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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 China and India posted positive growth rate over 2003. This 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
development, international trade, foreign direct investment and
environment-friendly practices.

Total Sales Trend of Four-wheelers in India


Porter’s Five Forces Analysis of Indian
Automobile Sector

Threat of
New Entrants

Bargaining Indust Bargaining


Power of ry Power of
Suppliers Customers

Threat of
Substitutes

1. Industry Rivalry
• Industry Concentration:
The Concentration Ratio (CR) indicates the percent of
market share held by a company. A high concentration ratio
indicates that a high concentration of market share is held by the
largest firms - the industry is concentrated. With only a few firms
holding a large market share, the market is less competitive
(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 total costs are mostly fixed costs, the firm 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
In growing market, firms can improve their economies.
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 case the diversity of rivals is moderate as most offer
products which are close to standard versions 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

• 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 are becoming increasingly important as competition is
driving the profit margins to lower levels. Also being a capital
intensive industry economies of scale have important
consequence

• Government policies:
o Automobile Industry was delicensed in July 1991 with the
announcement of the New Industrial Policy
o The passenger car industry was delicensed in 1993. No
industrial licence is required for setting up of any unit for
manufacture of automobiles except in some special cases
o The norms for Foreign Investment and import of
technology have been progressively liberalized over the
years for manufacture of vehicles including passenger cars
in order to make this sector globally competitive
o At present 100% Foreign Direct Investment (FDI) is
permissible under automatic route in this sector including
passenger car segment. The import of
technology/technological upgradation on the royalty
payment of 5% without any duration limit and lump sum
payment of USD 2 million is allowed under automatic route
in this sector
o 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
o 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)
o The industry provides direct and indirect employment to
1.31 crore people. The contribution of the automotive
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 of the Government

With all the policies regarding the FDI and Tariff barriers as
mentioned above, it has become easier for the foreign players to
enter the Indian automobile industry.

3. Threat of Substitutes
• The replacement market is characterized by the presence of
several small-scale suppliers who score over the organized
players in terms of excise duty exemptions and lower overheads.
• A product’s price elasticity is affected by the presence of
substitutes as its demand is affected by the change in 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
800cc range it is the market leader and the threat 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


• 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

5. 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 there is purchases of large volumes
• There is prevalence of alternative options
• Price sensitive customers were some of the factors that
determined the extent of influence of the buyers in this industry
E.g.: In the case of Maruti, the sales volumes have shown
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 incentives in the form of cost discounts and better after sales
services
• The major focus of Indian Component suppliers is Quality as suggested by
one of the Japanese Quality focus firm. The Industry association ACMA
reports that over 170 of its members have already received ISO-9000
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


• 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
E.g.: Industry
cent
Carwale.com
also has tie-
Elantra and
ups with Santro
Tucson
leading car

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 Finance and Deutsche bank, to facilitate the process of buying and
selling second-hand cars. “It is this easy accessibility that brings around
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:
Since its launch in India on October 31, 2007 the i10 has received 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
Indian automobile awards with its distinction and performance. It has
received a total of 4 ‘Car of the Year’ awards from Business Standard
Motoring, CNBC TV18 Autocar, NDTV Profit Car and Bike India and Overdrive
magazine. The car also made a clean sweep of the ‘Viewers’ Choice’ 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 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, Hyundai focused on nurturing its relationship with 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 equipped with a 1.3 litre Single Over-Head Cam (SOHC) petrol
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
dealers to sell Terracan than the product. The major competitors 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
similar models from the stables of Toyota (Corolla) and General Motors
(Chevrolet Optra).

Tucson
While Terracan was a full-fledged SUV, Tucson was a milder version that
complemented as a car, an SUV and an MPV. Both the products would
therefore co-exist in Hyundai’s portfolio.

PERCEPTUAL MAPPING
Perceptual mapping is a graphics technique used by marketers that
attempts to visually display the perceptions of customers or potential
customers. Typically the position of a product, product line, brand, or
company is displayed relative to their competition.

Perceptual maps can have any number of dimensions but the most common
is two dimensions. Any more is a challenge to draw and confusing to
interpret. The perceptual map below shows consumer perceptions of various
automobiles on the two dimensions of sportiness/conservative 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

BM
MERCE
W
DES P
ORS

B
AU

Conservative Sporty

TA T
MARU
OYO
THI
C
HEV
Practical

Affordable

Cars that are positioned close to each other are seen as similar on the
relevant dimensions by the consumer. For example consumers see BENTLEY
and AUDI as similar. They are close competitors and form a competitive
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 experts predict that by 2050 every 6th 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.