City, Civic and Accord—were top-selling models in their respective segments. Even the fully imported sports utility vehicle (SUV) CR-V was selling more than any other car in the segment. In the first seven months to July this year, the company has sold 35,111 units, a decline of 22.23% from the year earlier.
“In the last three years, a different story has emerged. Honda just sat by the sidelines and watched as newer brands (including rival Volkswagen) controlled the market. No change in strategy at all,” said an automotive expert at a leading consultant, who declined to be named. “Then, Indian petrol prices increased significantly. Then Honda went wrong with the Jazz’s pricing and lagged behind in volume game.”
In recent times, the Honda City has been overtaken by the Volkswagen Vento. Civic is well behind its competitors such as ToyotaAltis and ChevroletCruze. In the premium segment category, Honda Accord has lost pole position to Skoda Auto India Pvt. Ltd’s Superb. In the SUV category, Honda’s CR-V did not sell a single unit in July.
The Jazz, which was introduced in 2009, sold about 500 units a month till the earthquake and tsunami in Japan in March affected parts supplies to India.
Honda has been selling about 250 units a month since then. The older version was priced at Rs7.13-7.56 lakh (ex-showroom in Delhi), while the new one will cost Rs5.50-6.09 lakh. Before the new version started selling, some dealers were offering discounts on the Jazz of up to Rs1.75 lakh.
“Sometime, somewhere we had to bite the bullet,” a top HSCI official said on condition of anonymity. “The competition is increasing every day and we have to keep in mind market demand. We just can’t sit idle and, later, be in a position from where we just can’t recover. We have realized the fact that Indian customers can pay Rs50,000 extra on accessories, but would stay away from spending on safety features.”
The Indian small-car market has seen some aggressively priced car launches with the new version of Maruti Suzuki India Ltd’s premium hatchback Swift priced at Rs4.22 lakh and Toyota—Honda’s global competitor—pegging its only small car at Rs3.99 lakh.
Honda’s move was on expected lines, said Nikhil Deshpande, research analyst at Pinc Research, a brokerage firm.
“The problem is that they have been hit in their bread and butter segment. They have been sitting with unused capacity at both their plants,” Deshpande said. “That has triggered this decision and moreover you cannot sustain in the Indian market if you are not competing with others on the price front.”
The company was making more money on the outgoing Jazz than on the City, Deshpande said.
“There is a price difference of around Rs70,000 between the old Jazz and the City and the company pays 10% excise on Jazz and 20% on City; that increases the profitability on Jazz,” said Deshpande. “So till recently, they did not have to hard sell Jazz, but with City not doing well, there was hardly any option left with them.”
The company will take a hit on margins, said the official cited above. “Jazz shares a lot of common components such as with the Brio, including local assembly of the 1.2-litre engine,” he said, referring to the small car that Honda is introducing in India next month, its first in the mass segment in the country. “We have started making those components at our facility in Tapukara in Rajasthan. We may not be making money on this model till the Brio comes in. The combined volume of Jazz and Brio will help in making profits.”
Jnaneswar Sen, senior vice-president (sales and marketing), Honda, said the Jazz and the Brio will share components, but didn’t comment on whether the new car will be profitable for the company.
“R&D (research and development) efforts started in 2009 to reduce the cost. It’s just not about localization, but also about supply chain efficiency and manufacturing efficiency,” he said. “We have been working on all these things.”
Another reason for the price cut is the appreciating yen, which is affecting Honda’s margins as it heavily depends on imports, Deshpande said. The yen is near an all-time high of 76.25 to the dollar. About 76% of the Jazz is localized.
Honda is working on a diesel engine.
“Our headquarters is working on a diesel engine, which is going to be ready in two-three years,” said Seki Inaba, the new director for marketing at HSCI. “We will try and get as competitive as we can. With the Brio coming by the end of next month, we hope to do good numbers.”
The Brio is a make-or-break bet for Honda, said the company official cited above.
Graphic by Sandeep Bhatnagar/Mint
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First Published: Thu, Aug 18 2011. 11 51 PM IST
More Topics: Honda | Jazz | City | civic | Toyota Kirloskar |