Thursday, December 2, 2010

The Indian Auto Story:MILES TO GO BEFORE IT SLOWS!

(Published in Top of  Mind, Nov 2010)

When TOP OF MIND called me to figure out if the current growth rates of the Indian car industry were sustainable, I responded with an emphatic ‘YES’! India has just started stretching its legs! The official Frost & Sullivan estimate for the growth of the passenger car market in India is 18 percent (CAGR). And these estimates are not founded in optimism, but grounded in reality.

The Indian car market is really in a state of infancy. The penetration is so low in comparison to not just developed markets, but even those in comparable stages of evolution. The number of cars per thousand, in India, is between 12 and 13. In a market like Thailand, this number stands at 25 to 30. In markets like Malaysia, there are 250 cars per thousand people. In developed countries like the US and Australia, the figure stands at a whopping 500!

Affordability of various customer groups in India is improving. As more Indians become more affluent, the number of cars will go up. We may not have a car for every two people immediately, but the number cannot remain at 12 or 13 per thousand. So if one is wondering if the high sales figures we’re seeing in the market now represent a peak that will start waning, they couldn’t be more wrong. It is a intermediate peak, from where the number of cars sold will go up further steadily.

Various markets across the world follow a typical curve for growth of automotive markets. The graphs below indicate Penetration of car per thousand Vs per capita GDP on PPP basis. The curve indicates the path the market is likely to follow as the per capita GDP increases.  

The biggest hurdle to this trend would be lack of infrastructure development. It is not keeping in pace with the market growth rates. (may be you can elaborate on that)

New Markets

So where is this new market coming from? Is it from the second or third car for the house being bought? Is it the bike user graduating to buying a car? Or is it a new segment that never thought about a car ever, but is suddenly waking up to the idea of owning a four wheeler?

It’s actually a bit of everything. In India, there is a new segment emerging at every layer of the pyramid, climbing one step upwards on the consumption front. So there’s a new segment fuelling demand for cars, there’s one driving growth of two wheelers, and one driving sales of bicycles! Take the Tata Nano for example. In some cases, it has become the fourth car in the household. In others, it’s the first car for those who aspired to buy one. And then there are others, who never thought of buying a car, who own one today. Take, for instance, the case of a 65 year-old gentleman, who hadn’t thought of buying a car, never felt the need for it. Suddenly, there’s something that lures him in terms of affordability, he finds that the vehicle is easy to handle, and he buys in for the convenience of a car at his disposal.

And it is not that the car market is growing at the cost of two wheelers. There’s growth all around. If there’s a new market for cars, the same is true for two wheelers too.

Role of Marketing

If one contends that the demand we’re seeing is a function of incentives and promotions and marketing campaigns, I beg to differ. Marketing has some role to play in the growth of an industry, but it cannot create demand per se. The fundamental economic factors need to be in order. And they are very much in order in the Indian market.

Marketing cannot invent customers. But, with a great product and marketing campaign, what you can you can do is pre-pone the purchase. Someone looking to buy two months later will buy today, if incentivised enough. There is a notion that some of the discounts and promotions create demand - that is not true. The purchase happens earlier, and when you withdraw the offer, the sales figures drop.

The More the Merrier

The Indian customer is finally getting to pick and choose from the best there is in the world, besides the home grown auto majors like Maruti (Suzuki), Tatas or M&M. The number of players today reflects an integration the Indian auto industry with global markets. All the players who are present in other markets have entered the fray, and it is exciting times for car buyers. They are being spoilt for choice the same way their counterparts in other markets have been for some time now! It’s about time too.

In mature markets, the top three players will have, at best, 30 to 35 percent of the market. In India, Maruti, Hyundai and Tata Motors have, between them, 70 percent of the car market! This is unique to the Indian market and it also reflects the potential that exists to grow with the market. I would dare say that the number of players in India hasn’t hit the ceiling yet!

But it won’t be cake walk for the new entrants. In China, they’ve figured things out. With everything from sourcing to distribution in place, the task now in China is one of execution. In India, new entrants will be finding their feet in terms of sourcing, production, positioning, distribution and after sales, among other things. The established and entrenched players enjoy the advantage of having figured things out earlier.

Rising Prices? No Big Deal!

Rising prices in the auto industry is a function of rising input costs. And at most times, the price change would be a collective decision by the industry, because the rise in input cost affects everyone. Also, the price rise is typically never more than 2 to 5 percent. So when the price rises from say, Rs. 3,00,000 to Rs. 3,15,000, the impact is minimal. Yes, there will be an impact, but it will be a short term impact. One has to look at it relatively: If both Maruti’s and Hyundai’s prices have risen by Rs. 15,000, and I have already decided to buy one of the two cars, I am not going to stop from buying because of the price hike.

What will affect demand are things like a huge hike in the Excise Duty, for example, by the government. If the duty goes up from 8 percent to 16 percent, then we have a problem. Minor changes in pricing will not result in more than seasonal fluctuations.

Seasonality of Purchases

This exists across markets: there are times when it is considered auspicious to buy a car, and there are periods when people avoid making any kind of purchases! Indians would be only too familiar with the entire concept of ‘auspicious day’ to buy something. What’s interesting, is that even in Singapore, we have a month called the ‘Hungry Ghost Month’, when people avoid purchases altogether!

So how should marketers and auto companies handle such beliefs? You can’t, obviously, wish them away! What marketers need to do is account for these seasonal fluctuations. If there is a community that believes in not buying a car in a certain period, can we look at other segments that do not share the beliefs of that community? There is a need to adjust not just production, but also promotion, according to the pulse of the market and such seasonal variations. Segments that do not follow that belief of ‘Don’t Buy period’ can be incentivised during this period.

A Customer at Every Price Point

This is one of the things that makes the Indian market unique - within the same segment, the market leader, Maruti, has a multitude of offerings. In effect, there is a car which is Rs. 50,000 or Rs. 75,000 more than the next model from the same stable. A car buyer can choose from an Alto, WagonR or A-Star, going up to the Swift, if compact is what he is looking for. While this can at times confuse the consumer, it gives the company a presence at every possible price point, with variants to boot. In other markets, the models are not priced so close to each other, but variants would.

This is something that has worked wonderfully for the car maker in India. It is also reflective of the Indian market, where there is a customer available at every price point! Having a range of products within a segment helps make the brand stronger, because you can address various customer segments within a particular range. There’s virtually no gap in the portfolio of Maruti in India.

In terms of the overall number of models available, across players, it is bound to go up further. In comparison with the US, Australia or even Malaysia, Indians still have fewer models to choose from. As the market progresses, the number of models will go up too.

‘Indians are Value Conscious’. Who Isn’t?

Across the world, customers seek value, and this is true of automobiles too. There are many countries where Value-For-Money (VFM) is the most important criteria affecting choice of car. We have an award at Frost & Sullivan called the VFM Awards, in several markets like Malaysia and Singapore. In the Malaysian market, there is a company called Peruguva VIVA that has come out as the top rated company consistently. In Malaysia, the affordability is pretty high, but consumers still seek VFM.

In the US market, the fastest growing cars last year were Hyundai and Kia. These represent VFM. They were growing at 10 to 12 percent when the rest of the auto companies were registering a drop in sales.

Made in India. Sold The World Over.

The domestic sales of cars in India are higher than its exports, and that is because the domestic demand is so high. That is not likely to change because the domestic demand is not going to dry up soon. However, there is huge potential for India to emerge as a small car hub - that export potential is real and is being reflected by developments already.

The export potential is determined by the kind of product you have competency in. Across industries, and especially in manufacturing, it is about having the competency across an entire supply chain. Thailand, for example, ha the entire supply chain for manufacture of pick-up trucks. It has hence become the production hub in the region for pick-up trucks.

India has developed that potential for small cars and foreign companies are paying attention to this aspect too. On the exports front, export-focused models are being manufactured in India, whether it’s the Hyundai Santro or the Maruti Suzuki A-Star. Very few countries have the competency to be a small car hub. We will see foreign players enter India not just with an eye on the market, but also with strategic intent like production of certain types of engines. The vendor community that services the auto industry stands to benefit, even as exports from the region will benefit the nation.

The Top of the Pyramid

The top end of the market, which is addressed by players like Mercedes, BMW, Audi and Lexus, is still largely untapped. Luxury or premium cars, as a percentage of cars sold worldwide, is hardly 3 to 5 percent. Manufacturers catering to this segment are sensing this opportunity. For these companies, the absolute volumes that India’s upper crust and upwardly mobile represent is exciting, even if it is not so large as a percentage of the population.

What is the motive to buy luxury cars? The motives are the same as the ones that give customers the propensity to indulge in other premium and luxury goods, coupled with the ability to buy. So as a category, and as a paradigm, luxury is something that is bound to grow in India. It is only natural that luxury cars will grow with the trend.

Road Ahead

From the products perspective, India is unique in terms of the number of small and medium-sized cars of the total cars sold. There is an obvious skew towards small and medium-sized cars, possibly because of the large middle class belly that exists and the narrow roads in our country. In that sense, the Indian car market is charting its own course.

Things are looking good for the Indian car companies. The total demand in a market is defined by what we call the Gompertz Curve, which evaluates penetration of cars against disposable incomes. The Indian market is pretty much following this curve and is expected to in the future as well.

This indicator of future demand has been quite accurate in other global markets as well. So, there’s enough reason to cheer the market on, as more and more people get behind their new set of wheels. Common sense tells us that the need for mobility is so high, that people will need to commute, and when they can afford it, would like to do so in the air-conditioned comfort of their cars.
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