Mumbai: India’s top three auto makers will need to start looking into their rear-view mirrors for the first time since establishing a dominant position in the small and compact car segment, which forms about 70% of the country’s market.
At least four new models will start rolling out in a few months from the factories of Ford India Pvt. Ltd, Nissan Motor India Pvt. Ltd, Volkswagen India Pvt. Ltd and General Motors India Pvt. Ltd (GM), joining a race in which Maruti Suzuki India Ltd, Hyundai Motor India Ltd and Tata Motors Ltd are clear leaders.
The new models—the Ford Figo, the Nissan Micra, the Volkswagen Polo and the Chevrolet Beat—will hit the road in the first six months of next year and will seek to take advantage of the increased income in the hands of Indians as Prime Minister Manmohan Singh’s government seeks to push growth to 8-9% levels over the next few years.
Fresh competition: A file photo of a Hyundai car assembly line unit in Chennai. Hyundai’s senior vice-president Arvind Saxena says sales in the smaller towns and cities are growing 20% every year, against the top 10 cities that are seeing single-digit growth, albeit on a higher base. Babu Ponnapan / Mint
Finance minister Pranab Mukherjee estimates growth this year at 7%-plus, indicating a recovery from the slowdown caused by the financial crisis, after the fastest economic expansion in 15 months in the July-September quarter.
India’s auto industry was in any case among the first sectors to recover from the slump. Auto sales have surged 18% to 7.8 million in the eight months from April to November. Passenger vehicles sales have gone up 21% to 1.2 million.
Listen to Kumar Kandaswami, senior director at consulting firm Deloitte talk about India’s car market
Kapil Arora, partner at consulting firm Ernst and Young, says a 5-10% market share target in the initial years of the launch, would be ambitious. “Factors like a strong brand reputation, wide reach and pricing advantage will give the existing players like Maruti and Hyundai, an advantage over the new ones,” he said.
The new entrants will add capacity of half-a-million cars in the next two to three years, saddling the industry with excess capacity by 2012-13, according to Dilip Chenoy, director general at the Society of Indian Automobile Manufacturers, a lobby group. While the models will also be exported to other emerging markets, they will come on top of the 1.5 million cars sold locally in the year to 31 March. The slack will be picked up by 2014-15, Chenoy said. “While the big three (Maruti, Hyundai and Tata Motors) will lose market share, the overall market will grow.”
The push into the new segment is partly thanks to government policy, which favours smaller vehicles. Cars with a length of 4m and an engine capacity of 1.2 litres for petrol and 1.5 litres for diesel are defined as compact or small cars, attracting a lower excise duty of 16% against 24% on those exceeding the limits. The new models, expected to be priced at Rs3.5 lakh- Rs4.5 lakh, will be competing with Maruti’s Swift and Ritz and Hyundai’s i10 and i20, among others.
The premium compact car segment, which these cars will partly straddle, grew 48% to 182,000 units in the 10 months to October from the year earlier period.
Maruti, Hyundai and Tata Motors have developed competitively priced products with high local content and a nationwide distribution and after-sales network.
“Certainly, the new launches will eat into the dominant share of the market leaders,” said Kumar Kandaswamy, senior director at global consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd. “When Hyundai launched, Maruti did lose market share.” The prospect of fresh competition doesn’t seem to be unsettling the big car makers.
“New entrants do not have to necessarily grow at the cost of existing players. The pie can grow bigger,” said Shashank Srivsatav, chief general manager, sales and marketing at Maruti, the country’s largest car maker. While the company’s market share has grown marginally to 55% from 54.5% in 2002, manufacturers have doubled to 16 from eight and brands have quadrupled to 65 from 16 in the same period, he said.
Hyundai also has no qualms about more rivals, although it does plan to introduce a car cheaper than its current entry level model, the Santro, priced at Rs3.14 lakh on road in Mumbai.
“There is enough room for everyone in the small car segment,” said Arvind Saxena, senior vice-president at Hyundai Motor India. Right now, most manufacturers are vying for 10-12% of the market—mid-size to large cars—instead of chasing the small car segment that accounts for 70% of sales.
An AT Kearney November report, titled Think Small to Grow, says the low cost small car (LCC) is an emerging segment predicted to grow globally at more than 500% by 2020.
It defines LCC as a segment that includes vehicles ranging from $2,200 to $7,800 (Rs1 lakh to Rs3.6 lakh), which includes the Nano, which Tata Motors began selling this year at a starting price of Rs1.26 lakh (on road, Mumbai).
Nissan and Volkswagen have thus far been fringe players in the Indian car market, with their fully imported vehicles selling at Rs14-25 lakh, making the small car critical to their prospects in the country.
While the Figo, expected to be launched in March-April, will be Ford’s first entry into the segment, GM India already offers the Chevrolet Spark, starting at Rs3.42 lakh, as its entry-level model.
“If you want to be in the game here in India, you have got to be in that segment,” Michael Boneham, Ford India’s president and managing director, told the Reuters India Investment Summit earlier this month. “If not, you’ll be an interesting niche player, not a mainstream player. And Ford wants to be a mainstream player here.”
Rural markets could offer a way of making inroads into the market as they are not as brand conscious, except for generic knowledge about Maruti.
Hyundai’s Saxena says sales in the smaller towns and cities are growing upwards of 20% every year, against the top 10 cities that are seeing single-digit growth, albeit on a higher base. With greater availability of finance facilities and growing aspirations, sales will accelerate in the smaller towns, he said.
“This to some extent offers a level playing field,” Deloitte’s Kandaswamy said. A car maker that can offer a value proposition need not traverse the learning curve and can quickly become a significant player in the rural market, he said.