International -- Asian Business: INDIA
A SWARM OF BUGS IN INDIA (int'l edition)
Auto makers are gunning for the only viable market: Minis
Almost all of the neat, spacious factory of Tata Engineering & Locomotive Co. (Telco) in western India is open to visitors. Except for one part: Plant A, where engineers are working feverishly on a small automobile that is scheduled to appear late this year. The reason for the secrecy: This is Telco's first-ever passenger car, and the company doesn't want rivals getting a peek before the launch. This model will challenge the most popular car in India, the $6,600 Maruti 800 compact made by Suzuki Motor Corp. in a joint venture with the Indian government.
Telco is not the only carmaker taking on Maruti. Unable to make money in a high-end market that never materialized in India, auto makers are now shifting gears and targeting India's lower-end consumers. Korea's Daewoo Corp. and Hyundai Motor Co. both plan to introduce budget cars by the end of 1998. Fiat has big plans in India for its Uno compact, which is already on the road. "The race is on for the small, budget car," says Indian auto analyst Hormazd Sorabjee. The companies will be promoting their wares at India's auto show, which opens on Jan. 15.
NEW MIND-SET. It's a perilous time to be pursuing ambitions in India's car market. In part because of the growth slowdown affecting all of Asia, Indians are banking their money rather than making big purchases. As a result, Indian auto sales--which have risen 25% annually since 1993--rose just 7% in 1997. The market for midsize cars priced up to $20,000 shrank 4% as India's expanding middle class failed to trade up to roomier vehicles with more features. Forecasts that predicted annual new-car demand would reach 1 million in India by 2000 are unlikely to be fulfilled.
The shortfall in sales has left auto makers with about 30% excess capacity in their plants in India. France's Peugeot pulled out of the country in November after a year of production problems and disputes with its partner, Premier Auto.
Carmakers are realizing they have to lower their expectations--and their prices--to compete. Daewoo Motors India, which launched its 1,600cc Cielo for $15,000 in 1995, has had to discount prices by 15%. Its Indian plant is operating at less than half its annual capacity of 25,000 cars, but the company says it has no plans to pull out of India. Ford Motor Co., too, has had to scale down production. Despite coming out on top of consumer satisfaction surveys, Ford is selling 30% fewer Escorts than the planned 16,000 per year. Ford introduced $16,000 to $22,000 models in 1996 and overestimated buyers' affluence. "Our Escort, which in most markets is a family car, is an ultraluxury car in India," says John Parker, president of Mahindra Ford India, the joint venture that makes the Escort. "So we have to change our mind-set." Ford may consider a budget car in 2002.
ROCKY ROADS. The low end, currently 90% controlled by Maruti, seems to be the only segment with any promise because it appeals to first-time buyers. Hyundai's Indian subsidiary is building a $1.1 billion factory near the southern city of Madras to produce a new 1,000cc hatchback, the Santro. The car will have higher ground clearance to navigate India's rocky, rutted roads. It will also meet the latest European emissions and safety standards, which Hyundai says India's finicky consumers want. The car, expected to cost $8,400, will compete with Maruti's Zen, which has a 1,000cc engine and costs $9,500. Meanwhile, Daewoo is going after the Maruti 800. Daewoo's space-age-looking M-100 is priced at $8,100.
The timing may work well for those who would challenge Maruti. The Indian government and Suzuki have gotten into a bitter public spat over who to appoint as the joint venture's managing director, and the matter has gone to arbitration in Geneva. That has slowed the decision-making process at Maruti headquarters, creating a window of opportunity for competitors working full speed at getting their models to market.
Maruti's long-awaited $350 million expansion program to add 100,000 units to its existing 350,000, for example, will now be completed in 1999, two years behind schedule. Arindam Bhattacharya of consultants A.T. Kearney Inc. says that to defend its position, Maruti has to roll out a new product in the next two years or lower prices. But Maruti remains confident. "The market will grow, and new players will help expand the customer base," says Maruti Marketing Director Jagdish Khattar.
INDIAN PARTS. The most interesting challenge to Maruti's dominance is likely to come from Telco's 1,400cc small car. Although it is designed by an Italian company, the car will be made completely from Indian parts, a point that should appeal to national pride. Analysts point out that while Telco is a truckmaker, it has been making popular sport-utility vehicles and has plenty of engineering expertise in-house. "Telco has a simple value-for-money approach, a strong distribution network and brand name," says Neeraj Bhagwat, auto analyst at W.I. Carr in Bombay.
Yet even mighty Telco may have trouble making much money in the small-car segment. Profit margins are typically 20% to 30% lower than on larger cars, analysts say. The Maruti 800 makes a decent 7% margin--but only because its high-volume manufacturing helps the company achieve big economies of scale. If Maruti's management spat is resolved and the company holds on to most of its share, none of its rivals is likely to profit much from a foray into selling to the masses. The question is how long all these carmakers can hold on if the road gets too crowded.By Manjeet Kripalani in BombayReturn to top