The Road Ahead For The Automobile Industry

Published Date: 02 Nov 2017

Contents

US Automobile Industry

The domestic US economy has almost always been impacted significantly due to the ups and downs faced in the 20th century by its automobile industry. It was possible to gauge the health of the economy based on the number of new cars added to the market every year.

But couple of recessions and more so the one in 2007-08 has hit this industry very badly as the number of new cars sold in the market have plummeted heavily owing to the sharp slump in spending by its consumers.

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Ford had, across the years, generated a huge cash pile in its backyard which actually did act as a very important hedge during such adverse times. But other peers like the General Motors and Chrysler couldn’t claim such solvency and instead had to file for bankruptcy with the United States government and the Treasury. The TARP money, initially meant to bail out the investment banks riddled with junk assets, was pumped into these mega corporations to breathe a new life into these automakers.

Reports of a mild and slow recovery of the United States automobile industry in the first half of 2012 were on the back of the fact that both Chrysler and General Motors have managed to pay off the TARP loans to the government and the treasury. The three major car makers have started posting huge profits yet again and these companies have been the most profitable not only in the US but also worldwide.

Let’s look at the history of this multi-billion dollar industry during the past century and explore reasons that led to its initial years of boom and then the decline.

The Early Years

It is almost always understood that Henry Ford was the inventor of the new generation car or the "horse-less carriage" – this is not true. But he still is a very famous and great innovator. The golden era for the US auto industry started when Henry Ford invented the assembly line technique in 1913 thereby leading to very high levels of productivity per worker. This high productivity had led the purchase price of a car fall steeply from almost equal to two years’ average salary down to just two months’ worth of wages.

The automobile was advertised and marketed as an item of luxury in its earlier days. In 1909, a Ford cost approximately US $850 and Ford had sold 10,000 of such in that year. Henry Ford wished to boost sales of the company and he even went to extent of compromising on profit margins to increase revenues.

In another surprising move, Henry Ford more than doubled the daily salary for the workers in production from $2.34 to $5 and cut down the working hours from 9am to 7pm to now 9am to 5pm. This move was highly criticized by other automakers and the general business community as highly damaging to the financials of the company. Higher salaries combined with low cost of car manufacturing had made the one time luxury of owning an automobile a household affair as now even the production workers found the cars very affordable.http://t1.gstatic.com/images?q=tbn:ANd9GcTSNFtdHE1Dr6DWcspVGJ6uTrjuWo91JWW7t2LHWqbzMu9GeuPC

In 1913, before the assembly line, a Model T took approximately 12.15 hours to be produced. After the introduction of assembly line and other innovations, the time in 1927 had reduced to one car every 24 seconds. The Model T was discontinued but Ford produced and sold around 15 million Model Ts in two decades.http://t3.gstatic.com/images?q=tbn:ANd9GcRfSgP_i2iivYR2h9IJExTfPT3HdS-Jx1aLAWzMn3ODa5ly-khA

With the production numbers reaching an all-time high, the automobile industry demanded an increasing number of components and supplies for the chassis, engines and other fixtures in the car. This led the steel industry to flourish and the demand for machine tools and makers of these tools highly increased. Many entrepreneurs jumped onto this automobile industry led boom and established ventures that supplied paints, battery, etc. to meet the ever growing requirements of the major car producers and these numbers grew every year.

These ripple effects led to a decent increase in the spending power of a higher chunk of population who were now opting to buy and use cars on a more regular basis and hence the automobile, once a luxury, became a necessity for the purposes of transport and commerce.

In addition to the industries producing the basic components and input supplies for the automobile industry, various other sections of the American economy too saw a boom as the insurance, print media and petroleum industry too jumped on the bandwagon to benefit from this ever growing industry.

Cars, although much less expensive now than what they used to be before Model T came in, still needed insurance coverage to protect against accidents and thefts. This led to increasing revenues from premiums for the insurance companies in United States. The car manufacturers and mainly the big three invested heavily in pan-America advertising campaigns and this contributed millions of dollars in revenues to the advertising and print media industry. The industry for automobile repairs too saw a major increase in business as the number of cars grew every year. The industry which benefitted the most from this boom was the petroleum industry which saw high revenues from the sale of gasoline as the number of cars plying on American roads grew year by year.http://3.bp.blogspot.com/-B7-oKDStMRw/TtWJnQFK1II/AAAAAAAADB8/YcVVDFbbXdQ/s1600/1929-ford-model-a-town-car-vintage-print-ad-lrg.png

Great Depression

In the October of 1929, the stock markets in the United States crashed that ushered in the great depression. The same year had witnessed record sales for the automobile industry. With stock markets at an all-time low, investments by US households were wiped out and spending power was lost almost instantly which was clearly reflected in the fast slowing car sales in the years of depression. This slowdown in the automobile industry hit the US economy very badly which was suffering in general.

Unemployment rates in the US soared as the numbers of jobs were reduced in both the mainstream automobile industry as well as other supporting industries like insurance and maintenance. But the power of the automobile industry was still very much intact - in 1934, approximately 54% of the households in the United States still managed to own a car in spite of the financially difficult times following the great depression.http://www.bilerico.com/images/great-depression-soup-line.jpeg

It is during these times that one of the most important reasons for the decline of US auto industry took birth. Working conditions were very poor in some of the production facilities and the riding on the financial situation created by the great depression; the United Auto Workers Union was established in 1935-36. The UAW was aimed at ensuring higher wages and benefits for the employees in the auto industry. The members of the union went on strikes; the first victim of such sit-in strikes was GM and later followed by Chrysler and ultimately Ford which underwent a bitter and ugly struggle in the June of 1941 before giving in to the demands of UAW.

World War II

The automobile industry took up military production during the Second World War from 1939-45. The Willys Company built the first ever Jeep and many more later on for purposes of military movement as the vehicle provides for high maneuverability over land. Companies like the Chrysler started manufacturing tanks for War. The US resources and capacity was so much exploited for military purposes that in the year 1943, only 139 vehicles were produced for the normal civilian population.http://t1.gstatic.com/images?q=tbn:ANd9GcSmLM2kDN8h31rOjDk1lzK-6b9tRTNznLgWTDxql3IhvGTEh87D

Immediately post the World War II, there was a huge demand for new cars due to pent-up consumer demand from the years of the war. This led to the automobile industry returning to its days of glory (pre Great Depression) once again – the industry witnessed yet another boom and profits were sky rocketing. A plan to build a new network of four lane highways was being taken up in the country immediately post the War. This network would allow for quick movement of men and material across the country in no time without encountering much traffic and congestion. This gave a further boost to the automobile industry.

It was the year 1958, when the first cars manufactured outside the US territory were imported into US. These were manufactured by two Japanese automakers the Datsuns and the Toyotas. While there was no immediate impact, it was in no time that the Japanese imports started eating into the market share of American auto makers. These imported vehicles boasted of world class quality engineering and precision, affordability and high fuel efficiency thus thereby reducing the fuel bill for the US civilians. These imported cars further came to prominence during the oil crisis of the 1970s and the conflict in the Red Sea which led to gas prices soaring very high. The Big Three automakers took charge of the situation soon and invested heavily into manufacturing cars which were relatively smaller but promised higher mileage and hence higher fuel efficiency.

At the beginning of the 21st century, the United States was still the leading automobile manufacturer in the world but this didn’t stay too long as the sub-prime crisis hit the American shores in 2007-08 and brought in the worst ever recession that the world had seen. As per a study published in 2003, the automobile industry was directly and indirectly responsible for 9.8% of the jobs in the United States and the industry represented 3.3% of the US GDP.

Global financial crisis of 2008

In the September of 2008, the Big Three – Ford, GM and Chrysler started facing increasing expenses for health care for its employees (while sales came to an all-time low) and in a bid to avoid bankruptcy and the layoffs post that, these companies which were once powerhouse of profits and ran the US economy, asked the Treasury and the Bush government for a $50 billion bailout package. By December, the Congress had managed to sign a $25 billion loan to these three companies together. But fresh statistics regarding the financial impact and the scale of the losses faced by the US economy in the recession were released and presented an even gloomier picture. The probability that GM and Chrysler would be able to avoid bankruptcy now looked very less. In May 2009, Chrysler, and in June a month later General Motors too filed for bankruptcy protection. Ford, as mentioned before, was sitting on reserves worth $25 billion as a hedge that helped it to survive in the difficult times of the recession.

The US auto industry had slumped to an all-time low as the economy reeled with the financial crisis and this presented a golden opportunity for the Asian and European car makers to gain control of the market share in the United States.

2012 marked a year of recovery for the US automakers as GM posted a highest ever net profit of $7.6 billion and Chrysler was out of the red for the first time ever after announcing bankruptcy with a profit of $183 million. The bankruptcy protection provided by the US government played a major role in reviving the US automobile industry in general and the Big Three in specific. Chrysler and GM managed to repay their loans and interest on them to the US government much in advance of the due date aided by couple of years of healthy recovery. But a vast amount of shareholder value had been eroded, retirement health benefits for a vast majority of US population very drawn back, manufacturing facilities were shut down and brands and assets were sold off.

Conclusion

In spite of the crisis of 2008, the US auto industry is still the most profitable in the world, but analysts and experts warn of caution and suggest only moderate optimism in the near and long term. Given the current pace of annual sales of automobile, it would roughly take 25 odd years to replace the 250 million different types of vehicles that ply on US roads.

Albeit slow, if the current pace of recovery of US economy can be sustained for the foreseeable future, there are chances that auto sales may improve. As history suggests, the Americans love their cars for a multitude of reasons and as the economy recovers and later prospers, surely the auto industry too will prosper. But it may be a while before this happens.

Issues with US auto industry

Three primary issues have contributed majorly to the decline of the automobile industry – Weak management, Unions and the US Government. There may be issues too but they may either be very minor and irrelevant or may be due to one of the three main issues.

Weak management

In the second half of the 20th century, the top management had shifted its focus from product offerings to more of individual perks and power. As per law, in the United States, the CEO is appointed by the Board of Directors for any public corporation. Instead in the case of leading automakers it was identified that the Board of Directors were selected and appointed by the CEO himself and hence they deviated from their task of running a company efficiently and controlling the managers as they wouldn’t go against the dictates of the CEO who had appointed them. The automakers made huge losses and went deep into red due to losing market share and soaring costs, but the Board did nothing to control the situation and instead turned a blind eye.

Before the 1980’s, the three OEMs more or less held on to their market share and the market was highly stable with growth guaranteed. When the Japanese automakers entered the US markets with their low cost and highly efficient products, the companies couldn’t act fast enough to protect their market share against the imports due to multiple restrictions placed on them by the union rules. The UAW ensured that its members receive high wages and various benefits. This was exploited by the non-union workers too and they managed to secure high wages for themselves. The management reeled under its inability to keep these costs under control when the market share and profits started to slide downwards. Emphasis was laid on reducing the costs by employing various cost-cutting measures rather than investing and launching newer products; thereby losing out on the competitive advantage and market share.

United Auto Workers

The union composed of employees of mostly the Big Three has managed to garner sufficient power by lobbying with elected officials and in cases by threatening to withdraw support. This has led to the management’s inability to run the huge corporations in a financially sound manner. The members pay high dues to be part of the union (almost about 2 hours’ worth of wages and current wage rate is approximately $30 per hour). These dues accumulate into a huge strike fund which is used to pay the members during periods of strike. The size of this fund increased in size multiple times as there were no major strikes in the period. http://images.thetruthaboutcars.com/2008/03/3016755.jpg

UAW pools in all its resources and picks one company (dependent on the financial health among the Big Three) at a time as its target during the contract negotiations. Laws however do not allow the OEMs to come together while negotiating. This tactic of divide-and-conquer allows the UAW to command excessive power as the companies do not wish to halt production and hence agrees without much resistance.

UAW employs a tool which it has successfully used over years – pattern bargaining – with the other two companies too which means that they must accept to pay high wages and provide rich benefits even if their financial condition doesn’t permit. Also, the union laws forbid the companies from laying off or disciplining the workers and requires that the workers be paid in full if they are laid off from the company.

Unfair Government regulations

The US Government regulations were chiefly responsible for the unions’ gaining near infinite power against the automakers and making these corporations less competitive in the global economy especially when United States is reeling under a recession. The government’s regulations are supposed to be equal for all – hurt and benefit everyone equally. But in the case of unions, the regulations gave these single entity an almost monopoly over the automakers especially the three OEMs.

Indian Automobile Industry

The Indian Automobile industry contributes to about 7% of India’s GDP. The chart below showcases how domestic sales trends as to how the industry and its components have performed over the last 7 years. We see that the industry is on the rise, especially given that there is still scope for penetration in the country.

Market dominated by 2 wheelers, but passenger cars gaining share

Two wheelers driving recent growth

Source: SIAM data

However, the important observation that can be made about this industry is that while all segments have been growing, there is a change in the trend of the growth driver. We can see that the 7y CAGR suggests that Passenger and Commercial vehicles have had the highest long term CAGR growth among various segments, which explains the increasing market share of passenger vehicles. However, in the last 5 years, it is in fact the two-wheeler segment has outpaced these two growing segments. The other important insight is that while the Indian four-wheeler automobile industry is on the rise, it doesn’t seem to be rising at the same pace as earlier.

A brief industry chronology

While history of the Indian auto industry can be traced all the way to the 1940s, the distinct growth decades began in 1970. Let us see how the industry has evolved since.

1970-1985 - Restrictions

Between 1970 and 1984 cars were seen as a luxury product; manufacturing was licensed and expansion was restricted. Impositions of Quantitative Restrictions (QR) on import and tariff structures were prevalent restrictive practices at the time. Six manufacturers dominated the market:

Telco (now Tata Motors)

Ashok Leyland

Mahindra & Mahindra

Hindustan Motors

Premier Automobiles and

Bajaj Auto.

1985-1995 – Maruti enters the market

Maruti Udyog entered the market in this decade in the passenger car segment. The passenger segment was delicensed in 1993 but import related quantitative restrictions continued. While Maruti ruled the passenger car segment, Hero Honda ruled the 2-wheeler segment in this period.

1995-2000 – Technology up gradation

International players forayed into the Indian markets in the period from 1995-2000. The international players brought with them the advanced technologies of the West (US) and the East (Japan). The car manufacturers invested in development and marketing of wide service networks to support maintenance of vehicles. Ease of access of credit and financing also contributed as a driver to increasing demand.

2000 – present: Liberalization and FDI makes its impact

Several policy changes like abolishment of QR and Foreign direct investment of 100 percent via the automatic way was introduced. Domestically developed (Made in India) vehicles were launched in the local markets and several measures were adopted to increase exports and make them competitive. Auto companies started collaboration with financial firms for enhancing auto financing and insurance services. In 2003, Core-group on Automotive R&D (C.A.R.) was set up to identify priority areas for automotive R&D in India.

Drivers of growth

Emerging economies have experienced a tremendous impact of the rising wealth effect. Some of the factos for the growth experienced in India are:

A rapidly growing and economically thriving middle class

Higher per capital income and

Relative increase in the ease of funding a purchase as well as easy insurance

Other factors that have contributed both to passenger and commercial vehicles are

improved infrastructure in major cities in India

Better connectivity through highway infrastructure

Growth of the industry in India and China – a comparison

We now look at the growth of the automobile industry in emerging economies, specifically India and China.

While the main focus for Chinese firms has always been cost, Indian firms have instead concentrated on added value. While companies in both countries have exported cars, it is more so in China than India. While China’s recent firms export low cost products to the Middle East, India’s domestic market has also contributed to sales. We see in the charts below how India has a flourishing export market but also notice how the share of passenger car exports have given way to two and three wheeler exports with time.

Strong Export growth

Two wheelers gaining share of exports

Source: SIAM data

Source: SIAM data

Production wise, Chinese firms often outsource part of their production and development to other economies, which provide either a cost benefit or technological benefit, like Malaysia, Egypt and Mexico. International firms have also frequently used China as a base for assembly or production for exports. However, historically Indian companies have home produced their exports and never been used as a platform for assembling re-exports.

Policy wise, China has ensured that the government is in control of car plants for the large part. However, India through its liberalization efforts has ensured that there is a large amount of technological autonomy to encourage competition. India car producers are large conglomerate entities that have further used enhanced their learnings through the export of other products to market and export passenger cars.

Market entry wise, Chinese firms decided to mass-produce by entering into all categories of products, right from the low end catering to the masses to the high-end niche vehicles. This meant that they had to handle complex evolution issues as the market matured. Indian firms however decided to concentrate only on some segments and later on brought about more offerings to enter other segments, using the knowledge gained from the previous offerings. Therefore, conglomerates in India did not have to contribute investment to the extent that Chinese firms had to in order to enter the industry, which not only lowered the barrier to enter for Indian firms, also gave them a sales and distribution platform which can later be used to sell products across segments.

FDI also made a significant impact on developing the industry in both the nations. While in China, FDI brought money and technology. Joint Ventures came into existence under the supervision of the central government where the foreign player was not given complete autonomy to operate or locate itself as it chose. In India, the first joint venture between Maruti Udyog and Suzuki in 1984 proved to be a big hit as it catered to the small car segment for years without facing significant competition. This success was one of the reasons that FDI in India brought about many marriages of local and foreign players in 1993.

Role of FDI

Post the market liberalization in 1991 and driven by the great success Maruti Suzuki experienced since its formation in 1984, many foreign players set up joint venture collaborations in India. Some of the notable ventures among these being Mahindra Renault, Kirloskar Toyota and Hero Honda. JVs were created for various reasons and understanding. While there are cases where the Indian partner was only a small investor in the partnership, there are also instances where collaboration was simply to use the local player as a platform by the international producer to assembly its cars locally.

Some ventures also started out as a means for R&D activities to be carried out in India for low end vehicle exports for the international players. Further, the existence of IPR protection enables local players to leverage upon the advances made by the foreign players to incorporate them into the local production processes. For the foreign players, this is an opportunity for low cost R&D facilities as it uses the facilities in India to come up with processes that provide a competitive advantage, at a reduced cost, depending on the market it wants to serve.

However, the major takeaway from the arrival of the foreign players is in fact intangible. The technological advances and sharing of knowledge of processes by the foreign players in such collaborations led to the development of indigenous products such as the Tata Indica and Nano being launched with time. They also enabled developing the local market for consumption so that production was not completely dependent on exports. This is one of the reasons that Indian automobile industry has not taken as much of a hit in its sales during the 2008 recession and prolonged slowdown seen in developed economies.

One of the novelties of the way FDI has gained in India is an example of how a foreign player need not enter into a joint venture with a local player in order to be successful. While the big names such as Mercedes have gone in on their own, the real success story is Hyundai, which has created space for itself in the small car segment without local support. It has constantly brought in more and more products catering to the small car segment and is a household name today. This shows how it isn’t necessary for FDI to enter through a joint venture in order to be successful. We see in the table below that while Indian firms with or without FDI are a majority in the passenger car segment; Hyundai has been able to carve a meaningful share of this market for itself, without any local tie ups.

Source: http://www.isca.in/IJMS/Archive/v2i2/4.ISCA-RJMS-2012-03.pdf

Further, competition between different State Governments to attract investment to their states has also been very beneficial for FDI. Governments are willing to extend various sops and benefits to firms setting up large scale production plants in their state as they are capital intensive, which means it builds up State revenue and also provides employment opportunities to the people of the state. On the other hand, foreign players find it convenient that land laws and taxation norms are made suitable for them to make investments that provide them with a cost advantage.

FDI also finds value for money in India. The availability of cheap credit and easy insurance that can be bundled with a car greatly enhances possibilities of top line growth. Indians are saves by nature but in recent times have shown signs of taking up credit in order to get access to a car, which improves their social status and standard of living. However, in recent times, due to the evolution seen in the market, it has become difficult for firms to extract large margins as price competition has come in. This is why the international players have decided to play the niche card, by targeting the high-income group segment in order to keep its premiums and play the margin game instead of the volumes game.

Having said that, with tier 2 and 3 cities coming up with great pace and wealth no longer concentrated in the big cities, it is not too unrealistic to expect low end volume based sales offerings to be made by the large players in order to take on the indigenous products that currently monopolize this segment. There are some signs of this already happening as we see more and more hatchback offerings such as Hyundai I-series, Chevrolet Beat, Honda Jazz and so on.

One other factor that has enabled FDI to be successful in India is the flexibility shown by Indian firms with respect to what they can provide the foreign player with. This fluidity in strategy enables international players to choose who to partner with based on whatever they are looking to do in India.

Having said that, the failure of certain ventures due to the pulling out of either of the parties due to incompatibility or divergent vision, especially seen with the way Mahindra and Mahindra handled its ventures with Ford and with Renault later on has had a detrimental impact on establishment of joint ventures in the current period. Long standing ventures such as Hero Honda that have risen from nowhere to become market leaders in the two wheelers segment by a large margin have since broken up as more and more Indian firms believe they do not need the presence of a foreign player to be relevant in the domestic or export sectors.

It is noticeable that when such ventures break down, some foreign players have tried to go by themselves in the Indian market, but without much success so far as it can no longer leverage upon the wide distribution and low cost production facilities enjoyed by the Indian firms. This is why they target low volume growths and niche segments, catering to the wealthy high-income group segment that is growing thanks to a developing economy and stock market gains.

FDI has made a significant impact on employment generation in India. The Indian automobile industry provides employment to about 1.7 crore individuals as of 2012, either directly or indirectly. The chart below shows an estimate of the employment opportunities provided by the Indian automobile industry going forward.

Source: http://www.isca.in/IJMS/Archive/v2i2/4.ISCA-RJMS-2012-03.pdf

Studies have shown that the impact of FDI on employment in the auto-manufacturing sector is estimated to increase by about 35% of the total passenger vehicle production. Studies show that additional employment of about 2.5 crore can be generated in the auto and related segments based on AMP 2016 in the Indian Automobile Industry.

M&A activity

As mentioned so far, most joint ventures were inbound in nature where a major international player would come into India and set up a partnership with a local firm. However, given the success enjoyed by Indian firms, the number of outbound bids and M&A activity has risen. While Tata’s acquisition of the Jaguar and Land Rover brands is clearly a huge achievement for an Indian firm, this has led to a number of similar bids by other Indian firms, as recently as Mahindra’s bid for the iconic brand, Aston Martin.

The takeaway from this is that Indian firms are bold in their plans of growth. Cost is not the only value proposition made by such firms as firms seek both organic and inorganic growth opportunities and are consequently being able to source new markets for their products. While they would target the low end of the product spectrum through their exports, such activity gives them a global visibility, creating a market for higher end and multi-purpose product offerings to be made outside India.

This also means that unlike the west, where cost efficient companies from the East, namely Japan were able to eat away market share, that is unlikely to happen in the Indian market. While the local industry is under competition from global majors, they still have a sizeable share of the market (as seen earlier) and are branching out to other markets to hedge themselves.

Issues with Indian auto industry

Inadequate development of roads and infrastructure

The increase in the number of cars on the road far exceeds the speed with which development of roads and other infrastructure is happening in major cities. Long traffic jams, environmental consequences have led to people resorting to carpooling which may have an impact on the number of cars being sold each year.

Rising fuel prices

Fiscal burden of subsidizing fuel such as petrol and diesel is not sustainable. Oil imports are the biggest contributor to the current account deficit but the government had tried to insulate the Indian consumer from fluctuations in fuel prices. However, this puts additional burden on government expenses, which can otherwise be channeled to bring about other developmental activities and also improve its credit worthiness as a borrower. This is why the government, much to the consumer’s dismay, has brought about a string of price de-regulation moves. Constantly rising fuel prices may dis-incentivize people from investing in a car.

Cars running on alternative sources of energy not yet commercially viable

Environmental hazards of cars polluting the environment have led to research and development work being carried out to bring cars that run on alternative fuel to market. However, popular variants such as the Toyota Prius is yet to be introduced to the Indian market and Reva, the can that runs on electricity, is also yet to be commercially accepted. While consumers are definitely more aware of the drawbacks of using fossil fuel driven cars and with increasing regulation for products to meet global environmental standards, auto-makers may have to bring cars that run on alternative energy to market very soon.

Continued tariffs on imported components

Import of auto components is still prevalent and it faces constant threat due to the rapidly fluctuating and weak Rupee against the US Dollar. Costly imports end up eating away the margins, which are already under threat due to the increase in the number of players and product offerings. With new segments no longer possible, producers are now looking to narrow the boundaries between segments by bringing in more and more multi-purpose vehicles. Under such circumstances, the producers do not have the bargaining power of transferring all the increased cost of imports to the consumer.

Political consequences

Tata’s encounter with Singur has left most firms in a tricky spot. Firms are not willing to just take State government’s word given how the Tata’s had to make last minute change in plans after making significant capital investment in West Bengal.

Union issues

Union issues have long plagued players in both developed and developing countries. While the developed countries have suffered more than developing countries, it is now becoming a problem even in India. The recent issue faced by Maruti Suzuki at their Manesar plant is just one of the signs of the workers union acting as a possible roadblock.

Aspirational value

In the last decade, owning a Maruti or a Tata Safari used to be something of pride as they were seen as high aspiration products. However, with the introduction of globally famous names, they are losing their aspirational value and pride.

Learning from the West & Relevance to India

Firms in developed countries of the West have suffered from following major issues:

Value for Money imports

One of the major reasons for the decline of Detroit as the automobile hub was due to the entry of efficient Toyota and Honda cars. Not only were they competitive on price, but would provide much better performance. To add to it, the importers were also sensitive about issues such as sustainability and the carbon footprint, when they launched their hybrid car, Prius. Since this was done before sustainability became a buzz word, this also showed how the Japanese companies had vision and was an active stakeholder in trying to ensure comfort not coming at the cost of the environment, which further attached a sense of pride of owning such a vehicle. Increasing fuel prices further deteriorated the attractiveness of fuel guzzlers that were the Ford and GMC offerings and large SUVs were out of vogue

Relevance to India: So far the Indian market has not seen any firm coming in and trying to compete on price. Apart from Ford and Hyundai and Honda joining the race recently, the small car segment is fairly monopolized by Maruti Suzuki and there are no signs of a let up just yet. Foreign imports cater to the high end market, which is causing Indian products to become less relevant as consumers aspire for more. This need not be a cause for concern today given how the high end segments are a small proportion of the overall market, but given the sustained wealth effect and economic growth, it could become one of the major segments in times to come. While the small car segment provides penetration possibilities and top line opportunities, it is this segment that may soon become the most hotly contested between India firms and imports.

Commoditization

One of the reasons for the decline of the US auto industry is due to the commoditization of the passenger cars. People no longer cared to ask for an American product, an erstwhile sign of quality and trust. Foreign players could make the most of efficient processes, infrastructure and market. They did not have to face any late entrant barriers. Local bigwigs were unable to hold on to their brand power due to this commoditization, which is why a value proposition of cost made Japanese imports highly attractive.

Relevance to India: India is a dynamic market, with its idiosyncrasies. Firms have to understand the market, while in the market. This is precisely the reason that firms cannot go all out by themselves and succeed, apart from the success story of Hyundai. From market intelligence to utilizing sales and distribution networks to establishing connect with the consumer, there are emotional aspects involved. Franchises and dealers are not always driven by margins, but by relationships as well. Firms have tried to sell cars purely on the basis of technical specifications but not always failed. Maruti on the other hand continue to thrive since it signals an emotional appeal through its ads. The fact that there is a service station at obscure locations in the country signals that they are a safety net around you at all times. Further, ads that attach cars to festivals and celebration leverage upon the fact that owning a car in India is still something that is celebrated by most families. It also leverages upon market intelligence that a lot of cars are bought during festivals such as Diwali, something that doesn’t necessarily happen in the US during Christmas. In such ways, Indian auto firms have been able to cater to the Indian-ness of the consumer and are holding on to their brand power. This is why foreign players have to learn how to operate in the Indian environment and appeal to the sensibilities of the consumer to be able to play the volumes game. Further, not all product offerings are relevant for India. So if tomorrow, big names such as Lamborghini or Alfa Romeo wish to make an entry into India, India just does not have the infrastructure to be able to accommodate them. Hence, a fair amount of customization is also required in order to be able to be relevant in India. Therefore, commoditization is not something to be worried about in India just yet. The ad underneath makes our point of how a car is associated with a festival in India.

Recommendations

India is still a maturing market. On the one hand, Indian cars are a hit in the small car segment, but on the other, they are beginning to be outdone in the medium and high-end segments. Some of the things that Indian auto majors need to work on are:

Fuel efficient and alternative fuel variants

The consumer is both cost and environment conscious now and government regulations are getting stringent. This would require firms to bring sustainable vehicles to market fairly soon.

Rethink Strategy for regaining aspiration value

Indian majors have to re-think about their product offering to ensure that they continue to hold aspirational value among the consumers. While big names are a difficult proposition, they have to be functionally more efficient and emotionally attached to continue to hold significant mind share of the consumer.

Enter into Joint Ventures or continue global acquisitions

Big names entering India need local support and Indian majors can benefit from the brand recall of these international players. This makes a strong case for more joint ventures in India. Further, global acquisitions enable visibility which may increase desirability of current portfolio, outside India.

Union issues resolution

One of the key issues that plagued the West was union issues and it is beginning to cause concern here in India. Auto majors are very capital intensive and cannot afford to lose production time. They have to therefore ensure that all stakeholders are given their due and union unrests like Manesar are avoided under all circumstances.

Indulge in PPP for improved infrastructure

Firms may choose to contribute towards improving infrastructure of city roads and highways and other public systems that enhance car sales. PPP initiatives in designing and R&D and bringing about privately constructed toll roads and bridges for ease of commute can not only provide revenue to private firms but also have knock on effects of increased top line.

Given these recommendations, we think that the Indian majors would be well positioned even when the Indian auto market continues to mature. While we envision some of West’s problems to become relevant to India, taking such steps shall ensure that they do not see the kind of decline as seen in Detroit.