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Business News/ Companies / Can Toyota regain its footing in India?
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Can Toyota regain its footing in India?

From localization to cost control measures to small hybrid cars, Toyota is pulling out all stops in its recovery bid

Toyota Kirloskar incurred a loss of `180 crore in the fiscal year ended 31 March, largely on account of a recent focus on the small-car Liva and the entry-level sedan Etios. Photo: BloombergPremium
Toyota Kirloskar incurred a loss of `180 crore in the fiscal year ended 31 March, largely on account of a recent focus on the small-car Liva and the entry-level sedan Etios. Photo: Bloomberg

Mumbai/New Delhi: For Toyota’s Indian operations, small isn’t beautiful; it is unprofitable.

At least, that’s what the numbers would appear to suggest.

Toyota Kirloskar Motor Pvt. Ltd incurred a loss of 180 crore in the fiscal year ended 31 March, marking a dubious first in the Japanese auto maker’s 15-year history in India.

The loss was largely on account of a recent focus on the small-car Liva and the entry-level sedan Etios for a company that has always made money in India on the back of a focus on workhorse-like utility vehicles—the iconic Qualis first, and then the Innova—and up-market sedans such as the popular Corolla.

The launches were part of Toyota’s effort to play the volumes game in India based on its understanding of where the market was headed: 10 million passenger vehicle market by 2025—five times its current size—prompting a push for alternative strategies and newer models.

Only Toyota’s bet on economies of scale from the Etios brand to drive profits came a cropper due to a lack of consumer interest. It was caught on the wrong foot because its localization efforts were not at par with the industry’s. It didn’t seem to understand the Indian customer. And it seemed to have forgotten the famed Toyota way that emphasizes cost and quality.

Vikram Kirloskar, vice-chairman of the Indian unit, agrees. “In hindsight, everything that we did seems wrong," he said in an interview earlier this month. “Why haven’t Etios and Liva taken off if they are so good in terms of performance?"

“Toyota’s only pain points in India are Liva and Etios," said Gurgaon-based Deepesh Rathore, co-founder and director at Emerging Market Automotive Advisory (Emaa). According to Rathore, the cars are a mismatch of expectations—both for the company, which was not used to making a low-cost car but forced itself into it and struggled to meet the price target, and for the customers who did not find the models living up to quality and aspirations.

Sales of the Liva declined 20% during last fiscal and 13.27% in the five months to August this fiscal year. Sales of the Etios sedan declined 19.44% and 15.5% during the same periods, respectively.

Toyota decided to change lanes, and the new direction came from the top, with a revamp of the leadership. On 31 January this year, Toyota announced top-level management changes in its Indian arm. Sandeep Singh, deputy managing director (sales, marketing, customer service and commercial divisions) was moved to a new role in its Asia-Pacific operations. N. Raja, senior vice-president, and Akitoshi Takemura, senior managing coordinator, took joint responsibility of sales and marketing. T.S. Jaishankar, executive vice-president and director, was given charge of commercial functions, and Hitoshi Iwanaga, senior vice-president, took charge of customer services.

In a move underscoring the importance of India in Toyota’s global scheme, in January 2014, Toyota Motor Corp. deputed Naomi Ishii, a 24-year veteran at the Japanese manufacturer who was general manager of the strategic planning department in Japan, as managing director, Toyota India. He comes with a clear mandate from the headquarters—rapid localization of models and understanding the big challenges posed by the small-car market in India.

“Toyoda san (president and chief executive officer of Toyota Motor Corp., Akio Toyoda) has sent his best man to head the India operations. That shows the significance of the Indian unit," Kirloskar said.

The Toyota way

A shrinking car market (India’s passenger car market shrank for the first time in 11 years in 2013-14), high fuel prices and a weak rupee further singed the company’s earnings.

On 28 August 2013, the Indian rupee plunged to an all-time low of 68.85 against the dollar, sending alarm bells ringing at the Bangalore-headquartered firm that was already under pressure due to shrinking volumes. The high reliance on imported parts meant the company’s import bill would soar. It was time to aggressively pursue a strategy it hadn’t paid much attention to so far—localization.

Compared to their existing models, the two new models introduced by Toyota had higher local content at the time of their launch. That wasn’t enough.

At the time of the launch, the local content in both the cars was 70%, whereas rivals such as Maruti Suzuki India Ltd and Hyundai Motor India Ltd have cars in this segment with nearly 90% local content.

Over the years, Toyota too has increased local content with the commencement of local production of engines and transmission units. It is up to 90% for petrol models now, according to the company’s spokesperson.

It was also time for Toyota to implement what it has been teaching, and the world has been immensely benefiting from—the Toyota Production System, a management philosophy based on the core principles of elimination of waste (muda), inconsistency (mura) and overburden (muri).

“Even a 1 reduction is seen as a major initiative in Toyota," Kirloskar said.

Over the last one-and-a-half years, more than the drop in volumes, it was cost inflation—a sign of excess flab in the system—that worried the management. Now, what began as a small initiative—to switch off the lights when not needed—has morphed into a major cost-pruning exercise across business functions.

“We brought everyone and everything together so that everyone’s ideas can be implemented, making it very clear it’s not only a management issue. This is the Toyota Production System in its true sense," said Kirloskar.

From changing the mix of models and reducing friction in machines to improving the yield from the steel and other raw materials to doing away with discounts on models and salary hikes for those above the level of deputy general manager, the company is sharply focusing on costs.

It is hoping to make a small profit by end of the current fiscal year, said Shekar Viswanathan, vice-chairman at the firm.

With the changes in the internal cost structure, Toyota has, according to Kirloskar, managed to reduce the break-even volumes at its plant to 125,000-150,000 units per annum, half its installed capacity. It has also reduced its operating costs by 15-20%.

Declining sales

During the last fiscal year, Toyota’s overall sales in the passenger vehicle market declined 22% to 56,865 units and its market share dropped to 5.14% from 6.21% a year ago, according to the Society of Indian Automobile Manufacturers (SIAM). But on back of the economic recovery, the car market has now shown some early signs of revival, with sales rising 4.5% in the five months to August. Toyota’s efforts too seem to be paying off, with sales rising 2% to 54,539 in the same period—albeit on a low base.

“The overall numbers may not be looking impressive, but we have no inventory and we are running pillar to post to meet demand; we have waiting lists everywhere as we had curtailed production to align ourselves to the slow market," Kirloskar said.

“For us, the most important thing is that we are seeing black numbers every month since the last four months with whatever volumes we are producing."

To be sure, the unsuccessful bid to introduce models in the mass segment has slowed the company’s progress and forced it to recalibrate its strategy, said an industry expert.

“It had a lot riding on the Etios and Liva, the models developed ground-up for India. A bleak sales response slowed the company’s future product strategy," said Rakesh Batra, partner and national leader, automotive practice, at audit and consulting firm EY. In a market where new models have become an imperative for survival, mere refreshes do not work, he added.

The Etios and the Liva have hurt Toyota’s brand image in the country, Ishii said in an interview, adding that the company has checked the damage control and is happy with the current sales volumes in the segment.

Yet, the company would not have been able to work on its strategy of becoming an important player in India’s car market without launching a small car. Small cars account for seven of every 10 cars sold in India.

Indeed, the lack of models may have also resulted in Toyota ceding market share to rivals.

An intensely competitive market has seen a spate of model launches by rivals including Honda Cars India Ltd, Hyundai Motor India and Maruti Suzuki. But Toyota has been conspicuous by its absence in so-called compact sports utility vehicles (SUVs) and the compact sedan. The company hasn’t introduced any new model since the launch of the Etios and the Liva in 2010, although it has launched variants and extensions such as the Etios Cross, a cross-over based on the Etios platform.

It may take some more time before the company introduces a new model, Ishii said. “We are in an intense discussion regarding the mid- and long-term product line-up and business planning for India by redefining our position with the stakeholders in our headquarters. Accordingly, we can find out what we have to start," Ishii said.

In his initial study, Ishii has identified the so- xcalled B-segment (compact cars) as a priority. He is in the process of submitting a detailed report to Toyota headquarters, and a final decision regarding the product line-up for India should be taken in a year. Till then, increasing sales in the compact segment will be company’s top priority, he added.

As for small cars, he added, “we have adjusted our expectations. This is not necessarily the objective that we set up in the beginning of the operation."

And as the company works even towards those adjusted numbers, it is hoping to understand Indian car buyers better. India’s diverse profile of car buyers, according to Ishii has been a challenge, especially for a company used to the homogeneity of Japan.

Tax conundrum

A unique market character that is heavily driven by the taxation system is another reason Toyota’s sales have been slow, he said, citing the sub-4m small-car segment that has spawned a new body type in India. Cars with a length lower than 4m are taxed less.

“No other country has such a segment," he said.

Toyota is not the only firm that has found it tough to respond to the emergence of new body types such as the compact sedan and SUVs—a concept that is unique to India. Others, too, are struggling to come up with models and at the right price.

“We realized that we can’t transplant European cost structures here," Mahesh Kodumudi, president and managing director at Volkswagen India Pvt. Ltd, said in an interview in February, adding that “India is one of the most challenging markets in the VW (Volkswagen) world." Honda India, which too was struggling till March 2013, managed to revive its India fortunes with the launch of the Amaze compact sedan last year.

Ishii also wants to introduce hybrid models in India, a field in which Toyota is very strong. The company sells hybrids of some larger models in the country but wants to introduce small hybrid cars, too.

“We really want to promote hybridization. Right now we have the Camry hybrid. Even though the sales numbers are really small, they are picking up. We need to introduce some small models in this area," he said.

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Published: 18 Sep 2014, 11:55 PM IST
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