Life in the fast lane

THE INDIAN CAR INDUSTRY

It was as cryptic as they come. 'Bajaj Auto and Renault,' the release dated July 28, 2007 said, 'are in preliminary deliberations to jointly understand customer requirements and business potential for "very competitive"vehicles in India.'

Coming in the wake of Renault's alliance with tractor and utility vehicle maker Mahindra & Mahindra (M&M) for making 400,000 cars in Chennai, the talks with Bajaj Auto were a trifle surprising. Speculation is rife that Renault might consider teaming up with the Pune -based two-wheeler maker to produce a $3,000 car.

If the project with Bajaj Auto comes through, it will be the third venture for Renault in India in four years. But it's not surprising that late entrants like Renault and its Japanese affiliate Nissan are hurrying through with their plans for India.

Over a million cars and utility vehicles hit the roads in 2006-07 and experts say the number will definitely touch two million in three years time. Now, many are willing to bet it could be higher if the Tata car project, to sell cars for Rs one lakh, is a success.

If the industry was a duopoly for more than three decades starting from the mid-fifties, it's been a three-way split for the last five years or so. Even today, Maruti Suzuki, Tata Motors and Hyundai Motors account for three-fourths of the market.

However, in a booming economy, consumers are willing to pay top dollar for quality. That's possibly why players like Fiat India, which lay low for several years, are giving it a another shot. Late last year, Fiat teamed up with the Tata group for a Rs 4,000 crore car and engine plant at Ranjangaon in Maharashtra and Giovanni De Filippis, managing director, Fiat India Automobiles says two models "�the Palio Stile and Stile Sport have already rolled off the assembly lines. A couple of months back, General Motors, which was more into premium models like the Chevrolet Optra and Aveo, unveiled the smaller Spark.

That's not all. The news from the industry is that Volkswagen may make a car in Aurangabad where its sister firm, the Czech Republic-based Skoda has a plant.And the world's biggest car maker Toyota has been talking of a small car. Nissan, which has beeing selling premium models like the X-Trail and the Teana, is changing tack. Neeraj Garg, director, sales and marketing, Nissan Motor, is beefing up the firm's dealer network in anticipation of the rollout of its small car from the shared plant (with Renault and Mahindra) in Chennai.

It's not as though the early birds are slowing down. The Swift has been a roaring success for market leader Maruti Suzuki. With a larger capacity in Manesar, Haryana, up 50 per cent at 9 lakh cars, Maruti's ready for the competition. In about a year's time, Tata Motors will have a brand new platform for the Indica and will also be armed with a diesel engine from the Ranjangaon facility.

M&M's joint venture with Renault has already spawned the Logan; now it's readying THE launch a new car and a new utility vehicle in Chennai, with Renault and Nissan. Following the huge success of the Santro, Hyundai is ramping up capacity from 3,00,000 to 6,00,000 vehicles annually and Arvind Saxena, VP, marketing and sales, says another compact car is on the anvil.

With models rolling at regular intervals "� at the last count there were 80 models and variants "� the market's racing along at 20 per cent plus. Buyers are not complaining. As Pawan Goenka, president, automotive division, M&M says "In India, new launches are fuel for growth because customers are becoming very demanding." Goenka says that for any model to clock sales of 50,000 annually is a big achievement, whereas in the West successful models may sell numbers of 250,000 or more.

Most of the action, as Fiat's Filippis points out, has been in the economy space. "The growth in the B segment has been unprecedented and the maximum growth will come from the B+ and C+ segments, " he says, adding that Fiat is targeting the space with the Grande Punto.

Adds Goenka, "Everyone wants to play in the B segment and everyone wants a 10 per cent market share." The B segment, that Filippis and Goenka are alluding to, is the biggest chunk of the market, accounting for close to 60 per cent and growing at around 20 per cent annually. They're mainly hatchbacks priced between Rs 2 lakh and Rs 4.5 lakh, including Maruti Suzuki's Wagon R, Swift and Zen Estilo, Hyundai's Santro and Tata Motors' Indica.

In fact, so strong has been the growth in this space that it may have eaten into the C segment, comprising sedans like the Tata Indigo, Ford Ikon and the Mahindra-Renault Logan. In 2006-07, the C segment grew at about 4 per cent and in the June 2007 quarter it grew at about 5 per cent driven by new launches.

Says Nissan's Garg, "The C segment will do well but the biggest volumes will be continue to be clocked by the B segment, especially if there are good diesel offerings. So which ever player wants marketshare must have a presence in this segment." He, however, feels that there will always be niche players willing to operate exclusively at the premium end. Honda and Toyota, for instance, have been catering to upmarket customers; neither has a small car offering yet.

What could alter the structure of the market is the Tata small car being made at Singur, West Bengal. As Abdul Majeed, partner, Pricewaterhouse Coopers points out, it will create a completely new category of customers at the lower end.

Today, the entry or the A segment comprises the Maruti 800 and the Alto and it's share of the market is less than ten per cent. If priced at Rs one lakh, the Tata car, would be positioned at the lower end of this space. Says Majeed, "Even if a fourth of over eight million two-wheeler owners buy the car, it would mean sales of 2 million cars." That's twice the size of the industry. Adds Yezdi Nagporewalla, head, auto practice, KPMG, "In terms of the customers being catered for, it's an excellent concept and even if the product is reasonably good, we could see big volumes."

The industry believes that the small car will play a big role in the next few years and does not rule out the possibility of Renault making a small car with Bajaj. Says Arindam Bhattacharya, partner, The Boston Consulting Group, "Other players too could look at entry level models, because they will be popular." Both Tata and Renault, says PWC's Majeed, may cater to other Asian markets too, just as Hyundai plans to export 50 per cent of its production. With a huge domestic customer base, that should not be difficult.

As Fiat's Filippis observes, "The Indian market is quite different from the Chinese market in that Indian customers prefer small cars." Moreover, it's cost-effective. Carlos Ghosn, CEO, Renault and Nissan is convinced that making cars in India for the world market is 35 per cent cheaper than making them in Europe. Some of the Rs 35,000 crore ($8 billion) worth of investments in car manufacturing capacity, to be spent over the next few years, have been earmarked for exports.

So players that are able to roll out competitively-priced models for the home market and with a channel to export will emerge the winners. If that's the case, then Maruti's unlikely to yield too much ground to the competition in the near future. It has a strong domestic base and competence in engineering compact cars; for a new entrant to build a dealer and sales network could take years and it might be difficult without help from a local manufacturer.

Both Maruti and Tata have aligned with foreign partners, Suzuki and Fiat, respectively, to explore the overseas markets. And the Tatas have bought diesel technology from Fiat. Much would hinge on the success of the small car though. Hyundai has the early mover advantage and a good track record in the domestic market.

Judging by current pace of investments, Renault appears to be the only player looking for a really big share. But for next few years, it's unlikely that the pie is going to be divided very differently from the way it is today.