Gearing up for competition

The influx of global automobile majors is changing the contours of the Indian car market.

FOR decades, the passenger car industry in India offered limited choices to buyers; now all of a sudden it is offering a very wide choice. While several new models are ready on the roads, more models that are expected to enter the market in the coming months were on display at Auto Expo '98, the automobile exposition held at Pragati Maidan, New Delhi, from January 15 to 21. Three small car models from Telco, Daewoo and Hyundai were the highlights of the show.

An all-Indian car, Telco's small car (see box) has a 1400 cc engine and 55 bhp (brake horse-power), compared to 39.5 bhp for the Maruti 800 and 50 bhp for Zen. While the Tata car can hardly be called a small car, its price, at around Rs. 2.5 lakhs makes it a competitor to other small cars. The 800 cc D'Arts from Daewoo is in the Rs. 2.8-3 lakh price range while Hyundai's 1000 cc Santro is estimated to cost around Rs. 2.9 lakhs. Maruti's 800 cc standard model costs around Rs.2.2 lakhs in Delhi. The new models are expected to roll out in the next six months. With the entry of these models, the total installed capacity for small cars is expected to rise to nearly 4.5 lakhs by 1999; of this, Maruti 800 will account for nearly half the number.

By 2000, the annual production of Indian cars is estimated to reach anywhere between 7.5 lakhs and 10 lakhs. S.K.Bhargava of Eicher Motors said: "If we take the size of the Indian middle class to be 25 crores, the total market for cars in the country should be around five crores, if a family size of five and an average of one car per family is taken into consideration. Even if each family replaces its car once in 10 years, the annual demand could exceed 10 lakhs."

It is expected that the annual demand will cross 7.5 lakh cars at the least, provided GDP growth remains above six per cent and there is no drastic change in government policies. If the government scales down excise duty from the current level of 40 per cent, the demand will exceed these projections.

Also on display at the exposition were slightly larger, five-door luxury small cars - Fiat's Palio, Skoda's Felicia and Ford's Fiesta. These cars will compete with Maruti's Zen and Fiat's Uno. In the mid-size segment were Daewoo's Cielo, Opel's Astra, Ford's Escort, Mitsubishi's Lancer and Honda's City. The multi-utility vehicles on display were Telco's Safari, Sierra Turbo and Sumo, Mahindra & Mahindra's Armada and Pajero. Pune-based Kinetic Engineering displayed a 500 cc two-seater car that will be priced at about Rs. 1.35 lakhs. This model will be available from September 1998 and is aimed to attract two-wheeler owners to the car market.

Mercedes, Audi, BMW and Skoda (from the Czech Republic) displayed luxury cars that they plan to launch in India. While Mercedes-Benz will manufacture its E-series locally, the others hope to bring in pre-fabricated units in limited numbers.

The process of economic liberalisation in India, which opened up currently to the Maruti-dominated Indian market, coincided with a slowdown in the global demand for cars. The current growth in the global car market is reported to be around one per cent. The burgeoning Indian middle class presents a tempting market for the global majors, which are faced with unutilised capacity.

The perception that foreign majors look upon the Indian market essentially as an outlet for capacities rendered surplus in the international car industry is not entirely correct. No doubt, some international models introduced in the Indian market have been around for some time. The Uno and Peugeot 309 models are at least a decade old. Esteem, which is pitted against the newcomers in the mid-size market, is of 1988 vintage. Ford Fiesta was introduced in the European market in 1976 and Ford Escort in 1980. These models have been replaced in the European market. The Mercedes E-class being assembled in Pune and Honda's City are 1995-96 models.

The two Korean cars, Cielo from Daewoo and Santro from Hyundai, General Motors' Opel Astra and Fiat's Palio are new models which are being sold in the home markets of these companies. Santro is a new model that has been developed on the Hyundai ATOS platform for the Indian market.

The equity holding patterns of foreign partners in the joint ventures reflect their perception about the Indian market. Typically, most global automobile majors use the joint venture route only as an entry point and prefer to consolidate their stake as they go along. Daewoo, which started off with a 51 per cent stake in the venture with DCM, has since increased its stake to 94 per cent and may soon take over the company. Telco's stake in Mercedes-Daimler Benz AG stands diluted to 26 per cent and Siddharth Shriram's SIEL has only a 10 per cent stake in Honda-Siel Cars, with an option to hike the stake to 30 per cent. Hyundai is a 100 per cent subsidiary of the Korean company. PAL is looking to sell its 32 per cent stake in its venture with Peugeot. Ford and Mahindra have equal stakes in their joint venture as do General Motors and the C.K. Birla group in theirs, but this ratio could very well change in the near future.

Hindustan Motors has only a technical collaboration with Mitsubishi to manufacture the Lancer; the Japanese company can exercise the option to buy 10 per cent in the joint venture. Fiat has just licensed its technology to PAL for the manufacture of Uno. It is a moot point whether Suzuki would have preferred to raise its stake in Maruti Udyog Limited (MUL) had its partner not been the Indian Government.

Earlier, India's automobile policy had allowed the import of ready-to-assemble kits with a provision for progressive indigenisation over five to seven years. Import licences for semi-knocked down (SKD) and completely knocked down (CKD) kits were issued to those companies that had signed an MoU with the Directorate-General of Foreign Trade for foreign exchange neutralisation through indigenisation, the export of automobile components and sub-assemblies to the parent company. As a former Commerce Secretary put it, the MoU was a 'gentlemen's agreement', and was observed more in the breach. Foreign exchange neutralisation, to the extent it was achieved, was through routes other than indigenisation or export of components to the parent company.

With the Government looking the other way, car manufacturers often exported goods totally unrelated to the automobile sector to balance their import requirements. The new automobile policy announced late in 1997 has put the brakes on assembling kits. The policy has stipulated 50 per cent indigenisation in three years, going up to 70 per cent in five years. Foreign companies in India are still required to sign MoUs for foreign exchange neutralisation and there is a clamour to formalise the practice of allowing the exports of any kind of goods to balance imports.

The indigenisation requirement has a loophole, which car manufacturers may exploit. This relates to what actually constitutes local content in an automobile. Imported raw materials, components and accessories sourced from third parties are shown as local content to comply with MoU requirements. Industry experts say that most hi-tech components are sourced from outside the country while only trimmings are procured locally.

Global automobile companies prefer to set up their own component manufacturing units in India as a sourcing base for their assembly-line production, much to the disappointment of the domestic automobile component industry. Visteon, Ford's wholly-owned component subsidiary in Chennai, and General Motors' Delphi Automotive Systems, are cases in point. To the extent these subsidiaries become sourcing points for the companies' global operations, they should be welcome.

The Government has insisted on an MoU not out of concern over foreign exchange outflow on account of imports (it constitutes only a small portion the total import bill); it is essentially a device to separate the serious players from the not-so-serious ones. Without strict enforcement of MoUs, foreign exchange outflow from the passenger car segment can snowball in the near future. Even after 13 years Maruti imports its gear boxes and continues to be a net importer despite exporting fully assembled cars. By contrast, all other manufacturers focus on the domestic market.

Given the size of the Indian market, there are far too many players. China, whose market is twice as big as India's, has restricted entry to six players. The Indian Government believes that market forces should decide who will survive. The toughest competition is in the small car segment in which Maruti has hitherto been the lone player. Price will continue to be a major determining factor. Since Telco has mentioned a competitive price, it will certainly provide tough competition to the Maruti 800 and even the Zen. Telco already has an established dealer and service network. However, what might slow down Telco's march into the market is apprehension about model's teething problems The Korean manufacturers may have to scale down their prices or offer better features if they are to make inroads into the small car market.

In the mid-size segment, volumes have turned out to be lower than estimated. Daewoo cut the price of Cielo by Rs.1.3 lakhs despite the beating it took in its first quarter results this year. The company is also offering zero interest finance for Cielo. Other mid-size car manufacturers are pruning their output and adding features.

Apart from possible price cuts, competition has had a salutary impact. There will no longer be advance bookings, proceeds of which were used in the past to finance working capital needs. The new cars will be available off the shelf.

The competition is tough, but the existing models are not exactly intimidated by the emerging environment of choice.

Hindustan Motors, which sells around 28,000 Ambassador models a year, says it will continue to make them and probably augment production in the next few years. Chief general manager (marketing) C.K.Rao said: "We still have the taxi market and the small businessmen clientele. Nobody can touch the Ambassador in these niche markets." According to him, the Government buys only 2,000 vehicles a year from the company and that market is not very critical. Hindustan Motors' other model, the Contessa, sells 4,000 units. He said that some improvements and additions such as CNG and bullet-proof versions are being made in the existing models. PAL also plans to continue with its Padmini range.

As the contours of the Indian car market change, the question to ask is not about the identity of the winners or their strategies, but whether they brought about the promised multiplier effect on the economy in terms of increased employment, technology absorption and the emergence of a vibrant component industry, and at what price.