Passenger cars: Jostling on a wide road

Raghuvir Srinivasan

WHO SAYS that the old economy has no glamour? Just look at the passenger car and multi-utility vehicles (MUV) segment which is preening with new model launches every other day.

Indeed, this segment is one of the fastest growing in the automobile industry and also the one seeing maximum activity. Every major global car manufacturer with growth aspirations is present in the country. And it is a mortal fight for market share, with companies employing every trick in the book to get a more than a toehold in the growing market for passenger cars and MUVs.

The first 11 months of 1999-2000, ending February 2000, saw the passenger car segment grow at a scorching 57 per cent while the MUV segment grew by a more sedate 8.41 per cent. The market leader in the car segment, Maruti Udyog (MUL), has been on overdrive through the year, both in stepping up production volumes and in introduction of new models. While this has provided the foundation for the overall growth of the industry, the thrust was provided by the new entrants -- Hyundai, Daewoo, Ford and Tata Engineering.

New entrants widen market

By far the most significant happening in the car industry in the last year was its expanding to accommodate the new entrants. When Hyundai, Daewoo and Tata Engineering entered the segment, the general expectation was that they would not be able to make much of an impact and that their growth would mainly come at the expense of Maruti. But subsequent happenings have proved this wrong. The new entrants have been able to impart a spectacular growth to the entire industry by actually widening and deepening it. It is doubtful if the current growth rate of over 50 per cent would have been possible but for the entry of these players.

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Among them Tata Engineering, Hyundai and Daewoo Motors have sold more than 1.25 lakh vehicles in the April-February 2000 period even as MUL not only held on to its share but also registered an impressive growth of 22 per cent. Indeed, MUL's total sales of 4.06 lakh vehicles in fiscal 1999-2000 was quite close to the total industry sales of 4.15 lakh vehicles in 1997-98. This is enough proof to show that growth for the new entrants has come by an expansion of the market and not by eating into demand of the existing players.

Micro-segmentation of the market

The profusion of new models and the introduction of newer variants of existing models have resulted in the micro-segmentation of the market in the last couple of years. Each of the three segments of the old days -- small, premium and luxury -- has been further segmented on price parameters. Thus, in the small car there is the entry-level Maruti 800 -- in fact, a segment of its own with absolutely no competition. The next level is made up of the deluxe version of the Maruti 800 along with the petrol Indica. The premium end of the small-car segment comprises the fully-loaded petrol Indica and its diesel version, the stripped-down Zen, and the entry-level Hyundai Santro. The deluxe version of the Zen, the fully-loaded Santro and the Matiz form another segment along with the Fiat Uno.

Similarly, in the mid-size cars segment, the lower-end is brought up by the Esteem, the Fiat Siena, the Ford Ikon and the Opel Corsa. The higher end is made up of the Opel Astra, the Maruti Baleno, the Hyundai Accent, the Daewoo Nubira and the Mitsubishi Lancer. This segmentation is strictly on price lines and vehicle size.

Such extensive segmentation has aided the overall expansion of the car industry. The wide choice and the option of graduating from one level to another have increased the demand. Earlier, growth in the car industry came mainly from first-time buyers. Existing car-owners had little incentive to change vehicles because of the limited choice and the absence of a superior vehicle for upgrade.

That has changed now. For example, the demand for a Zen would come as much from an existing Maruti 800 owner as from a first-time buyer. This was not so earlier as the Maruti 800 owner would have had no choice other than the staid Ambassador or the Premier Padmini. A switch to any of the two models could by no means be termed an upgrade. Simply by offering choice, car manufacturers have sought to tap the latent demand of existing car owners to upgrade to a superior vehicle.

Actually, much of MUL's success in the last one year can be attributed directly to this strategy. The company woke up late to competition but it quickly assessed its strengths and weaknesses and realised that the only way of maintaining its leadership status in the industry would be by having a presence across all price segments. Thus, came the four variants of the Omni and six of the Zen, including the top-end Classic, and a stripped-down version at the lower end. In the premium segment, the company went one step higher than the Esteem by bringing in the luxury car, Baleno.

The Wagon R, introduced a couple of months back, adds a new dimension to the company's product range. MUL's strategy is clear -- to offer its customers a choice to upgrade within the company; in other words, retain customers with itself. For instance, a Maruti 800 owner can now graduate either to the Zen or to the Wagon R. Similarly, a Zen owner can graduate either to the Esteem or to the Baleno.

Competition dynamics

The competition is stiffest in the segment with maximum volumes -- the mass market of small cars. Contrary to expectations, MUL has managed to hold on to the market at the lowest entry-level where none of the new entrants has been able to match the price of the Standard 800 car. The Indica petrol car is more of a threat to the Maruti Deluxe 800 while the Santro plays it out with the Indica diesel on sheer price terms.

The Indica and the Santro actually created a new segment by exploiting the big price differential between the Maruti 800 Deluxe and the Zen. They quickly built up volumes, capitalising on the absence of a competing product till MUL stepped in with its stripped-down Zen in the same price bracket.

The Daewoo Matiz lost out in this initially because of its faulty policy of premium pricing. The Matiz, fully loaded with air-conditioning, power steering, power windows, and so on, debuted at around Rs. 3.75 lakhs when the Santro was available in three variants with an entry price of just over Rs. 3 lakhs. Little wonder that the Matiz lost out initially till Daewoo Motors decided to introduce a stripped-down version, the Matiz SS, to take on the Santro and the Indica. The Matiz also suffered from a perception in the market that it was under-powered at 800cc compared to the Santro with a one litre engine and the Indica with a 1.4-litre power-plant.

If the story of the last two years is the action in the small-car segment, that of the next two could be of the mid-size segment where there has been a lot of activity in the last few months. Competition has intensified with the entry of the Ford Ikon, the Fiat Siena and the Hyundai Accent into this segment which was the exclusive preserve of the Maruti Esteem. Unlike the small-car segment, the market for mid-size cars is limited with too many models competing for the available demand. But here again, the story could be a repeat of the small-car segment -- the market expanding to accommodate the new entrants.

Initial evidence suggests this. March saw a jump in sales in this segment to around 9,900 cars -- more than double that in the same month of 1999. The leap in March came on the back of increased sales in January and February when more than 6,000 cars were sold. This sudden rise could be mainly because of the availability of wider choice to buyers and this may not be sustained. But even if the sales levels off at 6,000-7,000 cars a month -- likely given the current sales figures of the Ikon, the Accent and the Opel Corsa -- it would be a major boost for the players in this segment. The industry would then be looking at annual sales of 60,000-plus in this segment alone compared to the past average of 35,000-40,000 per annum.

These figures suggest that the much-anticipated upgradation by existing car owners has begun to happen. This cannot but be good augury for the industry as growth till now has come mainly from cannibalising on the market share of the Esteem even as the overall market size hardly grew. This is also a sign of the market maturing with a discernible pyramid of demand -- high volumes at the low end and gradually falling as one goes up the price level.

Emission and technology

This was a much-neglected issue till the Supreme Court last year set a deadline for attaining Euro-emission standards. The Court set April 1, 2000 as the deadline for all cars sold in the National Capital Region (NCR) comprising Delhi and parts of Haryana, Rajasthan and UP, to achieve Euro-I emission norms. This came as a wake-up call to the manufacturers, MUL in particular as about 40 per cent of its sales is in the NCR. But this has ceased to be an issue with all car models now flaunting the Euro-I sticker.

However, such compliance has not been without its costs. MUL had to overhaul its 800 engine to convert from carburretors to fuel-injection systems and this obviously pushed up the vehicle cost. Similarly, the Indica and the Santro jacked up prices to pass on the increased costs of making their cars Euro-I compliant.

One issue that still haunts the industry is indigenisation. While the Santro smartly started off at a very high indigenisation level of 80 per cent-plus, enabling competitive pricing, the Matiz faltered on this count. The Fiat Siena is still an assembly of imported knocked-down kits as also the Baleno and the Honda City. High import content means these models are outpriced in the market. It is actually a closed loop where the demand is stunted because of the higher prices because of a large import content and manufacturers being unable to indigenise due to the low sales volumes.

It would take some extra commitment by the manufacturer to break out of this loop as this involves upfront investment of money and time in indigenising so that the price of the model can be brought down. Hyundai demonstrated this both with the Santro and the Accent and the results are evident with the Santro rising to the second position in its segment after Maruti.

Road-map for the future THE BUOYANCY in the car market is likely to continue in the medium-term. The Indian car market may be small by global standards, accounting for less than 1 per cent of the world demand, but it is one of the fastest growing. The Western markets, particularly the US, have matured and the growth rates there are not enough for the big players. This has forced them to turn to the Asian markets, especially India, which has been growing impressively in recent times.

Thus, competition in the domestic market can be expected to remain stiff and even intensify as the global majors slug it out. It would be as much a case of supply driving demand as the other way round. Assuming that the government drops taxes on cars, demand could shoot up exponentially, especially in the mass market small-car segment. Fiscal 1999-00 could see the industry end with total sales of around 6.25 lakh vehicles, and assuming a growth rate of 20 per cent, this should swell to about 7.5 lakh by end 2000-01.

Maruti Udyog would account for a major chunk of this demand. With its expanded capacity of 3.50 lakh vehicles, the company can technically produce up to half-a-million vehicles per annum; it sold 4.06 lakh units in 1999-00. Given its inherent advantages in terms of sales and service network, brand equity and range of models, MUL can be expected to keep ahead of the other players comfortably. Of course, it is likely to take a knock on margins and profitability as promotional spending increases. The company's margins on the Baleno and the Wagon R are also taking a hit.

Among the others, Hyundai, which is supposed to have already gone cash-neutral, may see profits this fiscal and there has also been talk of an IPO by the company. It is still a long road ahead for Ford, General Motors and Honda which are nowhere near break-even volumes. Fiat is still reorganising its set-up and is not out in full force yet. As for Hindustan Motors, the company has to re-focus rather quickly if it is not to lose out in the race.