Actes du GERPISA n° 28 35

THE INDIAN AUTOMOBILE INDUSTRY :

SPEEDING INTO THE FUTURE ?

Avinandan Mukherjee

INTRODUCTION of CBU to 110%, and commitment to

indigenization schedules.
Peter Drucker called the automobile industry as The Government of India's new automobile
"the industry of industries". During the last few policy attracted a large number of automobile
years, the production and management systems companies to India. These include General Motors
have been revolutionized in the automobile and Ford, and two Japanese, seven European and
industry (Karmokolias, 1990). One of the major two Korean companies. Toyota and Chrysler are
changes in the industry has been the opening up also seeking to enter the country with suitable
and growth of several emerging markets. India is Indian partners. In addition, there are three existing
one of the most important emerging car economies Indian companies, Hindustan Motors, Premier
in the world today. Automobiles and Telco, and one Indo-Japanese
In 1991, the Government of India embarked on venture, Maruti already in the passenger car
an ambitious structural adjustment programme market. Maruti is by far the biggest player with
aimed at economic liberalization, based on the about 70% of the market share. As of April 1997, a
pillars of Delicensing, Decontrol, Deregulation and total of 7 Automobile companies (Daewoo,
Devaluation. Post-liberalization, the Government Peugeot, Fiat, Ford, General Motors, Merc, Audi)
of India's new automobile policy announced in have already started selling cars, while another 8
June 1993 contained measures, such as delicensing, companies (Honda, Mitsubishi, Renault, VW,
automatic approval for foreign holding of 51% in BMW, Toyota, Hyundai, Chrysler) have either
Indian companies, abolition of phased begun operations in India or plan to start soon.
manufacturing programme, reduction of excise Some Indian companies like Telco and Kinetic are
duty to 40% and import duties of CKD to 50% and also working on introducing small car models.
36 Actes du GERPISA n° 28

The number of new entrants and the level of The supplier industry also faces enormous
investment within a very narrow time window of challenges to keep pace with rapid growth.
two to three years is unprecedented and seems Manufacturing practices will have to change
unique to India. Compared to three major models considerably to come closer to lean production.
available in the Indian market until recently, It is also possible that some companies will
customers can now choose from a wide variety of increasingly use India as a base for exporting
products. vehicles to other countries. These issues will
Some of the entry barriers faced by automobile become clear as the future unfolds
companies in India are relatively high levels of The Indian automotive industry has been
import duties, a nascent ancillary industry, and growing for the third year in succession at over
product modifications required for relatively poor 25%. The number of persons per car is 200, which
road conditions and high levels of heat and dust. is very large compared to other emerging markets
On the other hand, a rapidly growing middle class, like Korea and Brazil which have about 12 persons
rising per capita income, and high levels of latent per car.
unsatisfied demand with customers starved of There is therefore a very huge untapped market.
world class options promise enormous Compared to three major models available in the
opportunities. For instance, from current sales of Indian market until recently, customers can now
around 300,000 passenger cars in 1996-97, sales choose from a wide variety of products. Mukherjee
are expected to rise to anywhere between 850,000 and Sastry (1996) provide an analysis of the entry
to 1.7 million vehicles by the year 2000. strategies of the new entrants. Tables I to IV in the
Automobile companies have announced plans to Appendix describe different elements of their entry
instal capacity of around 900,000 vehicles by the strategies.
year 2000. The number of cars sold over the next The future looks promising since the economy
four years is going to be anywhere between 2 and has been growing at nearly 6% in real terms,
3.5 million vehicles.It is not certain how exactly inflation is relatively low at less than 6%,
demand will grow and on what factors it will consumption is growing at 11%, and deregulation
depend, and whether there is room for so many and market liberalization are now difficult to
players. reverse.

Table 1. – Prospects in the Automobile Industry

Cumulative Investment Turnover

1996 2000 1996 2000

Automobile Industry 80* 280 225 1 200

Auto Components 35 135 70 700
Transportation Industry 300 900 2 000 5 000
*
All figures in billion Rupees. Currently, US $1 = Rs.35.

As the data shows, the automobile industry does supportive government policies and trained
not dominate the transportation industry. Out of manpower. Major weaknesses are a small and
$17 billion fresh investments in the transportation fragmented ancillary industry, poor infrastructure,
industry up to the year 2000, only $5.7 billion will low level of diffusion of lean manufacturing,
be in the automotive industry. Turnover figures improvements needed in quality and productivity,
include sales for trucks, cars, utility vehicles like and lack of product development capabilities.
jeeps, and two wheelers. The opportunities that the industry offers are a
The share of passenger cars is much lower and large untapped market, and a possible production
is expected to rise from 11% currently to the 15% base for exports. Some MNCs like Maruti-Suzuki
to 20% range by the year 2000. Some of the have already started using their Indian plant for
strengths of the industry are low labor costs, exports.
Actes du GERPISA n° 28 37

DEMAND ESTIMATES between 850,000 to 1.5 million vehicles by the year

2000.
A rapidly growing middle class, rising per It is worth noting that in the past 15 years, all
capita income, and high levels of latent unsatisfied demand projections have been exceeded. It remains
demand promise enormous opportunities. For to be seen if this will be true of current projections
instance, from current sales of 312,000 cars in also. The following table summarizes industry
1994-95, sales are expected to rise to anywhere performance in the past five years.

Table 2. – Industry Performance in 1991-1195

1991-92 1992-93 1993-94 1994-95 1995-96 Average growth

(first 9 months) since 1992-93

Production 198 000 202 500 257 500 323 000 N.A. 26%
Sales 202 000 206 000 260 000 312 000 287 000 23%
Exports 25 600 16 000 19 000 22 900 N.A. 20%

Even though growth rates are impressive, urban incomes are lower, but disposable incomes
uncertainty about the extent of demand growth are higher because of lower house rents and cost of
persists for several reasons. The price to income living, and because agricultural incomes are
ratio for the middle class consumer is too high. exempt from tax. The current state of rural roads is
Currently the price of a car is about 18 to 24 very poor. The government has allowed private
months salary, and therefore price is perhaps one of parties to build international class highways and
the most important variables determining demand. collect tolls in some areas. If roads in rural areas
However, incomes are rising rapidly and inflation are developed, then car sales are likely to grow
seems to be under control. Car prices are also likely very fast since these areas have very low market
to remain fairly steady as companies indigenize penetration.
component production. Excise duties are high at In addition to price, duties and taxes, economic
40%. If these are reduced, it is likely to spur growth and availability of adequate road
growth. On the downside, infrastructure in roads is kilometers, another factor affecting demand is
very poor, and traffic congestion in many cities is availability and cost of credit. Vehicle financing
very high. has boomed, and currently is around $1.6b,
Of the total of 170 million families in India, covering 25% of industry sales. This figure
effective purchasing power is estimated to be with includes credit for all vehicles including two
24 million families, which includes 4 million wheelers, trucks and buses. Many companies also
families which are in the top income bracket, and provide new cars or soft loans for buying cars to its
can buy luxury and premium cars. These figures executives as perks. The following table shows the
are rising rapidly since the economy is growing credit made available to customers over the last
steadily at 5% to 6%. Rural incomes compared to two years.

Table 3. – Credit to Customers, 1994-1996

Car Financiers Credit Offered Credit Offered

(Rs. billions) (Rs. billions)
1994-95 1995-96

Citibank 3.0 n.a.

Ford Kotak Mahindra 2.25 3.75
Apple 2.55 n.a.
SRF Finance 1.98 2.2
GLFL 1.90 3.8
38 Actes du GERPISA n° 28

Table 4. – Capacities Planned by Major Companies

93/94 94/95 95/96 96/97 97/98 98/99

HM 26 137 26 115 26 000 25 000 24 000 23 000

PAL 25 002 27 807 11 000 11 000 11 000 11 000
MUL 152 539 199150 250 000 300 000 360 000 420 000
TELCO 3 994 12 540 25 000 40 000 82 000 205 400
PAL-PEUGEOT - - 14 000 30 000 45 000 55 000
DCM DAEWOO - - 20 000 30 000 37 500 45 000
M&M FORD - - - 5 000 15 000 20 000
GM-OPEL - - 3 500 7 500 12 500 17 500
FIAT UNO - - - 5 000 12 500 17 500
MERC TELCO - - 2 000 5 000 7 500 10 000
HM MITSUB - - - - 5 000 10 000
SIEL HONDA - - - 2 000 7 500 10 000
TOTAL 210 672 265 612 351 500 460 500 619 500 844 400
GROWTH RATE 28.6 26.1 32.3 31.0 34.5% 36.3%
(%)

Automobile companies have announced plans to The demand estimates do not include utility
instal capacity of around 900,000 vehicles by the vehicle (jeep) sales, which are classified as "off
year 2000. It is estimated that the number of cars road vehicles". Separate figures have been
sold over the next five years is going to be furnished for cars and for all vehicles including
anywhere between 2 and 3.5 million. trucks, buses, utility vehicles and two wheelers.

Table 5. – Demande Estimates

Report Passenger Car Total Vehicle

Demand Demand
(2000 AD) in '000s (2000 AD) in '000s

DRI/McGraw - Hill 502 5,100

McKinsey - EU 833 4,700
Association of Indian Automobile Manufacturers (AIAM) 600 5,000
INFAC 580 3,900
Morgan Stanley 576 5,500
Manufacturers' estimates n.a. 5,400
Based on mobility trends 1500 7,000

Source : Shah, S.G. "Shaping the Indian Automobile Industry," Association of Indian Automobile Manufacturers, 1996 ; Business
Standard Corporate Bureau report "Demand for cars to zoom to 1.5 m : survey," Feb 1995.

Car sales are expected to be in the region of THE INDUSTRIAL STRUCTURE

600,000 to 1.5 million vehicles by the year 2000.
The sales of lower end luxury cars is expected Suzuki was the first MNC to enter India in 1981
to account for 26% of the total market, i.e., 200,000 through a joint venture with the Government of
cars by 2000 AD. The industry will have to live India and set up Maruti Udyog Limited. Currently,
with uncertainty for the next two years before Maruti has around 70% of market share, and the
things become clear. Maruti 800 in the small car segment is the best
selling model.
Actes du GERPISA n° 28 39

Since 1995, the industry is witnessing a sea With so many MNCs entering the growing
change with the introduction of several new models Indian market, there will be a push towards lean
by MNCs coming into India through joint ventures production. Maruti has implemented JIT for some
with Indian partners. In the super-premium of its major suppliers. Some others are in the
segment there is the Mercedes Benz's E-class process of doing so. There is a stress on quality in
sedan. BMW and Audi are also considering plans the highly competitive industry. However, the
to sell cars. New introductions in the premium success of lean production at the industry level
segment are General Motor's Opel Astra, PAL depends not only on the efforts of the assemblers,
Peugeot's 309, Maruti's Esteem, Telco's Sumo, but also on the suppliers and on institutional and
Estate and Sierra, DCM Daewoo's Cielo and cultural factors. The bargaining power of suppliers
Sipani's Montego. In the economy car segment, of some components is high, because of capacity
Fiat Uno and Telco are expected to produce 60,000 constraints. This makes them accept only large
cars each per annum. orders, and therefore makes it difficult for
The power relationship between automobile assemblers to implement JIT.
companies, dealers and customers is going to
change substantially as the industry moves from a Government Regulations
supply constrained sellers' market to a demand The Indian government has made significant
driven buyers' market. Thus dealers and customers shifts in its policy towards the automobile industry.
are going to acquire greater power. Ever since independence, the government
considered the passenger car to be a luxury item,
Adoption of Lean Production and imposed very high tariffs. Since the economic
Since the Indian industry started mass liberalization launched in 1991, the Government of
production only in the mid 1980s with the arrival India's automobile policy announced in June 1993
of Maruti Udyog Limited, the transition to lean has changed. The excise duty varied as follows
production is likely to take time. over the last five years.

Table 6. – Duty Variations, 1984-1994

1984-85 1990-91 1992-93 1992-93 1993-94

15% 42% 66% 56% 40%

The import duty on car components increased component imports has not been specified. This has
from 40% to 75% during 1984-91 and then came helped companies to take advantage of the
down to 50% recently. Thus duties and taxes ambiguity. The phased manufacturing program
continue to be high by international standards. (PMP) which was in force till 1993, and required
These might be brought down in future as the component imports to be brought down within a
industry becomes more competitive. fixed time-frame has been withdrawn. However,
The Government of India has reduced its direct the licensing required by CKD assemblers from
control on the automobile industry following the phase to phase and for capacity expansions puts
announcement of the new automobile policy. Entry pressure on companies to indigenize.
of MNCs is permitted, either as joint ventures or on
their own. However, the indirect impact of Suppliers
government policies on the industry still remains There are about 6,350 small and large
far from insignificant. The government has levied component manufacturers in India, out of which
110% customs duty on completely built units about 350 are in the organized sector and are
(CBU) and 50% on CKD and parts. There are registered with the Automotive Components
several areas where there is ambiguity. At the Manufacturers Association. There is a sizeable
moment, the duty on both CKD kits and replacement market for parts and components, but
components is 50%. However, though component this market is heavily dominated by manufacturers
imports do not require any license, CKD imports who sell unbranded products at very low prices.
need a license. The difference between CKD and The component manufacturers therefore have to
40 Actes du GERPISA n° 28

rely on assemblers in the domestic market. The India would need to adjust to a situation where the
industry had a turnover of about $2.7 billion in customer has a wide choice.
1995-96. Although this is not impressive, industry In the current auto marketing system, the dealer
sales have been growing at nearly 35% since 1992- orders cars in advance in a `push' system driven by
93, and turnover is projected to reach about $6.4 the automakers' agendas, and in turn the dealer has
billion by the year 2000. Exports are projected to to bend the customer's requirements to existing
reach $565 million by the year 2000. stock. The typical Indian auto dealer has
Tooling costs for suppliers remain the same for traditionally confined his role to collecting
10,000 units or for 100,000 units. Till assemblers payments from customers and supplying the car to
achieve volumes, it is not profitable for suppliers to the customer after he receives it from the factory.
accept orders. Assemblers are thus forced to import However, with wider consumer options, auto
components. This pushes up costs and currently retailing in India is set to change. The new
prices as well, which in turn affects sales and multinational companies are trying to revolutionize
growth. Maruti developed a quality vendor base the concepts of car delivery and after-sales service
over a period of 10 years. However, new entrants in India, and are coming out with several
can expect to develop a supplier base faster. innovative retailing ideas to win customers.
The Indian auto component industry has had Customers are demanding more voice in the
some success in developing parts and components options they want and the cars they buy. This in
including collapsible steering columns, brake turn will force dealers to be more customer-
linings, power steering, catalytic converters and oriented. The emerging system of `customer pull'
central locking systems. Current technology translates to empowering the customer and creating
upgradation is in plastics, trims, electronics, anti a genuine symbiosis between the customer, the
locking braking systems, and environment and dealer, and the automaker. Technology is playing a
safety related items and materials. International major, possibly revolutionary role in this new
supplier firms are looking for Indian partners in a thinking and is increasingly expressing the voice of
variety of areas. Thirteen new joint ventures were the consumer. Dealers would need to change to
formed in 1995, and many more technical address the new market conditions. These factors
collaborations are being finalized. would require even better coordination between the
A large business delegation from CLEPA, the manufacturer and the dealer. With greater
Liaison Committee for the European Automotive competition, the Indian car manufacturers and
Components and Equipment Industry, visited India dealers are also likely to adopt advanced country
in February 1996. Further collaboration between practices, like large dealer groups, multiple outlets
Indian and European suppliers is likely to take per dealer, company-owned dealers, higher sales
place.Industry analysts expect that products made per dealer, higher margin to dealers, changing role
by new joint ventures will not only serve the Indian of the dealer as a retailer, etc.
market, but would also be exported. Export focus is
shifting from traditional markets in Asia, the
Middle East and Africa to North America, Europe THE MARKETING QUESTIONS
and Australia.
Market Segmentation
Distribution Channels The Indian automobile market is still in its
The distribution environment for automobiles in evolutionary or early growth stage. Therefore, no
India is quite different from that of most advanced fixed or widely accepted method of segmenting the
countries. Such differences exist in type and size of market has evolved as yet. Segmentation has
dealers, number of dealers, car supermarkets, mostly been done on product types or price ranges.
vertical integration, functions of dealer, bookings, There has hardly been any kind of segmentation on
financing, manufacturer-dealer relationship, psychographic or behavioral parameters as seen in
number of cars sold per dealer, margins, and developed car markets. The segmentation provided
market environment. Having operated for years in a in this paper is based on an understanding of the
supply-constrained industry, most car dealers in current state of the industry.
Actes du GERPISA n° 28 41

These segments are quite different from the Tata Sierra, Peugeot 309, Opel Astra, Cielo,
segments known in the US, European or Japanese Ford Escort, VW Golf, Mitsubishi Lancer,
markets. Rover Montego.
The following four segments based on price and Ø Super-luxury segment, comprising cars priced
type of car have been identified: at higher than $ 33,333, e.g., Mercedes-Benz,
Ø Off-road or utility vehicles e.g., Maruti Gypsy, BMW, Audi.
Mahindra Armada, Tata Sumo.
Ø Economy segment, comprising cars priced at There is a significant variation in demand in the
less than $ 13,333, e.g., Ambassador, Premier four geographical regions of India. North India is
Padmini, Maruti 800. the largest market for cars in India currently with
Ø Luxury segment, comprising cars in the $ 43% market share. Next come west with 27% and
13,333 to $ 33,333 price bracket, e.g., Maruti south with 22%. East has the lowest market share
Zen, Premier 118NE, Contessa, Maruti Esteem, at 8%.

Table 7. – Characteristies of the Different Segments on Selected Parameters

Segments Economy Luxury Super-Luxury

Market Share (1994-95) 79.6% 5.4% 15.0%
Buyer Profile Households Households Corporates
Key Attributes Price Power Safety
Influencing Choice Operating costs Comfort
Driving ease
Driven By Owner Owner mainly Chauffer
Models Ambassador Zen Mercedes Benz
Premier 118 NE BMW
Maruti 800 Contessa Audi
Esteem
Sierra
Peugeot
Astra
Cielo
Ford Escort
VW
Mitsubishi Lancer
Rover Montego
Growth Rate pa (last 3 16% 140% 65%
years)
Demand Drivers Household incomes Status symbol Rising affluence
New products New models
Corporate executive Financing schemes
perks Income distribution
Owner Profile Small businessmen Senior corporate Businessmen
Corporate middle-level executives Diplomats and expatriate
executives managers
Basis of Competition Product features Product features Positioning
Price Price Spares network
Distribution/spares Distribution and services
network
Mfg. expertise
Funding schemes

Source : INFAC report on Cars.

42 Actes du GERPISA n° 28

Positioning like the Government. 40-45% of the taxi segment

The positioning of the brands in the Indian in the country and as much as 55% of this segment
passenger car market can be understood from the in the South is accounted for by Ambassador cars.
price-power map given in the next page. This map The Contessa Classic is a luxury car and is
gives an idea of competition in different segments. primarily targeted at corporate sector clients. Only
Since the Indian car market is in a state of flux, the 10-15% of the total purchases of Contessa is by
positioning of most companies in the consumer's individuals.
mind appears to be confused. However, the Opel Astra, the 1995 Opel model, is a leader in
companies have developed image-based the European car market and the largest selling car
positioning strategies for their brands. Some of in Europe. This model is being produced in the GM
them are : India facility at Halol. Astra is positioned as a
Ø Hindustan Motors (HM) - enduring, sturdy reliable family sedan in the European market,
Ø General Motors Opel (GM) - German which has been modified to suit the Indian market
engineering where it is an upmarket vehicle given the under-
Ø Daewoo - Family car developed market.
Ø Honda - superior aftersale service Around 60 to 70% of Astra's European market
Ø Peugeot - sound-free diesel engine is in the taxicab segment and is regarded as the
Ø Ford Esteem - smooth drive reliable second car for a family. In contrast, the
Opel Astra positioning in India is - " German
Ambassador car of HM is being mostly targeted engineered luxury car with safety features
for the taxi segment and for institutional purchases unmatched by others".

Table 8. – Price and Power Characteristics of Cars in the Indian Market

Price 2000 Merc E220

(in Rs.000)
BMW
1500
Rover
1000 Civic Opel
Cielo

500 Zen Esteem,

Maruti 1000
Uno PAL 118NE Tata Estate Contessa
Omni, Ambassodor Tata Sierra
Maruti 800
100
A B C D E
POWER
A - < 800CC ; B - 800 to 1000CC ; C - 1000 to 1500CC ; D - 1500 to 2000CC ; E - >2000CC.

Advertising & Communication most of the new entrants have changed several
Advertising in the Indian passenger car industry times within a short period of one year. The
hardly existed till the onset of competition. Today advertising strategies of some of the companies are
however, the industry is one of the highest given below as illustrative examples :
spenders on advertising among consumer durables. Hindustan Motors (HM) has traditionally put in
A sizeable bulk of this has been spent by the new advertising efforts for the low-selling Contessa
entrants to create brand awareness. An interesting Classic, and not so much for the good old
aspect to not is that the advertising strategies for Ambassador. But with a plethora of new brands in
Actes du GERPISA n° 28 43

the Indian market, HM has stepped up its man, a woman and a child. The brand's TV
advertising budget significantly. The company commercial features a young wife's testimonial of
feels that the importance of advertising is set to how gear-free drives can be romantic. Maruti's
further increase in this market with greater luxury brand Esteem have also been using `slice of
competition.The company is also introducing life' ads, with the family as focus.
several promotion strategies like Contessa Ford initially talked of their market leadership
Campaign Scheme, free servicing, shields for no- in US, European and Japanese markets. They then
problem performance and customer gifts. talked of Ford's new face on the global map - India.
Advertising has been concentrated to the print In the next stage, their corporate values like
media. The company also recognises that effective customer care and safety were highlighted. Now,
PR exercises would be a critical component of its the ads are showing the product, with stress on a
marketing efforts in future. `pulse racing' feeling and the endorsement of
The advertising communication for General Indian tennis star Leander Paes.
Motor's Opel Astra handled by McCann-Erichson Peugeot has advertised on TV, and mainly
India has seen some discernible shifts. Initially, it shows slice of life ads. One of its commercials
talked of a rare combination of German stresses on reliability of the car, as is manifested by
engineering, American management and Indian a man reaching in time to his wife on the verge of
values. Then, there was a delay in its product delivering a baby. The brand has been positioned
launch, and it showed ads showing a pregnant as `reliable', highlighting its endurance.
woman and saying: "All good things are worth the Mercedes-Benz car has been positioned as a
wait". Finally, when the car was launched, GM super-luxury car. Their ads in the print media have
advertised its launch and announced the opening of been consistent with the universal positioning of
an Astra club (of customers). Its ads now subtly the product.
point to European uppitiness and product
superiority. Quality, Technology and R&D
Daewoo's Cielo is positioned as a mid-size With increased competition, established
family car with a `value-for-money' proposition. It automobile manufacturers in India are becoming
should be noted that inspite of being in the luxury more conscious about technology and quality.
segment of the Indian market, Cielo is not These companies are incorporating ISO 9000
positioned as a premium car. This positioning certification and Total Quality Management as
strategy is in line with the brand's positioning in explicit corporate goals. R&D expenditure in
world markets. The advertising of Cielo has Maruti, Hindustan Motors, Premier Automobiles
perhaps seen the maximum changes till now. and Mahindra & Mahindra, the four companies
Initially, the theme of advertising for Cielo had with over 95% of the market currently, is very low
stressed on the image of the company and the and in 1994-95, the combined budget of these four
brand in international markets, in order to generate companies was $1 million or 0.38% of sales.
awareness. Once awareness was created, they However, Telco has been building product
stressed on product features. The campaign development capabilities in trucks, light
described the ownership as a `state of mind' on the commercial vehicles, and jeeps over the past fifteen
triple benefits of comfort, safety and power. The years and has launched the Tata Sumo and Sierra in
agency was also changed. Initially, Ogilvy and the market. It has plans to increase exports of these
Mather was handling the advertising for the brand. models.
Now, the job has been given to a new agency, Most of the MNCs entering the Indian
called Equus. Other than frequent advertising on automobile market are bringing in modern
television and print, the company also sends direct technology. Emission control techniques like
mails to prospective customers. Next, the company catalytic converters and injection technology are
launched some ads with witty and cerebral present in most models. The fuel efficiency of
headlines (e.g., `left brain appeal, right hand drive') these cars is higher than that of domestic models.
and detailed technical specifications in the body Foreign models are equipped with vehicle safety
copy. Now, the company is showing `slice of life' gadgets which have never been seen in Indian cars.
ads, showing the Cielo as a part of a family of a In fact, some brands in the luxury and super-luxury
44 Actes du GERPISA n° 28

segments are positioning themselves on the basis of Natural Gas have introduced unleaded petrol in the
safety and engineering excellence. metro cities from 1st April, 1995.
Some European car manufacturers have even Catalytic converters are now fixed on passenger
expressed an interest in introducing technologies cars sold in metropolitan cities, without imposing
for improving mobility, such as traffic the increased cost on customers. The Indian
management, planning and control to manage automobile industry will soon see better quality
traffic flow in metropolitan areas. fuel and lubricants.

Vehicle Emissions Infrastructure

AIAM in collaboration with industry leaders is The total length of roadways in India was
trying to bring emission standards in India up to estimated at 2,037,000 Km in 1990-91 by the
international levels. The Ministry of Environment Economic Survey 1994-95. However only 49% is
and Forests and the Ministry of Petroleum and surfaced.

Table 9. – Roadways Capacity in India

1989-90 1990-91 1991-92

Length of roads ('000 km)

Total 1 970 2 037 Not available
Surfaced 960 1 001

Length of National Highways ('000 km)

Total
Surfaced 33.7 33.7 33.7
33.7 33.7 33.7

Length of State Highways

Total 127 127 Not available
Surfaced 127 127

Number of registered vehicles

(in thousands)
Total 19 177 21 310 23 462
Goods carriers 1 290 1 411 1 528
Buses 313 333 377

Source: Economic Survey, 1994-95.

Table 10. – India and other Countries, Compared Roadways Capacities

Country Total Length in Km Density Density

(Million) Km/ Sq.Km. Km/Mill. Popn.

India (1991) 2.04 0.56 2180

China (1988) 0.95 0.10 854
Brazil (1988) 1.67 0.20 13842
USA (1990) 6.24 0.67 25060

Source: EIU country report,1991; MVMA Facts and Figures,1991.

The National highway network was 34,058 km total road traffic. It is estimated that road traffic
at the end of 1993-94, comprising less than 2% of which accounts for 80% passenger traffic and 60%
total road kilometers, but carrying nearly 40% of of goods traffic will account for 87% of passenger
Actes du GERPISA n° 28 45

traffic and 65% of goods traffic by the year 2000. construct highways and collect toll in selected
To meet traffic expansion of such magnitude, the areas.
National Highway network needs considerable Delays caused by traffic congestion are
improvement. In the past, roads have been financed increasing in Indian cities. The problem is
from budgetary support and constructed by the aggravated since roads accommodate cars, trucks,
Public Welfare Department. Since budget buses, two wheelers and bicycles. The shift in
allocations are not adequate, the National Highway traffic from the railways to roads is evident from
Act has been amended to allow the private sector to the following table.

Table 11.- Railway and Road, 1950-1986

Year Passenger Kilometers

Road Rail
50-51 26 74
60-61 42 58
70-71 59 41
73-74 60 40
76-77 59 41
77-78 59 41
78-79 58 42
81-82 69 31
85-86 80 20

Source: Kothari Industrial Directory of India, 1994.

CHALLENGES FACING NEW ENTRANTS time to come, hardly any company is entering this
AND MARKET INCUMBENTS segment. Therefore, while MUL's Maruti 800 and
Maruti Omni continue to dominate the largest
The type of products in each company's segment unchallenged, the smaller luxury segment
portfolio is interesting to examine. The market is witnessing heavy competition with several
leader, Maruti Udyog Limited (MUL), has a small foreign players and well-known brands. There
800 cc car in the economy segment (Maruti 800), a could be several reasons for this. First, while the
family van (Maruti Omni), an off-road vehicle economy segment is the largest, MUL's sales
(Maruti Gypsy), a 1000 cc notchback car (Maruti volumes in this segment and its highly competitive
Zen), and a luxury car (Maruti Esteem). Thus, cost structure act as effective entry barriers for new
Maruti has now got a product in each segment entrants. Economies of scale in the sub-compact
except the super-luxury segment. GM currently has range occur at volumes greater than 150,000 cars
only one brand in the Indian market - the Opel per year. Maruti already has a capacity of 250,000
Astra. Astra is the third largest selling car in the cars which could be a deterrent for new entrants in
world. Ford is currently in the market with the Ford this segment. However, for a firm with an
Esteem, and will soon introduce a second brand - established portfolio of automobiles, the addition
the Ford Fiesta. Daewoo has currently only one of a sub-compact line could be attractive. Telco has
brand on the Indian roads - the Cielo in the luxury plans to move into this range. This option is not
segment. Honda is entering the Indian car market open to a foreign player planning to introduce a
with its Honda City, which the company claims has single model. Since none of the foreign companies
been `developed' and not adapted for India. The can match the price of Maruti 800 for a similar car,
product details and price details of some of the car they are preferring to operate in a segment which
models in the Indian market are furnished in values attributes other than just price. With the
Annexures I and II respectively. higher end of the market likely to generate high
While in India, the main market seems to be in margins, these companies plan to slowly move
the sub-compact economy segment for quite some down the scale to a smaller car in course of time to
46 Actes du GERPISA n° 28

take MUL head-on on price. This explains to some operation, depending on the level of indigenization
extent the fact that all new entrants are avoiding the achieved. Given that product life cycles range
sub-compact car segment. Secondly, the used or between 4 and 7 years, it raises the question of
second-hand car market in India is likely to become survival. However, the example of Brazil suggests
more organized in future. The car dealers will that product life cycles in India could be much
themselves deal with used cars. It is expected that a longer. Companies with a developed vendor base
used Cielo or Astra will be priced close to a new might try to create entry barriers by putting
Maruti 800. This could put a question mark on the pressure on their suppliers not to work with new
prevalent assumption that a large number of current entrants. In developed markets, customers look for
two-wheeler users in India will graduate to a and appreciate various advanced features in a car.
Maruti 800 in future with higher incomes. Often there is a loyal set of customers. The markets
Consumer behavior studies of Indian buyers seem are structured on sharply differentiated and clearly
to suggest that the car is the ultimate status symbol, positioned models. This is not the case with India.
and particularly a sedan signifies higher status than Here, cars enhance social status and there may be a
a small car. Therefore, if the price of a new Maruti strong association of price with quality and status.
800 is the same as that of a used Cielo or Astra, the The market may take time to mature and
demand for the luxury cars could grow higher than understand the value of advanced features.
expected. However, the third reason seems to be Given the poor condition of roads, the
the most plausible. An analysis of the world car management of distribution is a critical function.
market shows that no car company in the world, The recent industry trend has been to set up
with the expection of the Japanese, has a car in its exclusive dealerships. However this could be an
range, which is directly comparable to the Maruti expensive proposition. For instance, a showroom in
800. Contrary to popular belief, the Ford Fiesta, a large city could cost as much as $ 85,000. Since
Opel Corsa and the VW Golf would compete with car prices are high compared to incomes, the life of
Maruti Esteem or Maruti Zen, and not with Maruti automobiles tends to be longer than in developed
800. All these cars, though small by Western countries. This means a high cost of switching for
standards, are high-power cars which would be the consumer, and this represents a significant
priced in India in the luxury range. entry barrier. However as the used car market
Given that only 30% of the market is estimated develops, this factor might not be so significant.
for cars above 1000cc and with so many companies An interesting feature of car sales in India is the
already in the Indian market, the industry seems to use of 'bookings', i.e., getting customers to deposit
be heading for a shake out. The firms that would be $500 to $1000 for a car that will be supplied a few
able to design and properly implement sound months from the date of booking. This method of
marketing strategies are likely to be the winners. trying to tie in customers is possible because of the
With every company trying to woo the Indian car large amount of unsatisfied pent up demand, severe
buyer as never before, the industry is undergoing a capacity shortages, and the initial glamour for
shift from a supply-constrained market to a buyers' foreign cars.
market, with different car brands competing on These bookings are so successful currently that
different strategies. Alternately, India could emerge a company's entire capacity is booked within a
as a manufacturing base for exports. month. In anticipation of new product launches by
Maruti's experience with the Indian customer competitors, companies with established products
gives it a better understanding of product and could create artificial shortages of their product for
service needs. Moreover Indian firms have some time, and make it available off the shelf when
established suppliers, and are better at liaising with the competitor goes for bookings.
the government. Joint ventures will help but there
will be pressure in the initial stages. The
availability of a vendor base is a critical factor in IMPLICATIONS
the success of an automobile firm. Given high
import duties on components, it could mean the The market is growing at about 25% for the last
difference between breaking even in the first or three years. In the highly price sensitive market,
second year of operation or in the fifth year of reduction of prices because of lower duties and
Actes du GERPISA n° 28 47

taxes and progressive indigenization, and rising opportunities for survivors will open up. Another
middle class incomes are likely to further increase implication is that India could emerge as a
industry growth rate. Penetration in rural and semi significant manufacturing base for exports. The
urban areas is extremely low and could provide supplier industry is also going through massive
fresh markets. New entrants will have to deal with growth, although from a small initial base.
uncertainty of demand, different and evolving Except for Telco, product development
customer needs, a relatively poor supplier base, a capabilities are very low among established
market crowded with competition and industry indigenous assemblers and suppliers, and the
wide capacity shortages. However, if there is a industry has some way to go before it becomes
shake out as many analysts expect, further world class.

Avinandan Mukherjee
Indian Institute of Management
Calcutta - Inde
48 Actes du GERPISA n° 28

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