Automobile Industry

Automobile Industry Hailed as ‘the industry of industries’ by Peter Drucker, the founding father of the study of management, in 1946, the automobile industry had evolved continuously with changing times from craft production in 1890s to mass production in 1910s to lean production techniques in the 1970s. The Asian countries, mainly by Japan, China and India, registered a 9% increase in production over last year, constituting 35.9% of the global production. In fact China and India posted positive growth rate over 2003. This supply mainly catered to meet the demand from households where the automobiles constituted the second largest expenditure item next only to housing. Thus the global automobile industry dominated by Europe, US, Japan, and of late by China and India, continued to have a significant influence on economic development, international trade, foreign direct investment and environment-friendly practices.

Total Sales Trend of Four-wheelers in India

Porter’s Five Forces Analysis of Indian Automobile Sector Threat of New Entrants

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Bargaining Power of Suppliers

Bargaining Power of Customers

Threat of Substitutes

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Industry Rivalry •

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Industry Concentration: The Concentration Ratio (CR) indicates the percent of market share held by a company. A high concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holding a large market share, the market is less competitive (closer to a monopoly). A low concentration ratio indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. If rivalry among firms in an industry is low, the industry is considered to be disciplined High Fixed costs When total costs are mostly fixed costs, the firm must produce capacity to attain the lowest unit costs. Since the firm must sell this large quantity of product, high levels of production lead to a fight for market share and results in increased rivalry. The industry is typically capital intensive and thus involves high fixed costs Slow market growth

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In growing market, firms can improve their economies. Though the market growth has been impressive in the last few years (about 8 to 15%), it takes a beat in even slight economic disturbances as it involves a luxury good. Aggressive pricing is needed to sustain growth in such situations Diversity of rivals: Industry becomes unstable as the diversification increases. In this case the diversity of rivals is moderate as most offer products which are close to standard versions and the competitors are also mostly similar in strength Highly competitive industry: The presence of many players of about the same size little differentiation between competitors, and a very mature industry with very little growth were the features of a highly competitive industry. Higher the competition in the industry lower would be the profit margin. To remain ahead in competition, auto-makers were tempted to offer value added services to the customers incurring more costs

2.Threat of New Entrants These are the characteristics that inhibit the entrance of new rivals into the market and in turn protect the profits of the existing firms. Based on the present profit levels in the market, one can expect the entrance of new firms into the market or not. The entrance is however also affected by the start-up costs •

Economies of scale: The Minimum Efficient Scale (MES) is the point at which unit costs are minimized. The greater the difference between the MES and the entry unit cost, greater is the barrier. Economies of scale are becoming increasingly important as competition is driving the profit margins to lower levels. Also being a capital intensive industry economies of scale have important consequence

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Government policies: o Automobile Industry was delicensed in July 1991 with the announcement of the New Industrial Policy o The passenger car industry was delicensed in 1993. No industrial licence is required for setting up of any unit for manufacture of automobiles except in some special cases

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The norms for Foreign Investment and import of technology have been progressively liberalized over the years for manufacture of vehicles including passenger cars in order to make this sector globally competitive At present 100% Foreign Direct Investment (FDI) is permissible under automatic route in this sector including passenger car segment. The import of technology/technological upgradation on the royalty payment of 5% without any duration limit and lump sum payment of USD 2 million is allowed under automatic route in this sector The automotive industry comprising of the automobile and the auto component sectors has made rapid strides since delicensing and opening up of the sector to FDI in 1991 The industry had an investment of about Rs. 50,000 crore in 2002-03 which has gone up to Rs. 80,000 crore by the year 2007. The automotive industry has already attained a turnover of Rs. 1,65,000 crore (34 billion USD) The industry provides direct and indirect employment to 1.31 crore people. The contribution of the automotive industry to GDP has risen from 2.77% in 1992-93 to 5% in 2006-07. The industry is making a contribution of 17% to the kitty of indirect taxes of the Government

With all the policies regarding the FDI and Tariff barriers as mentioned above, it has become easier for the foreign players to enter the Indian automobile industry. 3.

Threat of Substitutes • • • •

The replacement market is characterized by the presence of several small-scale suppliers who score over the organized players in terms of excise duty exemptions and lower overheads. A product’s price elasticity is affected by the presence of substitutes as its demand is affected by the change in the substitute’s prices The cost of the automobiles along with their operating costs was driving customers to look for alternative transportation options The new technologies available also affect the demand of the product E.g.: In case of Maruti’s products, the threat of substitutes is high. The competition is intense as several players have products in the categories given by Maruti. However, in the 800cc range it is the market leader and the threat of substitute products is low. Price performance comparison

favors heavily towards Maruti in most product categories. Also the high availability and quality of services offered by Maruti gives the customer a better trade-off 4.

Bargaining Power of Suppliers • • •

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Suppliers can influence the industry by deciding on the price at which the raw materials can be sold. This is done in order to capture profits from the market. Steel is a major input in this industry and so steel prices have a sharp and immediate impact on the product price The industry being capital intensive switching costs of suppliers is high, other than steel as raw material which is highly price sensitive and the firm may easily move towards a supplier with lower cost

Bargaining Power of Buyers •

It specifies the impact of customers on the product When buyer power is strong, the buyer is the one who sets the price in the market. Here there is purchases of large volumes • There is prevalence of alternative options • Price sensitive customers were some of the factors that determined the extent of influence of the buyers in this industry E.g.: In the case of Maruti, the sales volumes have shown increasing trend over past so many years. The customers are more or less concentrated in metros or other tier two cities. The industry is also concentrated in these regions mostly. Most of them are have good amount of knowledge about the product. Except the 800cc range in other categories brand loyalty is only moderate. Also it is difficult to measure since repurchases are rare. Product differentiation is high as there are many categories in the passenger vehicle segment. Buyers get incentives in the form of cost discounts and better after sales services • The major focus of Indian Component suppliers is Quality as suggested by •

one of the Japanese Quality focus firm. The Industry association ACMA reports that over 170 of its members have already received ISO-9000 certification and 23 have received QS9000 certification. There are examples of Indian suppliers becoming single source global suppliers for leading OEMS (GM and Ford), and also becoming global leaders with Sundaram Clayton receiving the Deming award but there are few drawbacks as shown by A.T, Kearney survey which found that defect rates in India are in the range of 1000-2000 ppm against Japanese average of 100-200 ppm

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The rising gasoline price is bound to influence the buyers

Second Hand Market

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Worldwide, the ratio of new cars to old cars is one to four. In India, however, it is still at one to one; with majority of the sales coming from the small car market

The second-hand car market in India sees about 40,000 listings online every month Terracan,Getz,Ac i10,Verna cent E.g.: Carwale.com also has tieElantra and ups with Santro Tucson leading car

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Relative Market share manufacturers like Maruti, Hyundai, GM, Tata Motors, Mahindra, Mitsubishi, Ford, Toyota and Skoda, as well as finance companies and banks like ICICI, Tata Finance and Deutsche bank, to facilitate the process of buying and selling second-hand cars. “It is this easy accessibility that brings around 25,000 second-hand car enquirers to the portal every month, out of which 40% actually go on to buy a car.

BCG Matrix (Hyundai)

STAR i10: Since its launch in India on October 31, 2007 the i10 has received an overwhelming response from not only the media but from car buyers across the globe as well. In the domestic market in India it has sold over 45,000 units while from its overseas market HMI has received orders for around 72,000 units in a short span of 3 months since its European debut at the Bologna Motor Show in December, 2007. The all new Hyundai i10 has bagged the title of the ‘Indian Car of the Year 2008.It has already captured the entire gamut of the most prestigious of Indian automobile awards with its distinction and performance. It has received a total of 4 ‘Car of the Year’ awards from Business Standard Motoring, CNBC TV18 Autocar, NDTV Profit Car and Bike India and Overdrive magazine. The car also made a clean sweep of the ‘Viewers’ Choice’ award bagging the Aaj Tak Viewers’ Choice awards as well as the ‘Small car of the Year’ by NDTV Profit Car & Bike India.

Verna Hyundai launched Verna sedan in India during the third quarter (July-Sept.) of 2006, positioned between its Accent and Elantra models.

CASH COW Santro Santro rated as the “Best Small Car” and also the “Most Appealing Car” for two consecutive years 2000 and 2001. Santro was also called as “Best Fuel Economy” making comparisons with petrol-car rivals like Indica V2, Alto Vxi, Palio 1.2, Zen and WagonR, Santro compared with rivals Indica Diesel and Palio 1.2 and ranked as the “Most Affordable Car” in terms of frequently used spare parts. Its also considered as “Most Practical Car” and “The Best Small Car—2002.

QUESTION MARKS Accent Accent was targeted at corporate executives and high net worth individuals who were looking for contemporary technology and value. In a bid to capture 20% of the 60,000 annual mid-sized car market with Accent in the first year of operations, Hyundai focused on nurturing its relationship with existing customers, dealers as well as its financing partners like ICICI, Kotak Mahindra and Citibank.

Getz In late 2004, Hyundai launched its premium hatchback model Getz, which came equipped with a 1.3 litre Single Over-Head Cam (SOHC) petrol engine.Getz was available in two variants—GL and GLS. The Getz was positioned as a premium hatchback or B plus vehicle between the compact car and mid-size car segment.

Terracan On August 5,2003, Hyundai entered the Sports Utility Vehicle (SUV) market segment with the “Terracan”. The initial success of Terracan had more to do with an aggressive marketing strategy than anything else. With sports utility

vehicles not exactly taking off in India, Hyundai decided to focus more on the dealers to sell Terracan than the product. The major competitors were Forester from GM, Vitara from Suzuki and Honda CR-V.

DOGS Elantra In April 2004, in a bid to garner a sizeable market share in the fast growing executive car segment, Hyundai launched its sedan Elantra, to compete with similar models from the stables of Toyota (Corolla) and General Motors (Chevrolet Optra).

Tucson While Terracan was a full-fledged SUV, Tucson was a milder version that complemented as a car, an SUV and an MPV. Both the products would therefore co-exist in Hyundai’s portfolio.

PERCEPTUAL MAPPING

Perceptual mapping is a graphics technique used by marketers that attempts to visually display the perceptions of customers or potential customers. Typically the position of a product, product line, brand, or company is displayed relative to their competition. Perceptual maps can have any number of dimensions but the most common is two dimensions. Any more is a challenge to draw and confusing to interpret. The perceptual map below shows consumer perceptions of various automobiles on the two dimensions of sportiness/conservative and classy/affordable. This sample of consumers felt PORSCHE was the sportiest and classiest of the cars in the study (top right corner). They felt MARUTHI was most practical and conservative (bottom left corner).

Classy Distinctive

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Sporty V

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MARU THI C HEV

Practical Affordable Cars that are positioned close to each other are seen as similar on the relevant dimensions by the consumer. For example consumers see BENTLEY and AUDI as similar. They are close competitors and form a competitive

grouping. A company considering the introduction of a new model will look for an area on the map free from competitors. Some perceptual maps use different size circles to indicate the sales volume or market share of the various competing products.

CONCLUSION: Automobile Industry experts predict that by 2050 every 6th car in the world will be for Indians. By 2010 India will take over Germany in sales volumes and Japan by2012. The Indian automobile component industry is estimated to triple from USD 63 billion to USD 190 billion within a span of four years by 2012. Estimated turnover USD12 billion, plus components revenue USD 3 billion, this is the vastness of Indian automobile industry. Industry analyst predicts this industry to touch 13000 billion mark by 2010, a cumulative growth of 9.5 percent annually. It is said that for every Re 1 spent, the auto sector returns Re 2.24 to the Indian economy. By 2010, India is expected to witness over Rs 30000 crore of investment. According to estimation the compound annual growth rate (CAGR) of Indian automobile sales will grow at 9.5% and touch a mark of 13008 million by 2010.