The 150,000th car

By C. R. L. Narasimhan

Last month end, Hyundai Motor India Ltd. (HMIL) rolled out its 150,000th vehicle. Reaching that milestone barely 25 months after going into commercial production, the Korean auto maker is set to prove many other points as well. Its factory at Irungattukottai near Chennai is working at full capacity. Which means that unlike most other car makers, Hyundai has been able to assess the Indian market accurately.

Recently there has been further proof of its success in terms of the all-important financial yardstick.

HMIL has just confirmed what many analysts had speculated for long: that it will be the first of the new auto makers to turn in an after tax profit. According to a press release, the company had earned a net profit of Rs. 59.34 crores on a turnover of Rs. 2,314 crores in 1999-2000. Depreciation accounted for Rs. 113 crores and the profit before tax was Rs. 67.61 crores.

Impressive performance

These numbers based on audited results are especially impressive because they relate to the first full year of the company's commercial production. This debunks the theory that greenfield auto ventures - capital intensive and with long-gestation periods - can not break even leave alone earn a surplus except over the long term. How Hyundai (but Hyundai alone) could turn such conventional wisdom on its head should make for an interesting case study in an engineering or management institute.

``We are in for the long haul.'' Everyone connected with the auto industry has heard such statements so often from senior representatives of the auto multinationals. The trick, according to them, is to wait till India becomes a big enough market for their cars. But how long will that be? Surely even if their Indian operations are, as of now, only a blip in their mighty balance sheets, there is an ever escalating cost that has to be recouped at some point.

Neither GM nor Ford Motor India, the world's number one and two manufacturers respectively, has bothered to introduce a car that could be sold in reasonable volume in the Indian market.

Ford, which has had a comfortable headstart over Hyundai while setting up shop in India, has so far sold nearly 20,000 IKON (barely a seventh of the Korean maker's output). GM's volumes are even lower.

Of course, there are counter arguments. The economics of an auto manufacturer does not necessarily depend on volumes. As a general statement, it is true to say that a higher priced product contributes more per unit sold than a lower priced product. One, therefore, presumes (but can never be sure) that one IKON sold is worth more to Ford than what a sale of one Santro does to Hyundai.

There should be more contribution to Hyundai when one Accent gets sold compared to one Santro sold. Again, within the same model there are extra features added. The contribution enhancing theory as accountants will vouchsafe is behind auto companies' attempts to add extra features to the same model of a car. A fully ``loaded'' car contributes more to its manufacturer's revenues than a base car. Therefore, in current auto lingo, it pays to be present in the C&D segment, even if volumes are relatively low.Again, it is preferable if customers go in for a car with maximum features. The bigger - strategy - angle here is whether to start from the top or build from the bottom. The majority - Daewoo, Ford, GM and Honda - opted for the first and Hyundai alone the second. The financial results now available vindicate the second approach and Hyundai's strategy.

Other theories that are on test are: (a) It will not do to offer just one model even if that comes with mindboggling variants. Hyundai introduced the Accent on top of a highly successful Santro launch. Interestingly, both the cars have variants. GM, despite its current low levels of output, is persisting with a two car strategy: the newly introduced Corsa and the older Astra. Both come with a variety of options. However, the results of this strategy in financial terms are not known. (b) That the export route is one sure way to develop economies of scale. In November, Ford and Hyundai have reported impressive exports. The big question, however, is whether those exports are for meeting the obligation assumed under the trade policy.

In the absence of a sizable indigenous vendor base for components, Indian cars may not be competitive in the export market. Even assuming that a ``Made in India'' car will sell in a developed market. It does not require any analysis of the auto companies' financial performance to say that the domestic market is by far the most crucial. However, it helps to have financial data. In fact, the forthcoming debate over the feasibility of second-hand car imports cannot be concluded unless there is a greater financial transparency.

Barring Daewoo and Telco other car manufacturers have not listed on the Indian stock exchanges. (Even Maruti is closely held but because of the Government's equity stake there is a disclosure of its financial results). Very little is known about the rest of the passenger car manufacturers' financial health. This makes inter firm comparisons impossible.

For now Indian customers and industry watchers have to make do with the monthly car sales figures doled out by the respective companies. These are not audited by anyone. Availability of financial information will prove an advantage to the car buyer. Besides, for understanding the industry economics and passing comments on matters such as the new auto policy, the financial performance of the existing makers needs to be assimilated.

The rolling out of the 150,000th car by a new manufacturer is also an occasion to revisit the not so transparent assumptions of the passenger car industry.

Send this article to Friends by E-Mail

Section  : Business
Previous : India moots guidelines on visas, work permits at
           the WTO
Next     : FIIs net sellers in equities