Automobile Industry

Automobile 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 fact China China and India India posted posted positive positive growth growth rate rate over over 2003. 2003. This This supply 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 deve devellopm opment ent, inte nternati nation onal al trade rade,, for foreign eign dir direct inve nvestm stment and and environment-friendly environment-friendly practices.

Total Sales Trend of Four-wheelers in India

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

Indust ry

Bargaining Power of 

Bargaining Power of 

Threat of  Substitutes

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Industry Rivalry •

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Industry Concentration:   The The Conc Concen entr trat atio ion n Ratio atio (CR) (CR) indi indica cate tes s the the per percent cent of  marke markett share share held held by a compan company y. A high high concen concentra tratio tion n ratio ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holdin holding g a large large mark market et share share,, the marke markett is less less compet competiti itive ve (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 When total total costs costs are are mostl mostly y fixed fixed costs, costs, the firm must 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 growi growing ng marke market, t, firms firms can impr improve ove their their econom economies ies..  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 this case case the the dive divers rsit ity y of riva rivals ls is mode modera rate te as most most offe offerr pro products which are are close to stand andard versions ons 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 •

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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 scale are are becomi becoming ng incre increasi asingly ngly import important ant as compet competiti ition on is driving the profit margins to lower levels. Also being a capital intensive industry econom nomies of scale have important consequence Government policies: Automobile Industry was delicensed in July 1991 with the o announcement of the New Industrial Policy   The passenger car industry was delicensed in 1993. No o 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 technology have been progre progressive ssively ly liberalize liberalized d over the years for manufacture of vehicles including passenger cars in order to make this sector globally competitive At pres presen entt 10 100% 0% Forei oreign gn Dir Direct ect Inve Invest stme ment nt (FDI (FDI)) is permissible under automatic route in this sector including passenger car segment. The import of   tech techno nolo logy gy/t /tec echn hnol olog ogic ical al upgr upgrad adat atio ion n on the the roya royalt lty y 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 1.31 cror crore e people people.. The contri contribut bution ion of the automo automotiv tive e 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 taxes of the Government

With With all the polici policies es regard egarding ing the FDI and Tariff ariff barrie barriers rs as mentioned above, it has become easier for the foreign players to enter the Indian automobile industry. 3.

Threat of Substitutes •

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  The The repla replacem cement ent marke markett is charac character terize ized d by the prese presence nce of  seve severa rall smal smalll-sc scal ale e su supp ppli lier ers s who who sc scor ore e over over the the orga organi nize zed d players in terms of excise duty exemptions exemptions and lower overheads. A prod produc uct’ t’s s pric price e elas elasti tici city ty is affe affect cted ed by the the pres presen ence ce of  subs su bsti titu tute tes s as its its dema demand nd is affe affect cted ed by the the chan change ge in the 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 800c 80 0cc c rang range e it is the the mark market et lead leader er and and the the thr threat eat 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 Here there is purchases of large volumes  There is prevalence of alternative options Price rice sens sensiitiv tive cus usttomer omers s were som some of the the fac factor tors that hat determined the extent of influence of the buyers in this industry E.g.: In the the case case of Maru Maruti ti,, the the sale sales s volu volume mes s have have sh show own n 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 incentiv incentives es in the form of cost cost dis discou counts nts and better better after after sales sales services  The major focus of Indian Component suppliers is Quality as suggested by • •

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one of the Japane Japanese se Quality Quality foc focus us firm. firm. The The Indust Industry ry ass associ ociatio ation n ACMA ACMA repo report rts s that that over over 170 170 of its its memb member ers s have have alrea already dy rece receiv ived ed ISOISO-90 9000 00 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 •

 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      y cent      r E.g.: •

Carwale.com also also has tieieups with leading car

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Elantra and  Tucson

Santro

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 Tata Finance inance and Deutsc Deutsche he bank, bank, to facili facilitat tate e the proce process ss of buying buying and sellin selling g second second-ha -hand nd cars. cars. “It is this this easy easy access accessibi ibilit lity y that that brings brings aroun around d 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: Sinc Since e its its laun launch ch in Indi India a on Octo Octobe berr 31 31,, 20 2007 07 the the i10 i10 has has recei eceive ved d 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  Indi Indian an auto automo mobi bile le awar awards ds with with its its dist distin inct ctio ion n and perf perfor orma manc nce. e. It has has recei eceive ved d a tota totall of 4 ‘Car ‘Car of the the Year’ ear’ awar awards ds from from Busi Busine ness ss Stan Standa dard rd Motoring, CNBC TV18 Autocar, NDTV Profit Car and Bike India and Overdrive magazine. The car also made a clean clean sweep of the ‘Viewers’ ‘Viewers’ Choice’ award 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 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 operations,, Hyundai Hyundai focused focused on nurturing nurturing its relation relationship ship with existing 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 came equi equippe pped d with with a 1.3 1.3 litr litre e Sing Single le Over Over-H -Hea ead d Cam Cam (SOH (SOHC) C) petr petrol ol 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 dealer dealers s to sell sell Terrac erracan an than than the produ product. ct. The major major compet competito itors rs were 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 simila similarr models models from from the stable stables s of Toyota oyota (Coro (Corolla lla)) and Genera Generall Motors Motors (Chevrolet Optra).

 Tucson While While Terracan erracan was a full-fledg full-fledged ed SUV, Tucson was a milder milder version version that comp comple leme ment nted ed as a car, car, an SUV SUV and and an MPV MPV. Both Both the the prod produc ucts ts woul would d therefore therefore co-exist co -exist in Hyundai’s portfolio.

PERCEPTUAL MAPPING

Perceptua Perceptuall mapping mapping is a graph graphic ics s tech techni niqu que e us used ed by mark market eter ers s that that atte attemp mpts ts to visu visual ally ly disp displa lay y the the per percept ception ions s of cust custom omer ers s or pote potent ntia iall cust custom omer ers. s. Typica ypicall lly y the the posi positi tion on of a prod produc uct, t, produ product ct line ine, bran brand, d, or company is displayed relative to their competition. Perceptual maps can have any number of dimensions but the most common is two two dime dimens nsio ions ns.. An Any y mor more is a chal challe leng nge e to draw draw and and conf confus usin ing g to interpret. The perceptual map below shows consumer perceptions of various automobiles on the the two two dime dimens nsio ions ns of sp spor orti tine ness ss/c /con onse serv rvat ativ ive e and 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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MERCE

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Conservative

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Sporty

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MARU C

Practical Affordable Cars Cars that that are are posit positio ione ned d clos close e to each each othe otherr are are seen seen as simi simila larr on the the relevant dimensions by the consumer. For example consumers see BENTLEY and AUDI AUDI as simila similarr. They They are are close close compet competito itors rs and form form a compet competiti itive ve

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 Industry experts predict that by 2050 every 6 th 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.