 "The coming age of Honda")
Currency movement has its own upsides and downsides.
It is the other trigger that deserves more probing - sales of high margin products like Swift, Dzire and Ertiga and their composition in the product mix. Almost 45% of domestic sales for Maruti accrue from these three models. In the case of Ertiga, it is already facing the heat from Renault's Duster and sales are witnessing some pressure.
It is Swift and Dzire that are standing tall. Over the last year - the diesel variants of the two models have been driving profitability as the company liberally kept raising prices to leverage on its strong demand. It has had a free run. Until now. Honda has come late to the diesel party, but their latest car "Amaze" is well positioned to counter both the Swift and Dzire.
Honda's new product scores on almost every parameter against the Maruti. It is priced strategically (Diesel variant at Rs 7.5 lks on-road Mumbai) at 7% higher than the Swift and on par with the Dzire. Its diesel variant has superior power as well as mileage against Maruti's products.
Supporters of Maruti might well argue that it has countered competition from the likes of Hyundai and Toyota which have tried to make a dent. In reality - Hyundai and Toyota have never had a product to counter the Swift and Dzire. (i-20, Liva and Etios are much more expensive).
Besides these specification, it has something which is relevant for a buyer of a product in this category - Brand. In one of the research reports for my previous employer, it was revealed that a Honda car is a preferred option when buyers wish to upgrade. It is to Honda's discredit that they have failed to leverage on their brand value by launching products that were destined to fail in the Indian market. Initially with the disastrous pricing of the Jazz and then not having a diesel option for the Brio.
Does it mean that the Amaze will be a definite blockbuster? Far from it. Production capacity will remain a constraint until its Rajasthan plant gets operational in 2014. Given its capacity constraint, it will be able to produce no more than 4,000-5,000 cars per month initially.
This is hardly going to create a dent to models like Swift/Dzire which generate sales of 20k each every month. However, its impact may be reflected in its capacity to restrict the indiscriminate price hikes that Maruti has been able to do over the last year.
It will only be in 2014 that capacity constraints will ease up. Besides capacity constraints, Maruti has an unparalleled advantage on account of its low maintenance costs. Although newer players are increasing their localization levels, there is still a long-way to go.
Typically maintenance costs for a Maruti car are half of its peers like Honda, Skoda etc over a period of 5 years. While it is not the most critical factor for a buyer in this segment (as against an Alto buyer), it still holds relevance for an Indian car buyer.
How Honda tackles this part of the challenge along with a capacity ramp-up will determine the sustainability of its threat to Maruti's volumes of Swift and Dzire - and its profitability.
Price war on the anvil in two-wheeler segment?
While Honda's launch in the car market has garnered strong enthusiasm, expectations from its motorcycle are moderated. The Dream Neo is its new product to penetrate the 100cc mass segment dominated by Splendor and Passion. Although - the creation of a strong brand is much tougher in the two-wheeler market than the four-wheeler market, its previously launched Dream Yuga inspires little confidence that it has the characteristics to be a big-selling bike.
Customer feedback indicates that there is a slip in mileage for the bike within 6 months of use. While the initial price is the key factor at the time of purchase for a car, the most important criteria for a two-wheeler buyer in the 100cc segment is mileage.
Bajaj Auto products in this segment also failed to penetrate Hero's market share on account of the perception that its models witnessed a drop in fuel efficiency over a period of time. Splendor and Passion have had a stranglehold over the 100cc market on account of their sustained performance over the life of a motorcycle. (It's resale value is 25-30% higher than its peers)
If the Neo has the same issue that has plagued the Dream Yuga then Hero can sleep peacefully. But if it doesn't and mileage continues to be steady over a period of time, then we might just see something that has not been witnessed since 2007 - a price war.
Hero and Bajaj witnessed margin compression then of 300-400bps on account of the pricing battle as well as rising input costs. Companies learnt their lesson and have maintained pricing discipline. But then - that was when it was a battle between Hero Honda and Bajaj.
Now it is Hero, Bajaj and Honda. Honda's new product comes at a price which is equivalent to that of Hero's top selling Splendor. To lure customers, Honda's Neo comes with a maintenance-free battery. In sync, Hero announced a warranty for 5 years on all its two-wheelers - the first time ever the company has announced such a scheme.
If Honda's Neo takes off, the free warranty might not be the last incentive offered by Hero. Hero will need a lot more than a favourable currency move to offset a price-war damage.
The writer was a former analyst at CLSA India. He is currently an entrepreneur