Pall over the Palio

Fiat's world car seems to have slowed on Indian roads. Will it pick up speed again?

This was the car that would turn around Fiat India's fading fortunes.

Launched in end-September 2001, the Palio sold 1,100 cars within two days. By March 2002, six months after its trailblazing debut, 17,067 Palios had been sold "" out of the total 21,277 cars that Fiat India sold over the previous 12 months.

The Palio closed its first year with impressive sales figures of 33,000 units*.

Suddenly, Fiat India became a formidable opponent in the B-segment (small cars over 1,000 cc), forcing well-entrenched players like Maruti Suzuki (Zen, Alto and Wagon R) and Hyundai (Santro) to sit up and rethink their strategies. By September 2002, Fiat's marketshare in the overall car market had increased to nearly 10 per cent from under 2 per cent the same time previous year.

But the dream run didn't last too long. In the past year, the Palio has been driving downhill "" from sales of 23,000 in April-March 2002-03, the figure for April-March 2003-04 was down to just 9,000 cars. From a rubber-burning start, how did the car slow down to a crawl so soon?

Fiat India executives did not speak with The Strategist despite repeated requests. But industry observers point out that the Palio's experience carries a valuable learning: selling a superior product at a lower price works only if you tom-tom that fact.

At 1,200 cc, the basic model Palio has a bigger engine than the 1,000 and 1,100 cc engines of the competition; technically speaking, the car's brake horsepower and torque put it in the same league as C-segment cars.

But Fiat had priced it in the B-segment. Given that the Indian car market places a high premium on fuel efficiency and is always on the lookout for a bargain, customers should have been queuing up for the Palio.

Instead, the customer perception was that the car was a petrol-guzzler. Indian B-segment buyers demanded fuel consumption figures identical to, or better than, what the Japanese and South Korean cars delivered: that is, 12 to 14 km per litre, as against the 10 to 11 km per litre of the Palio.

Fiat forgot one other characteristic of the Indian car market: its utilitarian nature. In all its communication with potential buyers, the company emphasised the lifestyle aspects of the car "" stylish looks, funky colours and endorsements by Sachin Tendulkar "" instead of highlighting what should have been its USP "" more for less.

The Palio hit a second speedbreaker in June 2002, when reports in the media speculated on a wipe-out of Fiat India's capital. Prospective buyers of the Palio, who had been convinced that the car was right for them, now shied away from actual purchase, since they feared that Fiat India would go the Daewoo India way and they would be left with cars with practically no re-sale value.

Two trademark features of a developing market were at play here "" the fear of being associated with a losing firm and the importance of re-sale value at the time of purchase. Jittery customer reaction hit sales of the car "" from 4,000 in June 2002, a mere 380 Palios were sold in September.

Gradually, stocks began piling up with Fiat's dealers. And inventory levels at the company's plant at Kurla (Mumbai) were also increasing: remember, at its peak, close to 60 Palios were being churned out every day.

With virtually no sales at their showrooms, dealers were unable to pay the manufacturer. Recalls a former employee of Fiat India, "While there was still some demand for regular colours like black, slow-moving colours like red, pink and green were left with the dealers." And when dealers asked for the fast-moving colours, the company didn't oblige.

"Fiat first wanted its money for the existing stocks. Only then would it give fresh cars," says a Mumbai-based Fiat dealer. Stalemate.

That was a big mistake. And then, Fiat compounded its error by encashing bank guarantees in a bid to recover its money from some of its dealers. As far as most of the company's dealers were concerned, this was an unforgivable sign of distrust.

Not that the dealers were blameless. Ask any Fiat customer, and you'll hear a litany of woes: poor after-sales service means even simple tasks like replacing tyres or getting spare parts assume gargantuan proportions.

By now, Fiat's another error was coming home to roost. Three quickfire launches "" Fiat Siena, Palio Adventure and Palio Weekend "" between January and April 2002 didn't receive too warm a reception from the market.

Company sources admit that, to date, less than 1,000 units of the Estate versions have been sold. Says the Fiat ex-employee, "So now, Fiat had just about everything going wrong. It had wrong-colour Palios, and Sienas and Estate cars that were not selling."

In April 2002, Fiat introduced yet another version of the Palio "" a special edition called the S10 (Sachin Tendulkar signature series) "" and quickly followed it up with the Palio Sport. At its launch the S10, with its guzzler 1,600 CC engine, was priced at around Rs 6 lakh; now, according to industry watchers, the last remaining cars in the series are going for Rs 3.8 lakh to Rs 4 lakh.

But, back in September-October 2002, when the car market started offering discounts "" Hyundai was selling its Santro at 15 to 20 per cent less than the tickeR-price "" Fiat hiked the Palio's price by 5 per cent. (The entry price of a Palio 1.2 was Rs 3.5 lakh before the increase.) Now, the company is selling Palios to dealers at discounts of up to Rs 50,000, but that's still not been enough to bring back the buyers.

And the slow sales are reflected in the company's production line. Fiat India has stopped production of most of its cars (including the Uno and the older-model Siena), except for the Palio NV, which was launched in August 2003.

Company sources say that Fiat now makes around 1,000 Palios a month "" and sells 900 "" which is almost half of its 2002 production. That's one reason why inventory levels are down as well, from two months' worth last year, to about a month now.

While the Palio NV is just one efforts to bring the customers back into Fiat's showroom, the company also announced some changes in its after-sales service contract and slashed the prices of its spares in December last year, to bring them in line with those of the competition.

A new 1.6 litre diesel sedan variant titled Petra is to be launched this month; its attractive pricing (Rs 5.2 lakh, Mumbai on-road) may get Fiat India back into the numbers game, since the C-diesel segment the Petra will drive into is already doing well, with Tata Indigo leading the way.

A face-lifted Palio is already doing the rounds in other developing markets like Brazil, and it may make its debut in India by the end of this year. So will the new Palio be able to drive Fiat uphill again?

(*All figures from published data of the Society of Indian Automobile Manufacturers)