The fast emergence of India as a global export hub for small cars follows a series of unchained events and a set of characteristics that metamorphosed into a competitive advantage enjoyed by few other nations. Deepesh Rathore and Tilak Swarup report.
Traditionally, Japan and Italy were considered the mainstay nations of global small car innovation, stemming from their domestic markets. Though the small car segment still thrives in these countries, it is increasingly becoming an unprofitable venture because of tighter margins and ever rising costs of production. Small car production migrating to India hinges on it continuing to enjoy a competitive advantage as a low cost producer of small cars. What is interesting to consider is what factors have come together to make India such an attractive place for global small car sourcing.
Currently, the export story is still at a nascent stage with just four models being exported in significant numbers by three manufacturers. The three makers are Maruti Udyog (Suzuki majority owned), Hyundai Motors India and Tata Motors.
Overall exports have grown significantly over the last few years. In the 2002/03 fiscal year India exported 40,437 small cars, which grew by 134% to 94,556 units in 2003/04; the export share of production of small cars rose from 9.1% to 17.6%. Growth has been sustained in the first four months of the 2004/05 fiscal year. Total small car exports were 35,988 units from April to July 2004, an increase of 55% over the same period last year.
Maruti Udyog has so far led the manufacturers in small car exports. In the fiscal year 2003/04 Maruti exported almost 40,000 units of the Alto and still-hanging-in-there 800. Suzuki has slowly increased exports of its Indian-made Alto model to serve the European market. With the current Alto (introduced in the year 2000) exports have received a significant boost. Indeed, Maruti currently faces capacity constraints at its Gurgaon plant following a huge surge in domestic demand for the Alto.
Though Maruti has confirmed that it will be setting up another manufacturing facility, it will only come online in 2006. In the first four months of this fiscal year Maruti exported 15,145 vehicles, some 12.4 percent less than the same period last year and Maruti has consequently slipped to the number two exporter position. However, on an annualised basis Maruti's exports for the current year are forecast 15 percent higher at 45,435 units.
Suzuki has also named Maruti as its small car R&D and production base. Some R&D activity has already begun. Though it is in its formative stage, making cosmetic changes for mid-life facelifts of current models, the scale of R&D activity will intensify in the future. Further emphasis in that activity and also commissioning a Common Rail diesel plant in partnership with Fiat will boost exports still further with increasing demand for small cars with new small capacity diesel engines. Maruti enjoys a phenomenal cost advantage due to its scale of operations and a solid low-cost supplier base. An aluminium foundry is also in construction, which is due to start supplies by 2006.
Hyundai Motors India strategically entered India in 1998 with its Santro (Atos in other markets) to compete in the volume segment monopolised by Maruti. In tallboy guise, with class leading packaging, the Santro immediately found its mark in the Indian marketplace. Production volume of the Santro stood at 90,236 units in 2002/03 growing by 50% to 135,008 in 2003/04. Having garnered substantial volumes, Hyundai then named its Indian operations as its global small car hub. Capacities were ramped up in the period (from 150,000 per annum to 250,000 units per annum) and exports of Santro rose from 7,067 units in 2002/03 to 35,752 units in the last financial year. Hyundai has scaled up its exports in the first four months of fiscal year 2004 from a miniscule 4,512 units of Santro shifted in April-July 2003 to 19,877 units this year. At an annualised rate Santro exports for the financial year 2004-05 should be 66.8% perkier at 59,631 units but the company has set a target of 70,000 units for this year and 107,000 units for next year. Hyundai is exporting the current Santro Xing or Atos Prime to Southeast Asia, the Middle East, Africa, Mexico, Europe and Australasia. Exports so far in 2004 were actually 'subdued' for Hyundai while it faced capacity constraints and hindrance due to construction work at its plant.
R&D is another area where Hyundai plans further ramp-up in India. This will cater to small car design and development, further helping its export drive. Hyundai strategically chose the coastal city of Chennai (formerly Madras) as its production base to shift vehicles to port efficiently.
The Indica hatchback is the export mainstay for Tata Motors. Introduced at the 1998 January New Delhi Auto Expo, Indica has gained volumes over the six-year period since, offering a seemingly unbeatable price-value proposition in terms of utility, diesel economy and acquisition price. In the year 2002/03 Tata produced 74,283 Indicas and increased that volume to 89,411 in the last year - a 20.4% gain.
Its exports began in tiny volume to the European countries of Malta and Spain, but received a huge boost with a 100,000 cars, five-year deal concluded with MG Rover in 2003. The Indicar is sold in Britain by MG Rover under the Rover badge as the CityRover.
Tata Indica exports increased from 2,105 units in 2002/03 to 8,871 units in 2003/04 as CityRover deliveries to MG Rover ramped up. However, CityRover has not got off to a good start in Europe, largely due to the presence in the market of cheaper and more modern designs, such as the Fiat Panda. Rover has mulled a short-term measure to cut CityRover prices. However, even after the expected price cuts, sales are expected to show a major shortfall from the stipulated 20,000 units per year. In the YTD April-July sales, Tata's small car exports have shown signs of further slowdown, contracting by 31% to 966 units.
Until now Tata has been largely preoccupied with serving domestic demand on the Indica and been operating at close to full capacity, with limited interest in developing new export markets. Once enhanced capacity is online, expect to see an upward trend in Indica exports to new markets and some bolstering of current export market shipments. The company is keen to tap new alliances in the lucrative markets of China and Iran to increase the Indica's reach overseas. The company is also working on new engines to augment export sales. Its small car is now more than five years old with a 2004 mid-life facelift. Finally, an all-new Indica platform is expected to roll out in 2007.
Domestic market is solid base for small car volume
The Indian passenger car market in 2003 was dominated by small cars of A and B segment with a combined market share of no less than 77%. The massive skew towards small cars in India with volumes of 537,102 units in 2003/04 is not surprising given the market environment. The cost of petrol cost has traditionally been high in India, encouraging demand for more fuel-efficient small cars. While high petrol prices act as a cross-subsidy to LPG and Kerosene, the skew in the market towards more fuel-efficient cars will remain strong. Also, the road network in India is still very sparse. Distances travelled by car are generally short and roads are narrow. Conditions in India are exceptionally well suited to small cars suitable for use over relatively short, often intra-urban, distances.
Strong demand for small cars in the domestic market has helped to create scale operations for manufacturers, who have been increasingly localising their products. With an average of 90% localisation in small cars and optimal scale of operations, cost competitiveness is world leading in India. The supplier industry in India has also matured into a very cost competitive sector by undergoing difficult years of sustenance when the car market reached a plateau in the early nineties. At that time there were tremendous cost reduction pressures on the Indian supplier industry from the OEMs.
The existence of a wide supplier base in India stems from the import substitution programme undertaken by the government. Though it didn't help in sprucing up quality and scale, the network existed. Bringing it up to quality and scale was a result of competition and volume developments in the last decade.
* 12994 Alto + 2151 800s; ** 14,010 Alto+ 3284 800s
At the next level, we believe that Indian manufacturers will have to spend far more on development, building the ability to turn out model upgrades quickly. R&D commitments have spiralled with Suzuki and Hyundai making India a dedicated hub for small car development. As with the export of any goods, that will be helped by the increasing maturity of the domestic market. Since exports mean intense competition from a wider field of rivals, innovations will help exports and keep them competitive by wielding innovations back into domestic market to increase economies. There is an inherent disadvantage in going down the small car route, in global market terms, because more than 90 percent of the world market has engine size greater than 1.3 litre while 85 percent of the Indian market is sub-1.3 litre engine size (source: Morgan Stanley). With growth in income, infrastructure, demand for larger cars will surely grow in India.
From the perspective of the Porters Diamond framework for the competitive advantage of India we take a look at four interlinked factors and activities in and between companies in these clusters. These are further affected by the role of the government.
1. Firm Strategy, Structure and Rivalry
Direct competition between the small car manufacturers has pushed each of them to differentiate their offerings in the market. Maruti, the incumbent, enjoys cost competitiveness and hence can command lower prices of its cars. Suzuki, being a small car specialist, has in its stable many small car platforms and variants helping to widen the market, increase scale and providing an unbeatable service network. Hyundai brought in the first tallboy design to break away from the Maruti stronghold of traditional hatchbacks. Gaining volumes on the Santro (Atos), it has brought down costs significantly and been able to quickly get product upgrades and design changes to the market. The strategic location of its plant near the port gives it an export advantage.
Tata developed its small car Indica indigenously and to keep costs low, set up TACO (Tata Auto Components), a 12 company JV to supply key components. The Indica derives its volumes from providing a spacious small car with class leading fuel efficiency with its in-house developed diesel powerplant. It enjoys scale economies through variants on the Indica platform and keeping production costs lean.
2. Demand Conditions
From a monopolistic structure (Maruti) just a decade ago, to five players today has put the customer in the driver's seat. Innovation via body style, price competitiveness achieving cost competitiveness and service via customer oriented CRM-type objectives have come about with intense demand conditions. The quality of small cars has constantly improved in the market with the improved market base.
3. Related Supporting Industries
The upstream and downstream industries related to small car production have helped small car production. Small cars on average enjoy 90 percent localisation with a well-developed supplier base. Maruti set up JVs with 12 companies for supplies of key components as it felt the need to reduce costs. Along came hundreds of other Tier I, II and III suppliers to deliver non-key and assembly components. In a similar fashion Tata set up TACO, which has wielded good results. Hyundai has a supplier park adjacent to its plant consisting of Korean and other suppliers.
India has created a vast pool of skilled engineers, which is key in automotive production though their full utilisation in R&D is lacking because of little spend so far on such activities. Low cost of unskilled labour has helped keep production costs down on small cars, which operate mainly on scale and low margins. To its disadvantage, India's infrastructure is weak and the pace of ramp-up is dismal.
The government's role has been a boon in disguise for the small car sector so far while recent initiatives will likely prove as catalysts for further progress. The government's oil policy makes petrol cross-subsidise LPG and Kerosene oil while selling at a premium. With running costs being prioritised by customers, demand for small cars has been high. The recent national budget announced 150 percent tax sops to automotive companies expenditure on their R&D activities. This will encourage more activity that should become evident in the next few years.