New Delhi: Jagdish Khattar is betting big.

A former managing director of India’s biggest car maker, Maruti Suzuki India Ltd, he is now offering to service, repair and maintain cars through a chain of shops, revolutionize the business and use the service brand to venture into retail.

New road map: Jagdish Khattar. Ramesh Pathania / Mint

Third-party service centres are not a new concept globally. Brands such as Kwik-Fit in the UK and Auto Teile Unger in Germany have successfully established themselves as large, independent third-party service outlets.

Some experts believe it’s only a matter of time before India, too, moves in that direction.

To be sure, to make a success of these “multi-brand auto solution hubs", as Khattar likes to dub them, will take some doing in a market dominated by dealer networks of auto?makers?and?their so-called authorized service centres.

Add to that typical car owners wanting to make their rupee go the furthest and turning to roadside garages, and the challenge starts looking formidable.

Khattar says the key differentiator in his strategy for his new company, Carnation Auto India Ltd, to acquire and keep customers is to offer a reduced cost of ownership without compromising on quality.

Carnation outlets would not only take care of servicing and repair jobs but also sell insurance and accessories such as tyres, batteries and air conditioners, he said.

It was in 2006, while still at Maruti, that Khattar saw first-hand how dealers struggle to cope with an ever-increasing rush of cars that come for servicing every day.

On his way to a dinner engagement in Noida, a suburb of New Delhi, he decided to stop at a Maruti dealer and peek into the service shop.

“The place was overflowing with cars. You couldn’t walk. There were over a 100 cars in a small lot waiting to be returned to customers," he says.

What he saw only confirmed something he’d long suspected—the network of Maruti’s 261 dealers was struggling to service an ever-increasing number of cars and unsatisfied car owners were forced to turn to the unorganized sector.

Maruti’s dealers alone, according to some estimates, would have to invest as much as Rs4,000 crore in expansion by 2010 in order to service its cars. And even that may not be enough, says Khattar.

Even with the country’s largest service network, only about 70% of cars came back split evenly to Maruti’s dealers and authorized service shops once the initial free services were complete. The firm sells some 700,000 cars a year.

By the time he left Maruti in December last year, Khattar had his next step planned out. He engaged consultants to study the market, lined up financing and announced the venture in September.

Carnation starts with nearly Rs108 crore raised through Azim Premji’s PremjiInvest and IFCI Venture Capital Funds Ltd.

Auto veteran

A manager in the Indian car industry for long—he was at Maruti for 14 years—Khattar knows only too well the nuances of the domestic car market and has positioned his venture to take advantage of them.

In India, just three companies—Maruti, Hyundai Motor India Ltd and Tata Motors Ltd—make up 85% of the cars sold. Another 18 slug it out for the rest.

They lack the volumes to make a large dealer network commercially viable. High real estate costs also deter many prospective businessmen. And then, retaining them is a problem the companies constantly grapple with.

It’s this space that Khattar would like to occupy. “For this to be successful, you will need the smaller players to begin with," says Yezdi Nagporewalla, head of automotive practice at KPMG, an audit and consulting firm.

The problem lies in the way car retailing operates. The large glossy car display showrooms are often loss-making propositions in most cities. Typical margins on car retailing are no more than 2-3%.

And with dealers regularly running discount programmes to spur sales, even those are often under pressure. In spite of being the largest car firm, there was no clamour for Maruti dealerships, Khattar says.

Spiralling land prices have further squeezed margins. “Most car dealers in major cities own their outlets. If they were to rent them, they’d be loss-making propositions," says Gulshan Ahuja, secretary general of Federation of Automobile Dealers Associations of India. Most dealers have discounted the money they’d earn if they rented out their premises, he adds.

Low margins in the retailing business are partially taken care of with better profits on financing vehicles and selling insurance. Here, margins range from 3% to 4% for financing to 12-15% for selling insurance.

Fat pickings

But it’s the servicing, maintenance and repair jobs such as painting and denting where the fat pickings lie.

By initially going after this high-margin business, Carnation should have good cash flows that give it the money to expand.

Dushyant Singh, director, strategic and commercial intelligence at KPMG, estimates such services account for half of dealer profitability.

Here’s the rub for Khattar.

Letting go of these fat margins is not something dealers and car makers are going to do without putting up a fight.

“I don’t see that as something we’d be supporting," says Michael Boneham, president and managing director of Ford India Pvt. Ltd. It’s unlikely other smaller players would support Carnation either.

And they have a few trumps up their sleeves. While some companies such as Maruti sell their spare parts to independent service outlets, almost none of the other manufacturers do so.

“Some manufacturers have taken the approach not to distribute spare parts through a channel that is outside their authorized network," says Arun Dey, chief executive at Reliance Autozone, which has also taken initial steps into this business and is potentially a rival to Carnation. Reliance Autozone is a subsidiary of Mukesh Ambani-controlled Reliance Retail Ltd.

No regulatory help

In Europe, regulations mandate car makers make technical information available to independent garages, says Ben Waller of the International Car Distribution Program, a UK-based consultancy that specializes in multi-brand car retailing. In the US, the Right to Repair Act takes care of this issue. India doesn’t have such rules.

Unperturbed, Khattar, in an interview at his Noida office, says Carnation might even consider importing spare parts. Carnation has sent teams to Dubai, Bangkok and Shanghai to scout for spare parts and says it would have parts to service 80% of the cars on India’s roads today. Brands such as Mercedes, BMW and Audi that have relatively fewer cars on the road would likely not be serviced by Carnation.

Dealers also have extensive buyer data that allows them to follow up on their customers. Most dealers, for instance, call customers to remind them about servicing dates and renewing their insurance policies. Others offer to waive off labour charges after the free service period.

Moreover, Carnation won’t have access to the free service market where dealers make a lot of their money.

For Carnation, getting customers initially will be a challenge. Cost-conscious consumers are unlikely to shift out of the unorganized sector and it’s not clear what extras Carnation would offer customers that presently go to dealers for servicing. Buyers of larger cars will certainly not shift outside the authorized service networks easily.

On a recent evening at Ambience Mall in Gurgaon, Guneet Gogia, a Maruti customer, walked into the Reliance Autozone outlet to pick up a mobile phone charger. While he liked the third-party outlet selling branded car accessories at a reasonable price, he says he is unlikely to come to an outlet such as this to get his car serviced “even if the price is lower". He fears that Maruti may nullify the warranty on his Alto if he goes outside their service network.

Realizing this, Carnation initially plans to target three types of customers. Independent fleet companies, insurance firms and the government, according to Rajeev Mukhija of IFCI Venture Capital, which has invested in Carnation.

One such potential customer is Carzonrent India Pvt. Ltd. The Delhi-based franchise of Hertz India operates a fleet of 5,000 cars across India.

Servicing them is a problem, acknowledges chief executive Rajiv K. Vij. His servicing bill totals at least Rs1 crore a month, and he says he’d be looking to get into a maintenance contract with a reliable third-party outfit. For him, the cost is as important as the peace of mind a potential deal would bring.

Likewise, insurance firms plan to dedicate garages for repair jobs. Carnation says at least six insurance firms have come forward to explore a tie-up, but declined to provide names. “This might be in the interest of all stakeholders as this is an organized and professional entity whereas earlier it was fragmented and not so organized," says a senior executive at a private insurer who declined to be named.

Carnation’s eventual plan is to straddle the entire gamut of services, from retailing to servicing, as well as offer insurance and financing options for potential buyers.

But, for now, with the servicing business in India growing at an average of 15% annually, there’s enough for Khattar to get going. If this succeeds, others are likely to follow.

That’s the gamble he is taking, but if anyone has a chance, Khattar is likely the candidate.

“He definitely has the contacts to make this work," says Carl Slym, president and managing director, General Motors India Ltd.