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Multiple variants keep auto sales up

Multiple variants keep auto sales up
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First Published: Thu, Aug 06 2009. 12 46 AM IST

Sharing space: A Maruti Suzuki showroom. The firm’s portfolio comprises 13 models with 40 variants. Ramesh Pathania / Mint
Sharing space: A Maruti Suzuki showroom. The firm’s portfolio comprises 13 models with 40 variants. Ramesh Pathania / Mint
Updated: Thu, Aug 06 2009. 12 46 AM IST
Mumbai: The global automobile market has been governed by a simple rule ever since General Motors Corp.’s legendary chairman Alfred P. Sloan made planned obsolescence central to his strategy in the 1930s: Old models get replaced by new models.
This time-honoured rule is being challenged in the Indian car and two-wheeler markets, as old and new models share market space in a form of uneasy co-existence. So, even as Maruti Suzuki India Ltd and Hero Honda Motors Ltd, market leaders in car and two-wheeler segments, respectively, roll out swankier products, they have not retired old workhorses such as the Maruti 800 car and the Splendor motorcycle.
Sharing space: A Maruti Suzuki showroom. The firm’s portfolio comprises 13 models with 40 variants. Ramesh Pathania / Mint
On the contrary, Maruti Suzuki’s portfolio currently comprises 13 car models with at least 40 variants, while Hero Honda has 10 models with 25 variants and plans to introduce nine additional new products in the current financial year ending March 2010.
Executives at both firms said given the variety of customer needs, it pays to allow multiple products to coexist. Other car makers such as Hyundai Motor India Ltd and Tata Motors Ltd, India’s second and third largest car makers by sales, have also followed a similar policy. While Hyundai Motor has kept its original offering, the Santro, in showrooms, Tata Motors continues to sell the Indica, a compact car, which at the time of its launch was touted as the first car to be designed and made in India.
Both cars have been offered in various variants over the 11 years since they were launched, even as the car makers have launched sedans and multi-purpose vehicles alongside.
Though a product’s life cycle depends on many factors such as a firm’s strategy, geography and consumer behaviour, it has shrunk to five-seven years from seven to 10 years a decade ago in developed markets of the world, said Pankaj Chadha, director, automotive practice, at consulting firm Ernst and Young.
However, even in developed markets, auto makers have retained models over decades with improved variants, such as Ford Motor Co.’s Mustang, Toyota Motor Co.’s Corolla, Volkswagen AG’s Beetle and General Motors’ Camaro.
In India, the 25-year-old Maruti 800 and the 9-year-old Alto are still selling alongside newer products such as the Swift, SX4, A-Star and Ritz. Similarly, Hero Honda’s Splendor coexists with the Hunk, Achiever and Glamour, all sleeker, more powerful motorcycles.
“Unlike the mature auto markets of the world, there is still a lot of gap between the steps of the product ladder in India that have to be filled in. Auto makers are trying to address this,” said R. Venkatraman, partner and vice-president at global consulting firm AT Kearney Ltd, adding that an important factor is that India is one of the world’s most price-sensitive markets.
Surjit Arora, an analyst at Prabhudas Lilladher Pvt. Ltd said the need to have a variety of models with minor differentiators is driven by the need to retain customers.
It helps that as investments are recovered on older models, firms get the flexibility to price them competitively, creating a significant price gap between the old and new, said Venkataraman, adding that the trend will likely continue for another five years, when auto makers start generating higher volumes.
For Hero Honda, which has kept its at least a decade-old Splendor and Passion brands alive, the seven-variant Splendor still sells a million units annually, just under a third of the 3.42 million motorcycles sold every year.
Anil Dua, vice-president of sales and marketing at Hero Honda, said the underlying principle behind the strategy has been “One for everyone”, thus also preventing consumers from tiring of older brands. “It requires a clearly differentiated positioning, well-defined target customers, backed by a carefully planned communication to make it a success,” he added.
Similarly, at Maruti Suzuki, the Alto, introduced in 2000, sells 20,000 units a month on average, accounting for almost 50% of the company’s sales in the compact car segment. “It is not important to always discontinue old models when launching the new ones, as the idea is to expand the segment in which the product has been positioned,” said I.V. Rao, managing executive officer, engineering, Maruti Suzuki. “It depends on the product strategy and the response the old model has been getting from the market.” The company has replaced its Baleno, Esteem and Zen models with the SX4, Swift Dzire and Zen Estilo, respectively.
The multi-product trend, however, is seen most in companies that depend on volumes and pricing, unlike premium car makers such as Honda Siel Cars India Ltd or Toyota Kirloskar Motor Pvt. Ltd that use technology as a differentiator.
In February 2005, Toyota Kirloskar phased out the multi-purpose vehicle Qualis at a time when it was averaging 4,000-4,500 units a month and replaced it with the Innova.
“It was difficult for us to justify both the models, it doesn’t go with our strategy,” said Sandeep Singh, deputy managing director, marketing, Toyota Kirloskar.
However, the multi-variant strategy comes with its own pitfalls. “The complexity of the whole operation increases when you have more and more variants,” said Venkataraman. “The definite cost of complexities that arise out of enlarging product portfolio could be anywhere between 2% to 5% of the base cost.”
Arora of Prabhudas Lilladher said the only possible fallout of this strategy is cannibalization. “The Swift and the Ritz, for instance, have been cutting into each other’s sales,” he said.
Maruti’s Rao conceded the point, saying that given the overlap in the compact car segment, it’s a challenging task to convince customers on choosing one over the other.
Nonetheless, Maruti Suzuki reported a spike of 21% in July sales to 48,115 units in that segment.
To counter the cost effect, auto makers have been working on reducing complexities on two levels: using a smaller number of variants at the component level for different models and at the design level.
Fewer component variants reduce supply-chain complexity for the car maker and also give suppliers larger volumes. For example, Maruti’s Manesar plant that produces the A-Star, Swift, Dzire and SX4 is capable of rolling out all these models off the same assembly line.
Instead of redesigning new components each time a new car is launched, companies now keep a database of components that can be used in a new product. “It’s also becoming important from the aspect of servicing and sales, because one otherwise will end up supplying 100 different versions of a particular part,” said Venkatraman.
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First Published: Thu, Aug 06 2009. 12 46 AM IST