Chapter 1 Introduction to Automobile Industry
One of the greatest creations of man, the “Automotive Car” or popularly known as “Car” is a result of man’s consistent efforts and perseverance. Over the years, the automobile industry has evolved as one of the main revenue generators, provider of employment and has progressed immensely. Automobile can be basically defined as a self-propelled vehicle used primarily on public roads but adaptable to other surfaces. The concept of automobiles was developed form a horse carriage. Automobiles changed the world during the 20th century. From the growth of suburbs to the development of roads and highway systems, these so-called horseless carriages has forever altered the modern landscape. Automobiles have brought about greater mobility and also have opened up a new source of job creation. We live in the Age of Automobiles, and they will no doubt continue to shape our culture, economy and thus keep on enriching our lifestyles in the future. Size, style, number of doors, and intended use can classify automobiles.
The typical automobile, also called a car, motorcar, passenger car, has four wheels and can carry up to six people, including the driver. Larger vehicles designed to carry more passengers are called vans or buses. Those used for carrying cargo are called pickups or trucks depending upon their size and design. Minivans are van-style vehicles built on a passenger car platform that usually carry upto eight passengers. The cars are basically classified by their body structure and utility as follows. A normal or basic passenger car having four doors is called a Sedan, which depicts its shape. A hatchback is a sedan but with a compact boot. Sport-utility vehicles, also known as SUV’s, are more rugged than passenger cars and are designed for driving in mud or snow. A coupe is usually a two-door sedan with a sloping roofline. A convertible is a sedan, hatchback or coupe whose roof can be retracted. Convertibles having two seats including driver are also called roadsters. Multi-utility vehicles, also known as MUV’s are vehicles similar to SUV’s but less rugged.
They are concentrated more on passenger seating and comfort thus are shorter and longer than SUV’s. The engineering that helps function a vehicle are Drive train and chassis, Engine, Steering, Suspension, Safety parts and electronics. Chassis is an internal framework that supports the vehicle. The under part of a chassis consists of the frame (on which the body is mounted) with the wheels and machinery. Engine is a motor that powers the car. Steering is a type of control that helps to direct the car depending upon the driver input. Suspension is a set of springs, shock absorbers and linkages that serves as a dual purpose – contributing to the vehicle’s road handling and braking for safety and driving pleasure, and keeping vehicle occupants comfortable and isolated from road noise, bumps, and vibrations, etc. Safety parts include doors, bumpers, bonnet, hood, etc. which helps in providing safety to the occupants. And electronics are the vehicles lighting, (Engine Control Unit) ECU’s etc. Thus an Automobile is a complex piece of engineering that has made our lives more mobile and luxurious. Automobiles have gone through tremendous changes since the time they were introduced. Today automobiles are not only considered as a means of transport but also as a status symbol that enhances ones personality. Automobile industry is a symbol of technical marvel by human kind.
Being one of the fastest growing sectors in the world its dynamic growth phases are explained by nature of competition, product life cycle and consumer demand. Today, the global automobile industry is concerned with consumer demands for styling, safety, and comfort; and with labor relations and manufacturing efficiency. The industry is at the crossroads with global mergers and relocation of production centers to emerging developing economies. Due to its deep forward and backward linkages with several key segments of the economy, the automobile industry is having a strong multiplier effect on the growth of a country and hence is capable of being the driver of economic growth. It plays a major catalytic role in developing transport sector in one hand and help industrial sector on the other to grow faster and thereby generate a significant employment opportunities. Also as many countries are opening the land border for trade and developing international road links, the contribution of automobile sector in increasing exports and imports will be significantly high. As automobile industry is becoming more and more standardized, the level of competition is increasing and production base of most of auto-giant companies are being shifted from the developed countries to developing countries to take the advantage of low cost of production.
Thus, many developing countries are making serious efforts to grab these opportunities that include many Asian countries such as India, Thailand, China, and Indonesia. The rising competition and increasing global trade are the major factors in improving the global distribution system and has forced many auto-giants such as Toyota, Honda, Audi, BMW, Volkswagen, Skoda and Mercedes Benz, to shift their production bases in different developing countries which help them operate efficiently in a globally competitive marketplace. During the second half of the 1990’s, the globalization of the automotive industry has greatly accelerated due to the construction of important overseas facilities and establishment of mergers between giant multinational automobile manufacturers. Over the years, it is being observed that Asia is emerging as a global automotive hub. Exports of automobiles including components from Asia are also increasing by leaps and bounds. Asia has become the major consumer as well as supplier of automobiles.
At this juncture, this study makes an attempt to evaluate the growth pattern, changes in ownership structures, trade pattern, role of government etc. in automobile sector. The objective of the study is to understand the dynamics of Indian automobile sector in comparison to the same sector in other countries. Thailand is a major auto exporting country from Asia. The sector is mainly driven by Japanese FDI. Chinese automobile sector is growing very fast and is poised to make its dent in the International trade arena very soon with its strong position in component sector. India, on the other hand is consolidating its position with strong domestic and external demand. The Indonesian automotive industry is essentially an assembly industry, dominated by the major Japanese car manufacturers is also coming up in post-liberalization period and increasing its exports.
The evolution of the automotive industry has been influenced by various innovations in fuels, vehicle components, societal infrastructure, and manufacturing practices, as well as changes in markets, suppliers and business structures. Some historians cite examples as early as the year 1600 of sail-mounted carriages as the first vehicles to be propelled by something other than animals or humans. However, it is believed by most historians that the key starting point for the automobile was the development of the engine. The engine was developed as a result of discovering new energy carrying mediums, such as steam in the 1700s, and new fuels, such as gas and gasoline in the 1800s. Shortly after the invention of the 4-stroke internal combustion gasoline-fueled engine in 1876, the development of the first motor vehicles and establishment of first automotive firms in Europe and America occurred. During the 1890s and early 1900s, developments of other technologies, such as the steering wheel and floor-mounted accelerator, sped up the development of the automotive industry by making vehicles easier to use. Almost simultaneously, in America, the societal infrastructure provided a fertile ground for the proliferation of automobiles.
Driver’s licenses were issued, service stations were opened, and car sales with time payments were instituted. Famous vehicle models such as Ford’s Model T were developed during these times and, by 1906, car designs began abandoning the carriage look and taking on a more modernistic appearance. During the 1910s, the development of technologies and societal infrastructure continued in addition to new manufacturing practices. Traffic lights and road signs started appearing on roads. Henry Ford’s famous assembly line was launched in 1913, which allowed vehicles to be mass produced and thus achieved economies of scale. Ford also introduced the concept of using interchangeable and standard parts to further enable the mass production process. Automakers also started to merge with other automobile companies. In the 1920s, the development of infrastructure, adoption of new manufacturing practices, and the merging of companies continued (e.g., Benz and Daimler, Chrysler and Dodge, Ford and Lincoln). In the U.S., the Bureau of Public Roads and the enactment of the Kahn-Wadsworth Bill helped facilitate road-building projects and develop a national road system. In manufacturing, mass production methods became better established, which led to the availability of a wide range of satisfactory cars to the public.
While Ford had focused on a single model, GM adopted a new production strategy for providing greater product variety, which helped the company increase their market share by 20% and reduce Ford’s by 24%. In the 1930s, several new vehicle brands were developed (e.g., Ford Mercury, Lincoln Continental, Volkswagen) and trends in vehicle consumer preferences were established that differentiated the American and European market. In the U.S. market, consumers preferred luxurious and powerful cars, whereas in Europe consumers preferred smaller and low-priced cars. Also during this time, GM’s product variety strategy continued to give them a competitive advantage over Ford, allowing GM to continue increasing their market share while Ford kept losing theirs. In the 1940s, during World War II (WWII), automotive factories were used to make military vehicles and weapons, thus halting civilian vehicle production. After WWII, the economies of most European and some Asian-pacific countries, such as Japan, were decimated; this required the development of new production and business strategies such as those of Toyota, which began to develop what is now known as Just in Time (JIT) manufacturing. Most of the first models produced were similar to the pre-war designs since it took some time for the plants to revamp their operations to make new designs and models. In the 1950s and 1960s, more technological innovations, such as fiberglass bodies and higher compression ratio fuels, allowed vehicle developers to appease the growing consumer interest for vehicle comfort, look, and feel. Car designs were highly influenced by emerging safety and environmental regulations. Vehicle speed limits and front seat belts became standard, in addition to other features such as heating and ventilation equipment.
The 1970s were marked by stricter environmental regulations and the oil embargo of the early 70s, which led to the development of low emission vehicle technologies, such as catalytic converters, and a 55-mph nationwide speed limit in the U.S. Foreign cars like the Japanese Honda Civic started appearing in the U.S. market. The Civic was marketed as a fuel-efficient and low-emissions vehicle, which given the recent high oil prices and strict environmental regulations made it well received. Despite the entrance of new competitors into the U.S. market, U.S. automakers underestimated the threat of foreign automakers to their market shares. In the 1980s, the U.S. automotive industry began losing market share to the higher quality, affordable, and fuel-efficient cars from Japanese automakers. In response to this market share loss, U.S. automakers began focusing on improving quality by adopting different Japanese manufacturing management philosophies, such as JIT. Although their adoption of JIT and other philosophies helped improve the quality of U.S. vehicles, it did not fully bridge the gap between the quality of U.S. and Japanese cars. This gap remained because U.S. automakers tried applying JIT techniques without a full understanding of the whole Japanese manufacturing system, while Japanese automakers had decades to develop, refine and master their JIT approach. Another significant paradigm of the 1980s was the global nature of vehicle manufacturing. Automakers started assembling vehicles around the world.
This trend was accelerated in the 1990s with the construction of overseas facilities and mergers between multinational automakers. This global expansion gave automakers a greater capacity to infiltrate new markets quickly and at lower costs. The increased product offerings in many markets led to consumers having a greater variety of vehicles from which to choose. To this new vehicle buffet was coupled the explosion of the Internet, which made vehicle-related information readily accessible to consumers. Internet-informed and empowered consumers now wanted a vehicle that was “personalizable,” inexpensive, reliable, and quickly obtainable. Consumers desired vehicles that were less harmful to the environment, which led to the introduction of hybrid vehicles by Japanese automakers in the late 1990s. In the current decade, the recent trend of increasing sophistication and empowerment of the consumer has led automakers to identify new and more specialized markets within saturated markets with diverse customer bases, such as that of the U.S. Another trend is to infiltrate new emerging markets such as Southeast Asia and Latin America, which has further motivated the establishment of production facilities overseas and the establishment of global alliances and commercial strategic partnerships with foreign automakers. Of these new markets, China appears to be the most promising.
Growth of Automobile Industry
India is also an emerging market for worldwide auto-giants. Due to low cost of labor many multinational companies are investing in India. Its automotive industry has grown very rapidly from the middle of 1990’s. Recently, there are two big investments expected to boost the sector further, one is from Maruti and the other is from Honda Siel. Tata’s proposed investment to manufacture cheap car is also expected to boost the industry. India is the second most populated country in the World, and the growth rate of Indian economy is very high, which indicates the presence of huge demand in different industrial sectors. Automobile industry is not the exception in this regard. Indian automobile sector has huge demands from its own country. This demand also attracts the giant automobile suppliers through out the world to come and invest in the Indian automotive industry. Due to the contribution of many different factors like sales incentives, introduction of new models as well as variants coupled with easy availability of low cost finance with comfortable repayment options, demand and sales of automobiles are rising continuously.
Government has also contributed in this growth by liberalizing the norms for foreign investment and import of technology and that appears to have benefited the automobile sector. The production of total vehicles increased from 4.2 million in 1998- 99 to 7.3 million in 2003-04. It is likely that the production of such vehicles will exceed 10 million in the next few years. The increase in the exports of automobile sector is also due to the adaptation of international standards. It is expected that by the year 2016, the turnover of the Indian automobile sector could grow to $145 billion. Today, this sector has emerged as a sunrise sector. However, the overcapacity problem is haunting many of the players as demand may not go up significantly. Hence, many players are looking for an external market for Indian automobiles. The prospect of component industry is quite positive. The leading local firms have established over 200 technical cooperation agreements with foreign firms to be able to reach international standards in cost and manufacturing. The production of automobiles in volume began in the early 1890s, in Western Europe. The USA started the production of both electric and gas automobiles by 1896. In 1903, Ford stepped in.
The price of cars reduced from USD 850 in 1908 to USD 360 in 1916. The great depression and the World Wars saw a drop in sale; but the 1950s and 1960s were the glorious era for automobiles (driven by Ford, GM and Chrysler). Production reached 11 million units in 1970. Industry specialists indicate that international business in the automobile industry dates back to the technology transfer of Ford Motor Company’s mass-production model from the U.S. to Western Europe and Japan following both World Wars I and II. This gives rise to two important trends. The first one is that, the advancements in industrialization led to significant increase in the growth and production of the Japanese and German automotive markets. The second important trend was that due to the oil embargo from 1973 to 1974, the export of fuel efficient cars from Japan to the U.S. Earlier due to low fuel prices, US was producing ‘muscle cars’ but after the oil price shocks US had to compete with Europe and Japan who succeeded in producing fuel efficient cars. For the first time, design, marketing, prices, customer satisfaction etc become important in the automobile market. By 1982, Japan became the world leader in US market. The potential growth opportunities led to global overcapacity in automobile industry. 1990s observed the merger and acquisition (M&A) and formation of strategic alliances to tackle this overcapacity problem. Increasing global trade also act as a major factor for rising growth in world commercial distribution systems, which has also increased the global competition amongst the automobile manufacturers. Japanese automakers have instituted innovative production methods by modifying the U.S. manufacturing model.
They are also capable of adapting and utilizing technology to enhance production and increase product competition. There are three major trends of world automotive industry, which are discussed briefly bellow: Global Market Dynamics – The world’s leading automobile manufacturers continue to invest into production facilities in emerging markets in order to reduce production costs and therefore rise in profits. These emerging markets include Latin America, China, Malaysia and other markets in Southeast Asia. Establishment of Global Alliances – Now-a-days, there is trend of joint venture in global automotive industry. Most of the giant automobile manufacturers are merging with each others. The big three U.S. automakers (GM, Ford and Chrysler) have merged with, and in some cases established commercial strategic partnerships with other European and Japanese automobile manufacturers. The Chrysler Daimler-Benz merger, were initiated by the European automaker in order to strengthen its position in the U.S. market. Overall, there has been a trend by the world automakers to expand by merging with other giant automotive companies in overseas markets. But as automobile industry become more and more standardized, the production base of most of auto-giant companies was shifted from the developed countries to developing countries.
Standardization makes production more profitable in developing countries due to low cost of labor. Unquestionably, the Automobile Industry in India is one of the largest and fastest growing in the world. On an average, India manufactures over about 11 million vehicles (including 2 wheeled and 4 wheeled) and exports somewhere about 1.5 million every year. If we talk about Indian Automobile Industry, then starting its journey from the day when the first car in Indian History, rolled on the streets of Mumbai in 1898, since the day Indian automobile industry has shown a phenomenal growth. In today’s era, the Indian automobile industry presents a galaxy of varieties and models meeting all possible needs and globally established industry standards. India has become the world’s second largest manufacturer of motorcycles, with annual sales exceeding 8.5 million in year 2009. India has emerged as a superpower across the globe as passenger car and commercial vehicle manufacturing industry of India is the seventh largest in the world, which has an annual production of more than 2.6 million units in 2009. If we talk about India’s in house capacity of vehicles, India is home to 40 million passenger vehicles and more than 2.6 million cars were sold in India in 2009 at an increase of 26%, which apparently makes India the second fastest growing automobile market in the world. As per the Society of Indian Automobile Manufacturer’s latest figure, annual car sales are projected to enhance up to 5 million vehicles by 2015 and more than 9 million by 2020. According to a recent survey, by 2050, our country is expected to be at the top of the world in car volumes with almost 611 million vehicles on the nation’s roads. A big chunk of India’s car manufacturing industry is based in and around Chennai city, it is also called as the Detroit of India.
Changes Due to Growth & Opportunities
Despite increase in fuel costs, macro-economic issues and slow growth in 2011, the long term growth story of India’s auto Industry will remain intact. The country’s passenger vehicle sales and production is expected to grow by 14 to 16% over 2011 to 2021, reaching over 9 to 10 million units annually. Consequently, India is evolving to become not only a regional base for small car production, but also an exports hub to other emerging markets. While the Indian automotive industry defied the recent global recession, the cooling of domestic demand in 2011 took the industry by surprise. As competition intensifies among vehicle manufacturers, companies across the value chain must adapt their strategies to aim for market share growth, sustainable profitability and operational flexibility to preserve their long-term competitive position. The report identifies seven mega trends that will significantly impact the revenues, costs and profitability of stakeholders across the Indian passenger vehicle value chain: Increasing urbanization and evolving customer needs to have greater influence on OEM strategies and buying behaviour than reactive regulatory policies.
An estimated 200 million people are likely to be added to India’s urban population by 2020, piling further pressure on an already strained transport infrastructure. OEMs are likely to increase their offerings in terms of alternate fuel variants (CNG, LPG and also hybrids) and also advanced safety features across segments. Increasing risks across value chain position OEMs to deploy range of mitigation strategies Indian auto industry to be short of 300,000 skilled personnel by 2020 across functions including R&D and manufacturing With logistics infrastructure lagging behind the pace of the auto industry’s expansion, OEMs will need to consider multi-plant strategies and clustering of suppliers to be closer to regions with strong demand potential and to have better control of the supply chain
Global OEMs gain market share with ‘globalization’, while competition drives domestic OEMs to bridge technology gap Apart from localizing production to achieve cost parity and product differentiation, global OEMs also continue to expand their distribution network to tier II, III and IV cities. In response, domestic OEMs are strengthening their technological capabilities through organic and inorganic investments. While meeting local demand remains the priority of domestic and Global OEMs, they will be looking to leverage India as an export hub to emerging markets including Africa, Eastern Europe, and South-East Asia. OEMs leverage digital marketing for urban consumers and non-traditional distribution channels for rural markets OEMs are likely to increase their digital marketing spend, especially on social media, with a focus on innovative promotion tools such as live launch webcasts and online customer service among others. In rural markets, OEMs will increase their focus on non-traditional distribution methods including resident sales executives and satellite outlets. Indian social media users growing at 100% annually; over 38 million users on Facebook – third largest globally; 16 million users on Twitter – eighth largest globally; over 20 million smartphone sales annually. Consumers are sharing uncensored feedback and information of products and services via social media New entrants using creative business models for mobility, in-vehicle services and after-sales support With India’s urban population to reach 500 million and the growing infrastructure concerns, consumers will need alternative personal mobility solutions.
New entrants such as car-rental companies, multi-brand service networks and group buying companies are already taking a lead to leverage the Indian consumers’ needs for mobility, after-sales services, and need for enhanced bargaining power. Suppliers to enhance local product development capabilities, supply chain competency, and flexibility to meet diverse OEM expectations By 2020, the OE market for auto components is expected to hit a whooping number. India’s auto component exports to triple, by end of this decade. Global suppliers are setting up R&D centers in India to increase local content in vehicles and at the same time leverage it as a global hub for design and technology.
The supplier community will need to adapt to diverse expectations of OEMs, with domestic manufacturers expecting greater flexibility and closer engagement and global OEMs expecting quick responsiveness and global quality standards.at local cost levels. Dealers to focus on managing their capital agenda, skill development and shifting revenue contribution of high- margin allied services In particular, franchises of global OEMs will become attractive because of higher margin offers and flexible payment options. Apart from expanding their portfolio of brand franchises, dealers will also look to increase share of high-margin allied businesses including service, parts and vehicle financing/insurance.
Today, the Indian automobile industry presents a galaxy of varieties and models meeting all possible expectations and globally established industry standards. Some of the leading names echoing in the Indian automobile industry include Maruti Suzuki, Tata Motors, Mahindra and Mahindra, Hyundai Motors, Hero Honda and Hindustan Motors in addition to a number of others. During the early stages of its development, Indian automobile industry heavily depended on foreign technologies. However, over the years, the manufacturers in India have started using their own technology evolved in the native soil. The thriving market place in the country has attracted a number of automobile manufacturers including some of the reputed global leaders to set their foot in the soil looking forward to enhance their profile and prospects to new heights. Following a temporary setback on account of the global economic recession, the Indian automobile market has once again picked up a remarkable momentum witnessing a buoyant sale for the first time in its history in the month of September 2009. The automobile sector of India is the seventh largest in the world. In a year, the country manufactures about 2.6 million cars making up an identifiable chunk in the world’s annual production of about 73 million cars in a year. The country is the largest manufacturer of motorcycles and the fifth largest producer of commercial vehicles. Industry experts have visualized an unbelievably huge increase in these figures over the immediate future. The figures published by the Asia Economic Institute indicate that the Indian automobile sector is set to emerge as the global leader by 2012.
In the year 2009, India rose to be the fourth largest exporter of automobiles following Japan, South Korea and Thailand. Experts state that in the year 2050, India will top the car volumes of all the nations of the world with about 611 million cars running on its roads. At present, about 75 percent of India’s automobile industry is made up by small cars, with the figure ranking the nation on top of any other country on the globe. Over the next two or three years, the country is expecting the arrival of more than a dozen new brands making compact car models. Recently, the automotive giants of India including General Motors (GM), Volkswagen, Honda, and Hyundai, have declared significant expansion plans. On account of its huge market potential, a very low base of car ownership in the country estimated at about 25 per 1,000 people, and a rapidly surging economy, the nation is firmly set on its way to become an outsourcing platform for a number of global auto companies.
The Indian economy has grown multifold over the past couple of decades and this has led to the Indian middle class become more and stronger in terms of purchasing power. All this is expected to change the Indian automotive market as the Indian industry enters an age of maturity and serious competition from all the major auto manufacturers on the world; As the FDI CAP opened and more and more foreign companies began investing in India; instead of suppressing Indian companies it only made them work harder and develop products with higher quality in order to sustain the competition; thus benefitting the Indian industry; people; government and economy.
Michael Porter identified five forces that influence an industry. These forces are: (1) Degree of Rivalry; (2) Threat of Substitutes; (3) Barriers to Entry; (4) Buyer Power; and (5) Supplier Power. Like other industries operating under free market viewing the automotive industry through the lens of Porter’s Five Forces can be helpful in understanding the industry. Degree of Rivalry
Despite the high concentration ratios seen which typically signify that a lesser degree of competition is seen in the industry, rivalry and the global automotive industry is intense. Clearly, the concentration ratios do not tell the whole story. In the 1980s, the Japanese car makers Honda and Toyota entered a fairly disciplined U.S. market and have been very focused in growing their shares of the market. The great diversity of rivals in terms of cultures and associated philosophies has intensified rivalry in the industry. Market growth is slow in the established markets of the U.S. and Western Europe, and companies must fight fiercely to eke out gains or prevent losses in market share.
However, growth is potentially huge in the rapidly industrializing nations of China and India; in these booming markets, companies could take advantage of the opportunities to reap handsome rewards. The degree of rivalry in the automotive industry is further heightened by high fixed costs associated with manufacturing cars and trucks and the low switching costs for consumers when buying different makes and models. Threat of Substitutes
The threat of substitutes to the automotive industry is fairly mild. Numerous other forms of transportation are available, but none offer the utility, convenience, independence, and value afforded by automobiles. The switching costs associated with using a different mode of transportation, such as train, may be high in terms of personal time (i.e., independence), convenience, and utility (e.g., luggage capacity), but not necessarily monetarily (e.g., round trip train fare would most likely be less expensive than the cost of fuel consumed on a similar round trip, daily parking, car insurance, and maintenance). The exception to this statement occurs in the global urban areas with high population densities. In these areas, the substitutes available (e.g., walking, mass transit, bicycles, etc.) can be less costly than automobiles and thus alternative modes of transportation are often preferred. Also, there are inherent underlying social and cultural attitudes that keep people from owning automobiles in some parts of the world. Many nations are not as spread out or as mobile as the U.S.; they are constrained either by geography, race, class, or religion and the need for personal transportation is not as great, yet.
The American dream of “a car [or two] in every garage” is not what the rest of the world currently wants or needs. However, the marketing arms of the global automotive manufacturers are certainly working very hard to change this paradigm, and with unprecedented production volumes world wide, all signs indicate that they are succeeding. Most with the ability and means to own a vehicle, who live in a society with the necessary infrastructure (e.g., roads and fueling stations), will do so.
Barriers to Entry
The barriers to enter the automotive industry are substantial. For a new company, the startup capital required to establish manufacturing capacity to achieve minimum efficient scale is prohibitive. An automotive manufacturing facility is quite specialized and in the event of failure could not be easily re- tooled. Although the barriers to new companies are substantial, established companies are entering new markets through strategic partnerships or through buying out or merging with other companies. In fact, the barriers to entry for new (or different) markets may be quite low; in the 1980s, U.S. companies practically invited Japanese makers into the U.S. by failing to offer quality vehicles in the lower price markets.
All of the large automotive companies have globalized and entered foreign markets with varying degrees of success. In the newer, undeveloped markets of Asia, Africa, and South America, the barriers to entry similarly exist. However, a domestic start up, with local knowledge and expertise, has the potential to compete in its home market against the global firms who are not yet well established there. Such an operation, if successful, would surely be snatched up by one of the global giants and incorporated into its fold. Buyer and Supplier Power
In the relationship between the automotive industry and its suppliers, the power axis is substantially tipped in the industry’s favor. The automotive industry is comprised of powerful buyers who are generally able to dictate their terms to their suppliers. There are specific characteristics that make members of the automotive industry powerful buyers: (1) there is not a grand proliferation of companies manufacturing automotives, and the four largest automotive companies in the U.S. have roughly 90% of the value of shipments and value added in the U.S. are standardized commodities and these parts are only used on automobiles; and (3) backward integration can and does occur, as seen in summer 2005 when Ford purchased struggling parts maker Visteon.
In the relationship between the automotive industry and its ultimate consumers, purchasers of finished vehicles, the power axis is tipped in the consumers’ favor. Consumers wield the greatest power in this relationship due to the fairly standardized nature of the automotive commodity (a vehicle) and the low switching costs associated with selecting from among competing brands. However, the automotive industry remains marginally powerful due to the large customer to producer ratio. The automotive industry is a dynamic place. With the forces above at play, and with history as a guide, it is safe to say that the automotive industry will continue to change, evolve, and adapt.
Chapter 2 History of Indian Automobiles
Indian automobile industry has grown heaps and bounds since 1898, a time when a car had touched the Indian streets for the first time. The beginnings of automotive industry in India can be traced during 1940s. After the nation became independent in the year 1947, the Indian Government and the private sector launched their efforts to establish an automotive component manufacturing industry to meet the needs of the automobile industry. The growth of this segment was however not so encouraging in the initial stage and through the 1950s and 1960s on account of nationalization combined with the license raj that was hampering the private sector in the country. However, the period that followed 1970s, witnessed a sizeable growth contributed by tractors, scooters and commercial vehicles. Even till those days, cars were something of a sort of a major luxury. Eventually, the country saw the entry of Japanese manufacturers establishing Maruti Udyog.
During the period that followed, several foreign-based companies started joint ventures with Indian companies. During 1980s, several Japanese manufacturers started joint ventures for manufacturing motorcycles and light commercial vehicles. During this time, that the Indian government selected Suzuki for a joint venture to produce small cars. Following the economic liberalization in 1991 and the weakening of the license raj, several Indian and multi-national car companies launched their operations on the soil. After this, automotive component and automobile manufacturing growth remarkably speed-up to meet the demands of domestic and export needs. Experts have an opinion that during the early stages the policies and the treatment by the Indian government were not favorable to the development of the automobile industry.
However, the liberalization policy and various tax reliefs announced by the Indian government over the recent past have pronounced a significantly encouraging impact on this industry segment. Estimates reveal that owing to several boosting factors, Indian automobile industry has been growing at a pace of about 18% per year. Therefore, global automobile giants like Volvo, General Motors and Ford have started looking at India as a prospective hot destination to establish and expand their operations. The economic liberalization that dawned in India in the year 1991 has succeeded in bringing about a sustained growth in the automotive production sector triggered by enhanced competitiveness and relaxed restrictions prevailing in the Indian soil. A number of Indian automobile manufacturers including Tata Motors, Maruti Suzuki and Mahindra and Mahindra, have dramatically expanded both their domestic and international operations. The country’s active economic growth has paved a solid road to the further expansion of its domestic automobile market. This segment has in fact invited a huge amount of India-specific investment by a number of multinational automobile manufacturers. As a significant milestone in its progress, the monthly sales of passenger cars in India exceeded 100,000 units in February 2009.
Like many other nations India’s highly developed transportation system has played a very important role in the development of the country’s economy over the past to this day. One can say that the automobile industry in the country has occupied a solid space in the platform of Indian economy. Empowered by its present growth, today the automobile industry in the country can produce a diverse range of vehicles under three broad categories namely cars, two-wheelers and heavy vehicles. The automobile sector in India has always been largely influenced by government reforms. In 1991, the congress led government launched a comprehensive reforms program that changed the economic scenario for ever. Prior to 1991; the investment in the backbone sectors such as heavy, basic & capital goods were reserved for the government alone and were referred to as the Public Sector. Also one very interesting thing to be seen with the Indian automobile industry is that during the early days of the license raj and even some time after the 1991 reforms were introduced; cars were still an instrument of luxury for the average Indian; but after this Cars have only become more and more affordable to the average Indian and thus cars are now becoming a necessity and this goes a long way in determining what type of cars to introduce in the Indian market. India has emerged as one of the world’s largest manufacturers of small cars. In 2008, Hyundai Motors alone exported 240,000 cars made in India.
Nissan Motors plans to export 250,000 vehicles manufactured in its India plant by 2011. Similarly, General Motors announced its plans to export about 50,000 cars manufactured in India by 2011. In September 2009, Ford Motors announced its plans to setup a plant in India with an annual capacity of 250,000 cars for US$500 million. Tata Motors has been focusing on the export market in recent years and apart from South Africa it has been exporting to some other African countries, Europe, Middle East and in the Asian markets. Auto industry has gone through a critical transformation since the last two decades with startling designs and state of the art innovations. It is anticipated that automotive industry has got at its zenith with extraordinary & numerous designs and brands in the market.
The key global auto players like the Audi, the Hyundai, the Nissan, the Toyota, the Ford and many more have turned the auto world upside down with their perpetual changes in the technology of auto manufacturing. The craze for car collection, makes people go to any extent in order to procure a car of their own choice, and they can even import cars from overseas and are willing to pay all types of duties and taxes.
Globalization of the industry and a tremendous jump in the sales & production in the developing countries besides promising market in the developed nations have transformed the facets of the auto mobile industry. Innovation in the auto industry is something pre-requisite, that is accelerating, because auto-makers are not only concerned about present models but also conceiving the idea of designing the future cars. Top car-makers are slated to take a resort to supercomputing technologies in order to conduct research focused at developing pollution free and less fuel consuming vehicles, and lowering CO2 emissions, enhancing safety and cost efficiency. All these innovations & technologies make automotive industry remain evergreen.
According to the Ministry of Commerce and Industry, the automobile sector in India has witnessed a tremendous compound growth at the rate of 22 % between the year 1992 and 1997. Moreover, the annual turnover of the automobile industry in India, in the financial year 2002-2003, is said to have exceeded the capital investment of Rs 50,000 crore. With Indian automobile companies gaining international market, the turnover in the same year was calculated to be Rs. 59,518 crore.
Mahindra and Mahindra:
Established in the year 1945, this company has given a cutting-edge dimension to the Indian automobile industry. It began as a general-purpose utility vehicle-manufacturing unit and expanded its business to automotive, tractor, MSL and inter trade. Presently, the largest company in the private sector, this company boasts of an advanced technological infrastructure and manpower. Maruti Udyog Limited:
The first ever Indian company to manufacture low cost cars, in collaboration with Suzuki of Japan, Maruti is considered to be the largest automobile company in India. The company is known for producing high quality, fuel-efficient cars with Japanese technology, but adaptive to Indian roads.
The company has attained the annual production mark of 3,20,000, which is a trendsetter for any Indian company. Among the cars it has manufactured are the Maruti 800, Zen, Maruti Omni, Wagon R, Baleno and the like.
India’s biggest manufacturer of commercial vehicles, the company boasts of an annual turnover of Rs 101.3 billion. It is counted among the top ten vehicle manufacturing companies of the world in 5-15 tones segment. Among its chief productions are light commercial vehicles, commercial vehicles, multi-utility vehicles, and passenger cars. TELCO has launched numerous car brands in collaboration with foreign companies like Cummins Engine Company, USA, Daimler Benz A.G.and Holset Engineering Company, U.K. Using technology that not only cuts out on the pollution but also the cost, the company has manufactured vehicles like Tata Safari, Tata Sierra, Tata Estate, and Tata Mobile. Presently, the company has a market share of 6.4 % in the luxury car section and 31.2% in the manufacturing segment of multi-utility cars. Brand name, adaptability to Indian roads, and fuel-efficiency are the key factors that have led to the growth and development of the Indian automobile industry.
Moreover, liberalization of government norms and policies for foreign investment, technology and easy loans have added to the advancement of this industrial sector. India’s auto industry is growing fast, but it remains a two-wheel nation. More than 78 percent of motor vehicles on the road are two-wheelers, their popularity driven by low price, high fuel mileage, and an ability to maneuver deftly through India’s dense traffic. For the last eight years, the two-wheeler market has grown at a compounded annual growth rate of 13 percent; in 2007, 8 million units were sold. Over the next seven years, we expect the number sold to nearly double, to 15 million units per year. But even as the market grows, motorbikes face a pack of ultra- low-cost four-wheel challengers: the “Sub-A” segment automobiles exemplified by Tata Motors Ltd.’s $2,500 Nano.
The recently launched Nano bridges the gap between $1,000 motorbikes and $5,000 cars. With the Nano and similar cars from Tata and Bajaj Auto Ltd., the industry is walking the market down the demand curve; the low prices will quadruple the number of potential new-car buyers. While the Sub-A segment gains traction, India’s auto market remains dominated by cars in the A (small) and B (compact) segments, which together account for about 65 percent of sales. Global small-car players like Hyundai, Suzuki (including Maruti), and Honda, traditionally the leaders in India, now face stiff competition from local manufacturers such as Tata and Bajaj. Renault has partnered with local players Mahindra and Bajaj. In the D segment (midsize) and higher, the market has been dominated by global manufacturers like Toyota, Volkswagen, Daimler, and BMW.
The overall passenger vehicle market in India is expected to grow from 1.7 million units in 2008 to 2.4 million units by 2013, surpassing the markets in Italy and Spain. By 2012, annual car sales worldwide will increase by about 11 million units per year, with India expected to account for 20 percent of the increase. At that point, India will become the world leader in small-car market growth. The economic underpinnings of this growth are strong. A historic structural shift in the Indian economy will continue to generate great wealth. Back in 1950, agriculture accounted for more than 50 percent of India’s GDP; today, agriculture accounts for only 15 percent and that share will shrink further. Rapid urbanization drives the need for commercial transportation. Consider the need to keep food cold: 30 percent of agricultural produce in India now perishes en route to the market due to refrigeration gaps in the supply chain; hence, there is a nationwide need for refrigerated trucks. Rail transport once dominated the people- moving business. No more. Roadway passenger traffic is expected to increase from 40 percent of the total in 2007 to 55 percent by 2020.
Meanwhile, an expected increase in defense spending will prompt new demand for commercial vehicles intended for military use. Domestic manufacturers such as Tata and Ashok Leyland Ltd. dominate the military– commercial market with a diverse product portfolio, while foreign manufacturers like Daimler and AB Volvo remain niche players. The small commercial vehicle segment is growing most quickly, attracting new players both foreign and domestic. Today, India boasts the world’s third- largest market for new commercial vehicles. Because it is also the world’s second-fastest-growing commercial market, its future looks even brighter.
A growth spurt in any industry presents an opportunity to shape a market for long-term prosperity. Motorbikes, the prime driver of two-wheeler growth, carry fairly high margins in a rapidly growing market. High-value sports and luxury motorbikes boast fat margins, too, yet global market leaders such as Harley- Davidson, BMW, and Ducati are not aggressively investing in the Indian market, which leaves an opening for domestic manufacturers. Sales of lower-margin scooters have increased somewhat, whereas sales of mopeds, with the thinnest margins, have declined. Mainstream consumers use two- wheelers for personal or family transport. New engine technologies that increase horsepower while maintaining the high fuel efficiency of the four-stroke engine have strong potential to further boost sales.
To sustain sales growth, manufacturers, dealers, and consumer finance groups must work together to build innovative financing options for consumers. The four-wheel passenger vehicle market has grown impressively at the hands of the new middle class, although market penetration remains low. Four-wheel automobiles are still too expensive for the vast majority of Indian motor vehicle buyers, although the Tata Nano and other Sub-A segment automobiles will bridge a significant gap in the automotive ladder. While the small-car market continues to develop, local players like Tata and Maruti are also aggressively pushing into the compact and entry midsize segments. The entry midsize market represents particularly fertile ground, expected to grow 27 percent over the next five years. At present, the Honda City, Hyundai Accent, and Maruti Esteem are the leading models in this segment. To become a global player in small cars for both domestic and export markets, Indian manufacturers will need new innovations in power-train and manufacturing technologies to drive down costs and compete with two-wheelers.
There are opportunities on the cost side of the entry midsize segments as well, as automakers utilize India’s world-class engineering and low-cost manufacturing labor. Global OEMs now have an opportunity to develop cars in India and even manufacture them for export to the Western markets. Even in a moderate economic scenario, we expect the four-wheel passenger market to reach at least 2.5 million units by 2015. India’s commercial vehicle industry, although one of the largest in the world, is nascent by Western standards. Only 20 percent of the nation’s commercial vehicles are in fleet ownership, compared with about 70 percent in the Western markets. An increase in fleet ownership will make the market more regulated, more consolidated, less price sensitive, and more apt to be driven by economics than by emotion. At the segment level, small commercial vehicles like the Tata Ace have changed the industry landscape. Combining high utility with low prices and low maintenance costs, these vehicles allow consumers to trade up from load-carrying three- wheelers. India is already the second- largest exporter of small cars. The Ace presents an opportunity to export small trucks to other emerging markets and will serve as a model that prompts other manufacturers to begin building and exporting similar vehicles. Refrigerated trucks represent a segment that will grow naturally with increasing GDP. Such trucks must be economically attractive and environmentally friendly; development of fuel-efficient technologies in this area will further increase the market size. In the meantime, high-end trucks and ultra luxury buses present opportunities for the domestic market and for export.
The measured build up to the automobile boom in India began in the 80s when Japanese manufacturers began to launch ventures for motorcycles and commercial vehicles. The economic liberalisation of 1991 relaxed restrictions and this led to a sudden acceleration in the growth of the automobile industry. According to CAGR (Compound Annual Growth Rate) there was a 13.7 % hike in car sales between 2003 and 2010 and this growth rate is expected to continue. In 2010 India recorded an annual production of more than 3.7 million units. On the global automobile scene, this makes India the seventh largest passenger car and commercial vehicle manufacturing industry. It is possible that the Indian automobile industry will even overtake Brazil to become the sixth largest passenger vehicle producer in the world. This industry can attribute its growth to domestic companies such as Tata Motors, Maruti Suzuki, Mahindra and Mahindra who were one of the first to expand their production and export operations in and across the country.
Historically, the middle class has always played an important role in India and even today the growth of this class along with a growth in the economy has benefited the automobile industry. More and more people seem to be able to afford cars like the Skoda and Benz (Skoda reported a 69% increase in sales in June 2011 and Benz recorded a 67% increase since last year).The ready availability of trained manpower at advantageous costs has made India an option to set up manufacturing units for many automobile companies. The things that could thwart this steady growth of the automobile industry are the rising fuel prices. It is unlikely that these prices are going to drop.
This along with the awareness of the harmful effects of the pollution caused by vehicle emissions may have an impact on the automobile industry. The industry has responded to this with Electric Vehicles (EVs) or power run vehicles. Abroad, the hybrid Toyota Prius had a good reception and in India the Reva is slowly becoming popular. Mahindra recently acquired a large stake in the company so it is possible to expect better models. Tata is also working on the electric version of their Nano while General Motors is expected to launch the electric Chevrolet Beat or Spark. According to sources Electric vehicles will become a regular feature on Indian roads by 2015.
As described earlier, India’s export orientation has been developed to tackle the overcapacity problem. As a result of this, the entire sector is not geared up equally for exports. The overall export is much lower than that of China but unlike China, India’s exports are more than its imports in most of the categories. In components, overall export and imports are very close to each other in 2004. India’s major export destinations of automobiles are developed countries such as USA, UK, Germany, Middle East and SAARC countries. Unlike China, Japan does not come among the top 5 export destinations of India. Also, India is making an effort to find out a South Asian market for its products which is evident as Sri Lanka, Bangladesh are among the major export destination of some product groups. India’s export basket is more diversified compared to China in full vehicles category. India significantly exports, motorcycles, passenger cars, tractors, vehicles for transporting more than 10 persons and vehicles for transportation of goods. Though India is not heavily into component trading the country is gradually specializing in safety components and engine parts. Also it is expected that due to capability in R&D India may be a right choice for sub-system and design development.
In case of imports, Japan, USA, Germany, UK, Korea Rep are important sourcing countries. Highest import is observed in body parts and safety component category. Thailand also has come as a major sourcing country for brakes, clutches and some basic components. India-Thailand FTA has given emphasis on trade of auto components and in future India’s imports from Thailand is expected to increase. India’s market size is not as big as that of China. It has net trade surplus in that sector due to tight regulatory policy in importing automobiles. India’s import tariffs on vehicles historically are higher than other selected countries. In component sector export and import figure remains very close to each other. India’s export product basket consists of motorcycles, passenger vehicles, tractors and goods transportation vehicles.
In recent time, export growth of passenger vehicles is impressive. India is gradually specializing in small cars and two-wheelers. Indian auto component sector was never designed for exports rather it was supposed to cater the demand of domestic producers only. But it is believed that industry has reached some level of maturity and will be able to increase its exports in near future. Today, India is among the world’s largest producers of small cars. The New York Times has rated India as a very strong engineering base with an incomparable expertise in the arena of manufacturing a number of low-cost, fuel-efficient cars has encouraged the expansion plans of the manufacturing facilities of a number of automobile leaders like Hyundai Motors, Nissan, Toyota, Volkswagen and Suzuki. On 22 February 2010, Hyundai motors exported its 10,00,000th car, the feat which was achieved by the firm in just over 10 years. Hyundai Motors is the largest passenger car exporter and the second largest car manufacturer in the country.
In the similar lines, General Motors has announced its plans to export not less than 50,000 cars made in India by the year 2011. In yet another proposal, Ford Motors is to setup a manufacturing facility costing about US$500 million in India with an annual capacity of 250,000 cars. The firm has stated that the facility will play a major part in its strategic plan to make India a hub for its global production business. In yet another significant move, Fiat motors has stated that it will source a big volume of auto components from India worth about US$1 billion. In the year 2009, India overtook China by emerging as the fourth largest exporter of cars in Asia.
In addition to its many opportunities, the Indian automotive industry presents challenges for all players. Political and economic stability in India and stable global financial markets are the keys to meeting predicted growth rates; however, stability has been hard to come by. Global Economic Crisis
For the short term at least, the global economic crisis has slowed India’s economy and the commercial vehicle market. The medium and heavy commercial vehicle markets have been affected more than light commercial vehicles. Consumer lending has been severely affected. Although interest rates have been reduced, the percentage of loan approvals has also declined. Customer trade-downs mean lower trim levels and lower-end models. Despite all this, the four-wheel passenger vehicle market is expected to reach approximately 6 percent growth, far below the historic 14 percent CAGR, but a healthy level nonetheless. As noted above, the news is not so good for the commercial vehicle sector—sales are expected to decline by 35 percent for FY09. With support for financing from the government, sales should recover in FY10. The two-wheeler segment has shown some resistance to the global crisis; however, in a broader market collapse, this segment will suffer as well. Commodity Prices
As discussed, the two-wheeler industry faces homegrown competition from ultra-low-cost cars priced at $2,500 and less. A return to high steel prices will challenge these inexpensive four- wheelers. Manufacturers have little option but to pass cost hikes on to low-wage consumers. Oil and other commodity price increases will also challenge the four-wheel passenger market. Commodity prices may be depressed in a slowing worldwide economy, but they’re in for another rapid rise once global economic growth recovers. Infrastructure and Technology
If India is to achieve the full potential offered by motor vehicle industry growth, it must address several challenges. Emissions and safety standards in India are not up to European or North American standards; without reform in these areas, India won’t be taken seriously as a vehicle exporter. At the same time, the commercial vehicle industry in India faces legislation that would mandate anti-lock braking (ABS) and anti-skid technologies; with a high personal-ownership rate for commercial vehicles, it will be difficult to pass on the increased cost of such safety mandates to price-sensitive consumers. Infrastructure development in India must keep pace with the growth of small cars on the road. Impediments to the construction of the Golden Quadrilateral, the highway connecting the country’s major metropolitan cities in a giant ring, would directly affect commercial segment sales. Currently India has only 3,700 miles of highway, compared to 25,000 miles in China and 46,000 miles in the United States. Given this underdevelopment in infrastructure, India needs to redefine the normal commercial truck pyramid by emphasizing sales of small and light commercial vehicles.
There is a very stiff competition in the automobile industry segment in India. This has helped many to realize their dreams of driving the most luxurious cars. During the recent past, a number of overseas companies have started grabbing a big chunk of the market share in both domestic and export sales. Every new day dawns in India with some new launches by active players in the Indian automobile arena. By introducing some low cost cars, the industry had made it possible for common men to buy cars for their personal use. With some innovative strategies and by adopting some alternative remedial measures, the Indian automobile industry has successfully come unaffected out of the global financial crisis. While the automobile industry in India is the ninth largest in the world, the country emerged as the fourth largest automobiles exporter on the globe following Japan, South Korea and Thailand, in the year 2009.
Over and above, a number of automobile manufacturers based in India have expanded their operations around the globe also giving way for a number of reputed MNCs to enthusiastically invest in the Indian automobile sector. Nissan Motors has revealed its prospective plans to export 250,000 vehicles produced in its India plant by the year 2011. General Motors has also come up with similar plans. During the current fiscal year, the Indian automobile industry rode high on the resurgence of consumer demand in the country as a result of the Government’s fiscal stimulus and attractively low interest rates. As a result the total turnover of the domestic automobile industry increased by about 27 per cent. A reply produced in the Lok Sabha recently has quoted data from the Society of Indian Automobile Manufacturers and has revealed that the total turnover of the Indian automobile Industry in April-February 2009-10 was 1,62,708.77 crore. This is a remarkable achievement compared with the total revenue of Rs 1,28,384.53 crore reported during the same period of last fiscal year. Specifically, the segment of commercial vehicles witnessed the biggest jump in revenues by 31 per cent by reporting Rs 38,845.09 crore. During the same period, the passenger vehicle segment in the country witnessed a growth of 27 per cent over the last fiscal year by reporting a total revenue of Rs 76,545.96 crores.
These figures imply a highly prospective road lying immediately ahead of the Indian automobile industry. Predictions made by Ernst and Young have estimated that the Indian passenger car market will have a growth rate of about 12 percent per annum over the next five years to reach the production of 3.75 million units by the year 2014. The analysts have further stated that the industry’s turnover will touch $155 billion by 2016. This achievement will succeed in consolidating India’s position as the seventh largest automobiles manufacturer on the globe, eventually surging forth to become the third largest by the year 2030 behind China and the US. The Automotive Mission Plan launched by the Indian government has envisaged that the country will emerge as the seventh largest car maker on the globe thereby contributing more than 10 percent to the nation’s $1.2-trillion economy. Further, industry experts believe that the nation will soon establish its stand as an automobile hub exporting about 2.75 million units and selling about a million units to be operated on the domestic roads.
Chapter 3 Automobile Marketing in India
The competitive nature of the automobile industry has prompted the companies to take up new and innovative marketing strategies to survive the competition. The luxury segment of cars is the segment, which sees maximum competition as the consumer has a number of models to choose from and it’s the volumes, which drive the margins. All the companies as a part of their marketing strategy offers a range of vehicles in all the segment to make sure that the customer is driving one of their vehicles only. Advertisements on the audiovisual medium are a rage as it gives the carmakers an opportunity to flaunt their cars. Flashy cars can be demonstrated on television but when it comes to the finer prints of the cars, print and online media comes to the rescue. The online medium offers a greater flexibility to the car companies since they come with a lot of interactive features like demonstrating the interiors of the car with its salient features.
The print medium on the other hand provides an opportunity to the car makers to explain the function of a car in detail. Celebrity endorsements and testimonial advertisements have come a long way and they are also doing their bit to sell the cars. Super star Shahrukh Khan has been associated with Hyundai Motor Company for a long time and he comes regularly on television to promote the cars. Similarly Ford has roped in Junior Bachan for the promotion of the latest offering from the company. On a similar note Saif Ali Khan and Rani Mukherjee is shown chasing each other with a Chevrolet. Aamir Khan who is considered to be one of the most talented actors in the industry is frequently seen changing roles on screen to promote Toyota.Cricketers haven’t been left behind in the race of promoting cars. Fiat had received a great thrust when the batting maestro Sachin Tendulkar took up the promotion of the car. In addition to the publicity and advertisement that is done by the companies there are certain innovative strategies that are taken up by the companies to beat the competition from time to time. “AUTOMOBILES” – PRODUCTION TO MARKETING
Today, the large car manufacturers has a production facility in the different markets and from each platform a car is produced for that market as well as for exports to other markets. Big players in automobile industry do not have just one big factory which exports its products to all other countries. In addition, the products are not identical in each different market. It may have the same technical platform, but the design and the options and features differ between countries. They are different because the demands of customers differ between countries. For example, in South America, incomes are lower than in Western Europe and customers need more affordable cars. In the USA the customers want more space in the car, and that’s an important factor for a car to be successful there. On the contrary, small cars are quite popular in India.
It is not possible to be in the high volume market and to send the same cars to every market all over the world. So car makers are researching what their customers want and changing the car for each market otherwise they will loose customers. More and more CKD (completely knocked down) cars are being produced for some countries in smaller volumes. That is often the case if there are barriers to exporting cars to particular countries, and they are only being sold in smaller volumes. With larger markets, where sales of particular models are high, companies really need their own plant which has its own suppliers of parts. Due to sharp competition and changing customer demand, product development process advances have been more significant than changes in product architecture. Product cycles continue to grow shorter as more companies adopt the simultaneous engineering approach pioneered by Japanese automakers‡. At the same time, advances in Computer-Aided Design (CAD) and Computer-Aided Engineering (CAE) tools are being used to replace physical prototypes and testing processes. Now, major players (in post M&A situation) take greater responsibility for product design and allow production base to get shifted to advantageous location for low cost.
However, still due to lack of standardization, number of tiers at the supply chain is not reduced. Moreover, when design is replicated with modification for physical product development, several domestic issues need to be taken into consideration. These are mainly legal liability, and regulatory procedures. Furthermore, there is a technological move towards modules, i.e. self-contained functional units with standardized interfaces that can serve as building blocks for a variety of different products. Modularization is expected to reshape the entire supply chain in automobile industry as component designs will gradually get shifted to supplier companies. This is expected to reduce cost significantly and increase efficiency. However, IMVP (International Motor Vehicle Programme at MIT) found that cost saving is still elusive. The absence of a clear cost advantage for modules, combined with the inherent technical difficulties of changing the highly integral product architecture of an automobile, has reduced the probability of successful modularization. Nevertheless, a number of factors could still accelerate the move towards modularity, including automaker efforts to shift investment risk to suppliers, the increasing use of information technology within vehicles, and the possibility that consumers will show a strong interest in built-to-order vehicles driven outputs for final assembly.
Many automobile companies concentrate on assembling activities only and some have long vertical chains. The industry has long planning horizon and high fixed cost associated with new car design. The degree of scale economies in the industry is very much associated with the flexibility of the technology to constantly produce different models from same platform. Some of the major technological issues which are important currently are increasing energy efficiency, competency of internal combustion engine (ICE), reducing the weight of vehicles, incorporating high-tech safety features, etc. (Monteiro (2001)). On one hand the effort of standardization is reducing cost but new challenges on the other as mentioned above is fuelling the cost of production. In India, automobile market is mainly dominated by Japanese and Indian manufacturers; also some other multinational companies are currently investing in India. The major foreign automobile manufacturers in India are Honda, Toyota, Ford, Fiat, Daimler Chrysler, etc. The major Indian players are Marutyi Udyog, TATA motors, Hindustan motors, etc. Automobile production in India rose substantially in last five years. 77% of market share is captured by two wheelers. Passenger and commercial vehicles capture around 19% market share (SIAM statistics for 2006-07). In China, JVs have given preferences for development of automobile sector. On the contrary, in India government made an attempt to develop automobile sector through domestic private sector before the liberalization. As a result of this, important Indian players have diversified ownership structures (see Diagram 3) where promoters, banks and financial institutions own significant shares of the companies. Maruti was developed as a subsidiary of Suzuki. Today, government owns around 10.27% and Suzuki Motors around 54% of total shares. In case of Tata Motors, Indian corporate bodies own significant shares (33%) and only around 7% comes from FDI.
In both the companies, FII owns limited number of shares. In case of Hindustan motors, promoters own around 29%, financial institutions 11% and individuals around 31%. Between 2002 and 2004 there has been major jump in production in almost all segments. During the period 2000-01 to 2006-07, average growth of vehicle production was around 40%. The majority of this growth has come from the growth of motorcycles and three wheelers. However, the growth of scooter has been only 4.72%. Passenger vehicles grew by 30% in last six years. Despite the speculations of slow growth from different quarters due to unprecedented rise in input prices, the growth of passenger vehicles has been quite impressive in last two years. In 2004-05, installed capacity for four wheelers was 1.72 million and for two and three wheelers it was 9.13 million. In India, domestic producers initially concentrated on producing small and basic models under a protective environment. Most of the foreign players in India have focused on mid-range market (with exceptions such as Hyundai’s Santro) with the models which have been successful in other countries. Many MNCs took up a cautious approach till the time Indian consumers are ready for big cars. It has been gradual but very steady approach. However, like Chinese market, Indian automobile sector also experienced surge of investment which led to overcapacity problem. Some companies changed their strategy and started exporting to tackle the demand related issue.
The overall automotive Components sector is highly fragmented and has important quality problems. Over 300 small and medium companies service directly more than 20 companies assembling vehicles in the country, with as much as 5,000 other micro firms working for the first tier suppliers and for the replacement market. Mostly due to regulation, component import dependence is also small, with 87 percent of the domestic demand satisfied by local firms. Despite these levels of localization, the industry is quite small by international standards (Veloso & Kumar 2002). Indian auto producers are capable of exploiting the cost advantage due to cheap labour and sufficient amount of localization but they are unable to do so due to small demand and low level of productivity.
Automobile companies have adopted a strategy of global perspective in their operation. Growth of transplants in 1990s led to a presence of all competitors in virtually every corner of the globe. By focusing on common platforms and interchangeable modules, companies are able to make faster and lower cost deployment of new solutions across the whole product range, while tailoring vehicles to a multitude of tastes and preferences of consumers in the world. Moreover, they can assure enough differentiation between products to cope with proliferation while maintaining scale efficiency and a proper management of brand equity. As a result, major automakers are now operating on a global scale. With new investments, firms are also trying to replicate supply chain structures, demanding suppliers to be present in the new regions where they are located, often near their plants.
The supply chain of auto industry has completely changed over the years. Major OEM (original equipment manufacturer) players world-wide are increasingly focusing on basic design and assembly operations as well as servicing the after-sales market and prefer to deal with a smaller number of large suppliers. Consequently, the supply chain is morphing into sub-system integrators, component makers, and commodity players. The segregation is increasingly defined by ‘risk sharing’ which was earlier defined by only ‘cost pressure’. Tier 1 suppliers (concentrating on system supply, module assembly and sub supplier management) are taking increasing risk from major players shifting the cost pressure to Tier 2 supplier who concentrate only on production of sub components. In general, suppliers can be divided into few groups such as Systems Integrator (capable of designing and integrating components, subassemblies), Global Standardized–Systems Manufacturer (specialist in design, development and manufacturing of complex systems), Component Specialist (produces specific component or subsystem for a given car or platform) and Raw Material Supplier. Many companies (such as Volkswagen and Renault) feel that a mono-supplier strategy (such as in Ford) is not good but having limited number of large suppliers are of a better strategy.
Ford pushes the supplier to own the tools, a strategy of pushing the risk associated with volume fluctuations onto the supplier rather than Ford. Suppliers will have to be concerned with their amortization schedule when quoting prices because payback for the investment in tools must be included in price (Veloso & Kumar 2002). On the contrary, Volkswagen and Renault, are satisfied with 2 suppliers in each region with an additional one having less responsibility but ready replace any of the existing supplier. Globally, these companies want their suppliers to invest near their plants or transfer their knowledge to local players. Companies bring the quality standards and price reduction condition while developing the contract with the suppliers. In general, contract length and overall value are related to price reduction targets that the supplier is able to commit to.
For some of the assemblers, suppliers can also propose alternative designs that have the same economy results. The experience shows that magnitude of reduction per year varies from 2 to 8 percent due to achieving economies of scale. The competitive pressure in the industry is increasingly bringing the cost reduction targets as a major management decision of assemblers. Nowadays, major companies target cost reduction along with the design and models over a period of time. For example, German companies are targeting price reduction of 13% for the next generation model.
The changes in the automobile companies’ strategy have led to considerable restructuring in the components industry. In the 1990s, mergers and acquisitions created global mega-suppliers who became responsible for designing systems for vehicles. Mega- suppliers also in turn reorganized the rest of the value chain, managing the second-tier suppliers and developing supply systems in many different locations. The components industry is now increasingly concentrated in companies that can design and provide systems and sub-assemblies across different markets. Several supplier companies were created by assemblers. In fact, in-house component manufacturing division were given separate identities and encouraged to compete with other companies. For example, Delphi was created out of GM’s component activities. Similarly, Visteon (formerly part of Ford), Magneti, Marelli (Fiat) and ECIA (formerly owned by Peugeot-Citroen and now fused with Bertrand Faure) were also created in the similar line. M&A activities among suppliers also became a common feature in 1990s. Lucas and Varity merged in 1996, T&N was taken over by Allied Signal;
Bertrand Faure was acquired by ECIA. New global companies were created through the fusion of smaller manufacturers also. In Asia-Pacific region, the growth of component manufacturers has taken a different route. Most of the Japanese producers followed a tight relationship with their suppliers (independent or quasi-independent). The existence of the keiretsu system (business affiliation) in Japan greatly facilitated such an arrangement. But other manufacturers especially Korean, Chinese and Indian gave lot of importance on price and quality while buying from number of trusted suppliers. As a result of this indigenous auto-component sectors are thriving in many Asian countries though some MNCs are also present. Pricing:
Pricing of automobiles is a complex issue as it is dependant on fixed cost, economies of scale, technology and other aspects. Competition and consumer demand also play important role in this. Currently, most of the automobiles companies consider price reduction as major strategic move for survival. For price reduction, companies need to take series of decisions at every stage of production and selling; starting from managing factors of production and supply chain to negotiation with dealers. Price is one of the factors that influences sales variability of products and services significantly. Companies require appropriate policies to be played intelligently for managing the series of decisions. Interestingly, reducing prices does not always generate profits.
It should be in combination of other decisions regarding maintaining quality and marketing of the product. One undesired consequences of considering price reduction as the main means of obtaining customers, is attracting disloyal customers, who are attracted by the offer but do not see any other value in the company. Their life-cycle in the end is short, and they receive a much greater return from the company than the company can even make up the cost for obtaining them. Many companies take strategy of different pricing policies for different product segments of the considering the expected value to the customers through the offered products. Companies develop innovative strategies to maximise profits without hurting customers. Pricing is adjusted to the qualities, purchase volume, development potential, loyalty and profitability factors.
As the fixed cost is very high, companies look for different models from same platforms and decide about the total output of each model. The wide range of outputs along with the degree of economies of scale drive down the average cost of production. If the auto makers are basing price on average costs, expected deviations in output in the short run (between model years) could significantly affect prices without any change in factor costs. Moreover, higher the fixed costs as a proportion of total costs, the more sensitive is short run marginal cost to changes in the costs of the of variable factors of production (for example sudden rise in prices of steel or rubber). Thus the low proportion of the variable costs in the auto industry would make short run marginal costs especially sensitive to variable factor price changes. If firms are short-run profit maximizers, prices should respond positively to changes in variable factor costs (Hoffer, et al. 1976).
In most of the countries, automobile sector is identified to have monopolistic market (in some countries it is oligopolistic) structure where many players compete for market share with significant amount of product diversification. As a result of this, in the long run, most of the players earn zero normal profit and in the short run super-normal profit. Hence, competition in the short run is intense particularly when product life-cycle is very short. Moreover, within segment the nature of competition sometimes is oligopolistic as the number of models under one segment may be limited in a model year. Dominant firm sometimes take a strategy of ‘limit pricing’ setting it below monopoly prices while bringing a new model to bloc entry of other firms in that category.
However, after sometimes, it raises prices and allows entry in the usual fashion and convert the competition towards non-price variables. If non-price attributes involve slower responses by the other players e.g., due to product development lags, the dominant firm is likely to prefer to manipulate these characteristics in order to maximize profitability. According to (Kwoka, 1984), when a dominant firm or core begins with a substantial advantage over the fringe, we would expect an initial effort to drive the fringe down in size through strategic product policy, followed by product alterations which increase profitability while permitting some entry. According to Copeland et al. al.(2005) companies develop only one vintage of a product at a time and accumulate inventories and consequently sell multiple vintages of the same product simultaneously. The profit maximizing pricing and production strategies under a build-to-stock inventory policy lead to declining prices and rise in sales (and fall there after) and similarly, inventory stocks get built up initially and then gradually get depleted. A significant portion of the price decline inventory control considerations, as opposed to decreasing demand. Hence, along with ‘limit pricing’ strategy, inventory control plays an important role in maximizing profit of the automobile companies.
There has been evidence of collusive pricing also. The price disclosure law in the USA made major players to come together and which created a collusion among themselves regarding equalization of ‘quality adjusted’ prices. The law has inhibited players to provide price discounts (Boyle & Hogarty, 1975). Sudhir (2001) uses the ability-motivation theories and argues that in markets with high concentration and stable environment cooperative behaviors among producers are sustainable and therefore provide firms with the ability to cooperate.
He also argues that in a market where firms’ current customers tend to be loyal, they have the motivation to compete aggressively for new customers. Firms do so as they believe about the positive benefits of loyalty from the customer base in the long run. As consumer loyalty in the market increases, the gains from increasing market share by aggressive competitive behavior are more than offset by losses in profit margins. Firms therefore have the motivation to price cooperatively. In the USA, earlier GM used to announce price in late summer and Chrysler and Ford would follow suit. However, foreign competition and erosion of domestic concentration has changed price uniformity. Prices are now continually altered throughout year. In general, price variation is subject to mark-ups, costs and also imports duties and other trade barriers.
Tax structure is important both for demand and production as it is treated a an additional cost and affects demand by rising selling prices. Automobile industry in these countries is subject to variety of taxes such as excise tax, sales tax, corporate income tax, VAT and import duties. Table 21 provides the comparison of tax structure in these four countries. It may be noted that taxes on automobile industry do not have a homogeneous structure in the selected countries. In India taxes are not vehicle specific. However, in Thailand and China different taxes are levied on cars, motor vehicles, CVs etc. Corporate Income tax is highest in India among all these four countries. Quite interestingly, corporate income tax in China is higher in state owned enterprises (SOEs) compared to JVs. China is giving importance on JVs in terms of production. This is reflected in lower corporate income tax. Indian Government Policy & Taxation Structure
The Government of India is paving the way for research & development in automobile industry by offering suitable fiscal and financial incentives so as to to improve research and development activities of vehicle and component. Rebate on the applicable excise duty for every 1 per cent of the gross turnover of the company. The govt is fostering auto makers to found the independent auto designing firms through offering them tax relaxation, concessional duty on plant & equipment. Approval for upto 100 per cent foreign equity investment for manufacturing of automobiles & components.
Liberalization of import tariff of technology enhancement on 5 per cent royalty, around the payment of USD 2 million is also allowed under automatic route, is all meant for encouraging demand & promoting the growth of the industry. The extant policy to drive global players into the Indian market is more investor friendly, addressing emerging problems and is World Trade Organization compatible. International Trade:
The dynamics of international trade in automobile sector attracted attention of economists and policy makers to formulate trade strategy. International trade of automobiles has been influenced both by liberalization as well as protectionism. In the 1970s and 1980s, the U.S. auto industry faced its first major challenge from foreign competition as Japanese automakers aggressively entered the American market. The decline of automobile sector in USA and rising Japanese imports led to protectionism in USA through imposition of quota. This led to voluntary export restraints (VER) from Japan anticipating further restriction. Japan continued with VER even after the relaxation of quantitative restrictions by the USA government in 1985. In the post oil crisis period, Japanese fuel efficient cars were high in demand in USA (Finan, & Rappoport (1982). Also, reluctance of the Big Three in the USA to produce smaller cars led to increase in import demand from Japan.
Apart from this, the annual import limit had the perverse effect of encouraging Japanese car companies to change the product mix of vehicles they shipped to the USA, sending more upscale models, where the profits were greatest, and fewer smaller, cheaper cars. In the early 1980s estimates say that the quota was transferring US$5 billion a year in additional profits to Japanese automakers, who could sell their quota-limited cars at a premium††. Japanese car majors Toyota, Nissan, Honda, etc jumped the quota barrier and invested in USA for the domestic market also. The protectionism in automobile market is also prevalent in Korea Rep. Korean automobile companies developed the sector through protection and currently companies like Hyundai are heavily into export business. Similarly, Indian trade policy ensures high barrier in importing vehicles to provide protection to domestic players who have started exporting recently. In contrast to Japanese producers, companies from the USA were catering mainly to domestic market. In the post quota period, when Japanese players reduced prices in US market, domestic players were unable to compete.
Due to very high level of output and efficiency, Japanese players achieved significant economies of scale which was unattainable for US automobile giants. Today, this has led to complete restructuring of the industry where even US majors have started investing in other countries to capture the global market share. Germany, Japan and Canada emerged as major exporters of automobiles to USA (Warf, 1990). There is a strategic difference between Japanese and German players also. Studying the trade data (see Table 2), it is clear that Germany has emerged as a major vehicles exporting country in 2005 overshooting Japan. Japanese companies are more interested to relocate their plants (and also bring fresh investments) to SE Asia or other developing countries and use that base as exporting platforms. As a result, export from Japan gets reduced. Germany has given thrust to mid and big size high priced vehicles in its export basket in contrast to Japan which also gives importance to low value small cars. All these countries also import auto components significantly. Quite interestingly, Asian players such as Japan and Korea, rep import very less amount of components giving importance to domestic component industry which is fairly protective.
Today’s successful automobile companies possess at least some of the following attributes: production efficiency, well-planned cost structures, manageable size, distributed management of brands, attention to underserved markets, focused strategy, and well-respected brands and products. In this section, we will address each of these attributes individually. Production efficiency has played a significant role in making Toyota the most successful of today’s automobile manufacturers. Toyota has continually sought to improve efficiency through a number of innovative operational strategies such as the JIT paradigm and the Total Quality Management (TQM) view of design and production. In addition to innovative business strategies, Toyota has moved towards fully automated production facilities, resulting in both decreased labor costs as well as faster production times. It is interesting to note that the automotive industry’s most productive companies in terms of revenue are also some of its least profitable.
This can be attributed to the lack of well-planned cost structures within the industry’s largest producers. High costs can partly be attributed to inefficient production and distribution practices, but increasing health care costs are also a significant drain on the Big 3. In general, the companies without strong labor unions have more flexible cost structures in addition to having lower overall labor costs. Manageable size is obviously not an attribute of today’s struggling auto manufacturers. This is partly due to poor management and partly due to inertia—it is much more difficult for sweeping changes to filter through the atrophied bureaucracy of an older, well-established organization than through the relatively younger, more flexible foreign companies. Distributed management of brands seems to positively influence the prestige and marketing success of large, conglomerate corporations. This is especially relevant in today’s mature markets where numerous older brand names have repeatedly joined forces under consolidated central managements.
For example, the Chrysler Group is better able to manage and market Dodge products in the U.S. from Detroit than DaimlerChrysler central management would be able to do from Stuttgart; local management better understands both the customer and the brand. In addition to targeting market segments by locale, identification of and focused attention to underserved markets have helped smaller producers wedge their way into a larger market share. Honda, for example, is not able to compete with Mercedes in the high-end luxury sedan market due to Mercedes’ brand name and prestige. Honda is not able to compete with Ford or GM in the pickup truck market because of their consumers’ loyalty. However, recognizing these limitations, Honda has instead focused their efforts on producing reliable, relatively inexpensive sedans. Today, there are also two clear examples of the effectiveness of identifying and exploiting niche markets. Companies such as Toyota and Honda have established an upper hand on the Big 3 manufacturers by being the first to develop hybrid vehicles. Customizable products such as Toyota’s Scion line or DaimlerChrysler’s Smart Car similarly appear to be indicative of an emerging market niche.
Focused strategy seems to be an essential principle of management in all industries, but its demonstration is especially apparent in the automotive industry. While management at Toyota has been radical in their commitment to production efficiency, larger producers such as GM and Ford have been left behind with their attempts at moderation. JIT management, for example, cannot be successful when done halfway. Toyota’s strategy which focuses on responsiveness and consumer needs has proven successful, whereas companies such as GM and Ford who have not invested as heavily in either one have been considerably less successful. Finally, since automobiles are expensive long-term consumer investments, it is necessary that automotive companies produce well-respected brands and products. Brand loyalty takes time to build, but it can be done as evidenced by the successes of Toyota, Honda, and Nissan in the U.S. market. These companies were virtually non-existent in the U.S. before the 1980s, whereas now their products are ubiquitous on U.S. highways. DaimlerChrysler attributes much of their relatively consistent performance to the fact that they have established a tradition of quality brands such as Dodge and Mercedes and have thus achieved sustained customer satisfaction. General Trends in Direction and Evolution
Aside from specific company attributes, it is also possible to identify some general trends in the automotive industry. Studying these trends helps predict where the industry is headed and how it will evolve to meet new challenges. These trends will be useful in identifying which companies will likely be successful and how they will achieve success. In what follows, we will address the following trends individually: international expansion, conglomeration in mature markets, distributed competition in new markets, increased environmental regulation, increased energy constraints, and increased operational efficiency. International expansion has the potential to be the most lucrative growth sector in the automotive industry. In the U.S., there are 765 cars per 1000 people; in Japan, 543; and in the United Kingdom, 426. In contrast, Brazil has 81, Indonesia 21, India 12; and China only 10; these unsaturated markets provide potential for phenomenal growth. In the past several years, China has been the focus of this international expansion. In 2003, 4.44 million cars were sold in China, up from 2.1 million in 2001. However, it appears as though growth in the Chinese auto market has currently slowed considerably. Whereas growth was at 34% in 2003, the growth expectation for 2005 is down to 12% – still considerably higher than Detroit. It remains to be seen whether this growth will spread to South America, Africa, India, and other emerging markets. It is also uncertain as to whether these markets will be captured by local companies, by one or several of the large, multinational automotive corporations, or by joint ventures between the two.
Conglomeration in mature markets and distributed competition in new markets is a remarkable but obvious trend in the automotive industry in recent years. The 1990s saw a spate of mergers among American, European, and Japanese automotive companies. Since 1989, Ford has bought Jaguar, Aston Martin, Land Rover, and Volvo; Daimler-Benz AG and the Chrysler Corporation merged in 1998; and Nissan and Renault formed a strategic alliance in 1999. GM and Volkswagen have also taken over a number of other smaller companies. Comparatively, emerging markets such as China and India have seen a somewhat contrary trend. China, for example, has over 120 companies that make passenger cars. This results in distributed competition in new markets, with the large international firms competing not only with each other but also with the numerous smaller, local companies. This diversity in the young markets parallels the early years of the American automotive corporate landscape; it is likely that the trend towards conglomeration seen in mature markets will spread to the emerging international markets over time. Two general trends that almost certainly will not change are increased environmental regulation and increased energy constraints. While the U.S. government is considerably more lax than its EU counterparts, the trends definitely point towards tighter emissions controls in all developed markets and, ultimately, in today’s emerging markets such as China and India. Besides governmental regulation, auto manufacturers are becoming increasingly affected by a perceived increase in fuel costs. A recent study by the United States Geological Survey (USGS) has predicted that crude oil production will peak sometime between 2026 and 2047, which means that energy constraints will play an increasingly important role in the automotive industry.
This fact has many automotive companies developing hybrid drivetrains and looking for alternative energy sources to power their vehicles in the near future. As in many sectors, increasing operational efficiency of automotive design, production, and distribution is becoming one of the most important factors in establishing a competitive advantage. Movement towards “real-time” enterprise is increasing, with cycle times becoming shorter and shorter. Table 2 of Appendix A shows, for example, the average amount of time that each company spends fabricating a single vehicle. In almost all cases, this time has been reduced since last year. These increasingly short turnarounds result in reduced customer lead-time and increased efficiency and productivity for the manufacturer. Emphasis on JIT production and digital information management along with flexible manufacturing lines and supply chains will reduce over-capacity production and will eventually allow customized automobiles to be fabricated and delivered within days or weeks.
Chapter 4 Marketing Analysis of Top Three International Automobile Companies in India Audi
The luxury car manufacturer, Audi, was established in 1910, with its headquarters in Ingolstadt, Germany. The company name is based on the surname of the founder August Horch, meaning listen — which, when translated into Latin, becomes Audi. In 1909, Horch was forced out of the company he had founded. He then started a new company in Zwickau and continued using the Horch brand. The first Audi automobile, the Audi Type A Sport-Phaeton, was produced in 1910 in Zwickau. His former partners sued him for trademark infringement and the German Supreme Court finally determined that the Horch brand belonged to his former company. August Horch was barred from using his own family name in his new car business, so he met with his best business friends, Paul and Franz Fikentscher from Zwickau. At Fikentscher’s apartment, they discussed how to come up with a new name for the company. During this meeting Fikentscher’s son was quietly studying Latin in a corner of the room.
Several times he looked like he wanted to say something but couldn’t, until he finally blurted out, [“Father wouldn’t it be a good idea to call it Audi instead of horch?”] “Horch!” in German means “Hark!” or “hear”, which is “Audi” in Latin. Everyone attending the meeting enthusiastically accepted the idea. Horch left Audi in 1920 for a higher position at the ministry of transport, but was still involved with Audi as a member of the board of trustees. In September 1921, Audi became the first German car manufacturer to present a production car, the Audi Type K, with left-handed drive.
Audi cars were successful even in sporting events. Audi has competed in numerous forms of motorsports. Audi’s rich tradition in motorsport began with their former company Auto Union in the 1930s. In the 1990s, Audi dominated the Touring and Super Touring categories of motor racing after success in circuit racing in North America. In 1980, Audi released the Quattro, a four-wheel drive (4WD) turbocharged car that went on to win rallies and races worldwide. It is considered one of the most significant rally cars of all time, because it was one of the first to take advantage of the then-recently changed rules which allowed the use of four-wheel drive in competition racing.
Many critics doubted the viability of four-wheel drive racers, thinking them to be too heavy and complex, yet the Quattro was to become a successful car. Leading its first rally it went off the road, however the rally world had been served notice 4WD was the future. The Quattro went on to achieve much success in the World Rally Championship. The carmaker became a subsidiary of automobile giant Volkswagen Group in 1964. Today, it has production locations in a number of countries, including Hungary, Brazil, Belgium and China.
As a manufacturer of high-quality and innovative luxury cars, Audi, one of the world’s leading premium brands and among the most admired on the world market came to India and set up its own sales company for India in 2007. With the aim to cater to the super-rich consumers, Audi entered the Indian automobile business and began its operations as a subsidiary of Mumbai-based Volkswagen Group Sales India Pvt. Ltd. Some of the Audi cars are imported as Completely Built Units (CBU) and then assembled in India, at the Aurangabad facility of Skoda Auto. The cars launched by Audi in India are regarded as a symbol of class, elegance, sportiness and luxury. The basis of its success comprises pioneering concepts in the domains of advanced technology and design.
By establishing Audi India as a Division of Volkswagen Group Sales India Pvt. Ltd. in Mumbai, Audi has made a clear long-term statement in the country with ambitious growths plans. Audi’s goal is to become the leading automobile luxury brand in the Indian market in the next few years. The Audi India strategy encompasses significant investments in branding, marketing, exclusive dealerships and after sales service for the upcoming years. At present, Audi is assembling the Audi A6 and the Audi A4 for the Indian market in Aurangabad. MARKETING MIX OF AUDI
Audi has novel marketing initiatives to spearhead its presence in India. It is eyeing the possibility of endorsing its brand through national teams (in sports) or celebrities; though none of them would be brand ambassadors for the automobile major. On the launch of its Q7 model, the company had former cricketer Ravi Shastri promoting the product and the brand. He was promoting the brand on a goodwill basis due to his lineage with Audi (the cricketer was awarded an Audi 80 in the Benson and Hedges cup 1985) but was not a brand ambassador for the company, said Mr Rahil Ansari, country manager, Audi. The company intends endorsing its brand through such events in conjunction with leading celebrities and teams. Globally, it has been endorsing two football teams (Manchester United – UK and a Munich – Germany-based). Besides brand endorsements, the company has plans to offer Audi merchandise for its elite list of Audi aficionados.
The whole range would not be available; only certain products that would suit the Indian buyer will be available with the dealer. The products would be carefully scrutinized and picked up based on the lifestyle of the Indian consumer. Globally, merchandise of famous brands is a common marketing tool that is being endorsed by several companies. Audi has embarked on an intensive recruitment drive and aims to hire around 600 employees over the next two years. The spate of new hires is in line with the slew of product launches and expansion of its national footprint across India. The luxury automotive industry in India is poised for a giant leap forward. It is Audi’s constant endeavor to create a talent pool, which will lead this industry to accomplish global excellence at a local level. In line its commitment, Audi India will soon announce collaboration with INDIA Future of Change to feature a series of multi-disciplinary contests that reach out to students of leading business and design schools across India. These nationwide contests are a unique attempt to explore and harvest innovative ideas and solutions for the Indian automotive industry.
Also this will help them to promote its cars in a unique manner. According to their promotion strategy Audi India recently opened a brand new showroom in Ludhiana. Early this year, Audi inaugurated showrooms in Chennai and Delhi. Further developments include Coimbatore, Delhi West, Indore, Lucknow, Mumbai South and Surat. On the product front, Audi India has launched a slew of class-defining models this year, beginning with the Audi A8 L, the super sports cars, Audi R8 V10 and Audi R8 Spyder, the design marvel, Audi A7 Sportback and the high performance Coupé, Audi RS5. The new Audi A6, which soon arrives on Indian roads, will further consolidate Audi’s position in India. Audi India strongly believes that a competent workforce exhibits and fosters Audi’s brand values of progressive, sporty and sophisticated image, and it is one of the major contributors to profitable growth and will soon help them achieve the leadership position in the luxury car segment in India. This move is also a reiteration of its commitment to be a part of the India growth story.
Audi activated a marketing promotion around “Iron Man 2” that included prominent product placements for the R8 Spyder and the A8 sedan. Related marketing efforts included “Iron Man” themed spots in movie theaters, on late night TV and a presence on Fandango.com and Movies.com. An episode of “Entertainment Tonight” integrated the R8 Spyder by featuring Robert Downey Jr. and director Jon Favreau discussing the vehicle as well as host Mark Steines covering it in a segment. Audi also sponsored the re-launch of Marvel.com, which showcased the car via a digital comic book. Audi’s social media aspect of its “Iron Man” marketing came about in the “Tony Stark Innovation Challenge” contest, which promoted the movie’s theme of technology as a force for good. “Iron Man 2” was not the only movie with an Audi. Tina Fey and Steve Carrell’s characters stole the R8 Coupe from Mark Wahlberg in “Date Night,” while Tom Cruise and Cameron Diaz drove the S5 Cabriolet in “Knight and Day.” In India Audi has promoted its cars in many movies one of which is “Bodyguard” starring Bollywood actor Salman Khan. Mobile apps have become a new plaything for marketers and, you would have to believe, a worthwhile channel to engage a significant number of the right target customers. Kudos to both BMW and Audi for maintaining a rich depth of related apps and podcasts on the iPhone, iTouch and iPad platforms.
They produce a variety of podcasts, video content, brand experiences and related news content for their enthusiasts. I feel BMW has a slightly richer level of content through BMW magazine’s iPad apps and BMW TV podcasts. The BMW Z4 features a 360 degree view of the new Z4 roadster, which does a nice job for the brand. I also liked its Motorsport Le Mans 2010 app which was populated with some rich content. Audi’s A4 Driving Challenge driving simulation, one of its most popular gaming apps, had good graphics but, I have to admit, leaves me a little dizzy. While video and interactive experiences are the vogue, I would have liked to have seen some quality audio. I’m sure many drivers who are able to connect their iPods to their cars’ audio systems would be open to listening to some content that adds to their driving experience. Customer profile: Average Age 30-45
Bayerische Motoren Werke AG (BMW) is a German automobile, motorcycle and engine manufacturing company founded in 1916. It also owns and produces the MINI brand, and is the parent company of Rolls-Royce Motor Cars. BMW produces motorcycles under BMW Motorrad and Husqvarna brands. BMW is known for its performance and luxury vehicles. After World War I, BMW was forced to cease aircraft (engine) production and the company consequently shifted to motorcycle production in 1923, followed by automobiles in 1928–29. In 1959 the automotive division of BMW was in financial difficulties and a shareholders meeting was held to decide whether to go into liquidation or find a way of carrying on. It was decided to carry on and to try to cash in on the current economy car boom. The rights to manufacture the Italian Iso Isetta were bought; the tiny cars themselves were to be powered by a modified form of BMW”s own motorcycle engine. This was moderately successful and helped the company get back on its feet. In 1994, BMW bought the British Rover Group and owned it for six years. By 2000, Rover was making huge losses and BMW decided to sell the combine.
The MG and Rover brands were sold to the Phoenix Consortium to form MG Rover, while Land Rover was taken over by Ford. The 1 Series, launched in 2004, is BMW”s smallest car, and is available in coupe/convertible and hatchback forms. The 3 Series, a compact executive car manufactured since 1975, is currently in its fifth generation. The 5 Series is a mid-size executive car, available in the sedan and station wagon forms. The 5 Series Gran Turismo beginning in 2010, created a segment between station wagons and crossover SUV. BMW”s full-size flagship executive sedan is the 7 Series. BMW introduced many of their innovations first in the 7 Series, such as the iDrive system. The 7 Series Hydrogen, featuring one of the world’s first hydrogen fueled internal combustion engines, is fueled by liquid hydrogen and emits only clean water vapor.
The latest generation debuted in 2009. Based on the 5 Series” platform, the 6 Series is BMW”s luxury sport coupe/convertible. A two-seater roadster and coupe that succeeded the Z3, the Z4 has been sold since 2002. The X3 was BMW”s first crossover SUV. It made its debut in 2003 and is based on the E46/16 3 Series platform. The all-wheel drive X5 is a mid-size luxury SUV sold by BMW since 2000. The X6 is marketed as a “Sports Activity Coupe” (SAC) by BMW. The X1 extends the BMW Sports Activity Series model lineup. BMW India was established in 2006 as a sales subsidiary in Gurgaon (National Capital Region). A state-of-the-art assembly plant for BMW 3 and 5 Series started operation in early 2007 in Chennai. Construction of the plant started in January 2006 with an initial investment of more than one billion Indian Rupees. The plant started operation in the first quarter of 2007 and produces the different variants of BMW 3 Series and BMW 5 Series.
Mr. Peter Kronschnabl, President BMW India has been the face of BMW in India and has led them to the Numero Uno position in the luxury car segment in just three years, overtaking Mercedes, which had been firmly entrenched as the leader in the Indian market. BMW India Headquarters was established in Gurgaon (NCR), a Central Parts Warehouse in Mumbai and the BMW Plant Chennai in Tamil Nadu. In medium term, BMW India has employed around 200 people; up to 600 additional jobs have been created in the dealer and service network. BMW is aggressive and fast, and its Indian journey proves that. Within four
years of its launch, the company unseated Mercedes to become the top-selling luxury car in India, its market share has moved up from 9% in 2006 to 42% in 2011. Appealing to the younger buyers (average age of a BMW buyer is 40 years), it has introduced a varying product range at different price levels, starting with its cheapest model X1 available at Rs 23.7 lakh. It will further strengthen its portfolio by bringing in its MINI range, a new 3 Series and the new M5 sometime soon. On the back of all this, the country head Andreas Schaff is hoping to make India among the top 10 countries for BMW globally in the next 10 years.
At its Chennai plant, BMW assembles 3, 5 series and X1 while others like X3, X5 are imported as a fully built unit. But with growing sales, it may set up its second plant by 2015. It might also scale up its manufacturing facility from just complete knock-down (CKD) kits. Their local component sourcing, currently low, will rise. Already, they have a global sourcing team here to cater to their global needs and have identified 20 vendors so far. This number should go up in future. Its marketing strategy has largely been to create touch points like professional golf tournaments, wine tasting sessions and events with fashion designers.
Last year they organised an Xperience Drive in Gurgaon which brought in international trainers with a live performance by the Australian Raw BANG. A test course, with 10 obstacles, was especially designed to bring out X range’s special features. BMW is growing its dealer network and hopes to touch the 60 mark by 2015. With 80% of its cars being financed by its own financial services arm, BMW financing is a brisk business. Its recently launched used-car business BMW Premium Selection will soon be available across all its dealerships.
Aggressive product offering and rapid market expansion.
Anticipate trends and be prepared for the future.
Rigorous marketing strategy and strong corporate communications have contributed largely to the company’s success in India. By end of 2012, BMW India aggressively plans to expand its dealer network by doubling the number of outlets to 40 major metropolitan centres and emerging markets in India from the present 20 outlets. Setting up a 22-acre manufacturing unit in Chennai.
Mercedes-Benz entered the Indian market in 1994 as Daimler. After Daimler mergered with Chrysler, the Indian company was renamed as DaimlerChrysler India Private Ltd. In 2007, when Daimler sold out its shares in Chrysler, the company was renamed as Daimler AG and the Indian company was called Mercedes-Benz India. Mercedes-Benz India signed a joint venture with Tata Motors and launched the E220 officially in India. Mercedes-Benz and Tata Motors (then known as Telco) had struck a deal way back in 1954 to jointly manufacture medium commercial vehicles. All the Mercedes-Benz passenger cars were assembled at Tata Motors Pimpri plant. This plant was utilised by the German manufacturer to assemble and paint their cars. Tata Motors , however sold off its entire stake in the company to Mercedes-Benz India in 2000-01. Mercedes-Benz Research and Development India (MBRDI):
Mercedes-Benz even has a research and development centre (MBRDI) in Bangalore in India. MBRDI had eight employees in 1996 and now the count has got up to 367. MBRDI today is the largest research centre for the company based outside Germany and contributes in the areas of Computer Simulation (CAE), Design (CAD), Electrical/Electronics and IT-Services. Manufacturing plant in Chakan:
Mercedes-Benz India formally inaugurated its new manufacturing plant in Chakan, Pune in February 2009. The new facility was completed within 13 months from the start of construction — among the fastest green-field projects to be created. With an area of 100 acres of land and independent assembly facilities for passenger cars and commercial vehicles, the infrastructure was created to address future expansion needs, underscoring the long-term growth plans of the company in India. While the plant was designed to manufacture the current local production portfolio of the Mercedes-Benz C-, E-, and S-Class, it is also flexible enough to accommodate additional production of other models from the Mercedes-Benz model range on the same assembly line, if required by future market demand. CSR activity:
In August 2003, DaimlerChrysler India with Central Salt and Marine Chemicals Research Institute (CSMCRI) and the University of Hohenheim as partners started ”The Jatropha Biodiesel Project”. The project is partly funded by DEG (Deutsche Investitions Entwicklungsgesellschaft). Since 2004, the Jatropha Biodiesel has generated community-wide support and interest towards alternate energy and Biodiesel. The project also included field-tests with Mercedes-Benz cars powered by pure (unblended) Biodiesel across nine states in India in 2004. This was followed by the cold weather high altitude tests of the Biodiesel cars across KhardungLa- the highest motorable road in the world and also across the frozen Himalayan terrains in 2005.
Mercedes is now reorienting its India strategy to target the youth. The company is working on its model line-ups, marketing and brand positioning to keep them aligned. For example, the luxury brand is now increasingly emphasising on performance and sportiness of its brand in India. It is now closely associated with F1 in India. Further, the company has brought in performance cars from its AMG stable to appeal to young Indian buyers. It is planning to invest Rs 350 crore as part of its strategy to introduce new small and compact cars in India by 2015. The company is expected to bring in its B-class, front-wheel-drive small family car sometime around the festival season (October-November) this year. Currently Mercedes’ cheapest car is the C-Class. With B-Class hatchbacks, it will lower the entry threshold. The B-Class hatch, owing to its styling and agile contours will be positioned as sports tourer. During the next few years, Mercedes-Benz has planned the introduction of most of its 10 new global cars in India, and for this it is considering assembly of its SUVs ML, GL and GLC-Class here. The company has recognised the need for more compact cars in countries like India and China and assembling them in local markets is considered beneficial.
With better localisation of content, they will have a pricing edge over others. On the back of all this, as Indian luxury car market expands, the company is hoping to sell around 55,000-60,000 cars (from current 7,430) by 2020. This is part of the bigger plan for Mercedes to regain its top slot in India. Mercedes-Benz is planning to play bullish on the Indian auto market by following the cost-cutting measures, which will eventually reduce the production cost for the company. According to sources, the auto major is fearing to pass the price increase proposal as it will further dwindle the demand for its vehicles in the Indian auto market. In the first four months of this fiscal, overall sales of the German auto marque amounted to 1,633 units, witnessing a dip of around 24 per cent under the review of 2,141 units sold in the same tenure last year. The reason for the fall in sales was cited as the absence of cheaper models, between a bracket of Rs. 20-22 lacs, in the company’s Indian portfolio. In order to control the prices of its models, Mercedes-Benz absorbed 30 per cent of the inflation to avoid any further dip in the demands for its models.
This year, the auto major increased the prices by 5-7 per cent in its entire portfolio, which were further hit by the impact of high inflation and unfavourable modifications in the government’s taxation policy. Availing tax benefits, the domestic arm of Mercedes-Benz assembles its some of the iconic models, including C-Class, E-Class, M-Class and S-Class, in the Indian Territory via Completely Knocked Down (CKD) operation, carried at its Chakan manufacturing facility based near Pune. Owing to the fact that the demand for company’s best selling model, C-Class, just managed to drive in 2,000-3,000 units annually, Mercedes-Benz found it difficult to look for such dealers who could meet the demand of buyers in such low figures. Bringing the future plans of auto major in limelight, Mercedes-Benz is planning to introduce a compact SUV in the Indian auto industry somewhere in 2014-2015. It is believed that the upcoming model of the company will be based on the A-Class hatchback, which is also anticipated to sparkle at the Indian shores before the end of next year. Coming back to the yet-to-be launched SUV, whose development is currently under process, it is expected that the model will be assembled at the company’s Chakan plant. With a speculated price of Rs. 20-24 lacs, the car will efficiently square of against the likes of Audi Q3 and BMW X1.
With upcoming models slated to be launched in the market soon and adoption of price controlling measures, it seems that Mercedes-Benz is leaving no stone unturned to soon emerge as a leader in the premium car segment of the Indian industry by outpacing is country cousins, BMW and Audi. Mercedes-Benz used the Auto Expo 2012 to launch their new brand initiative, ‘mb. inspired’. The initiative looks at targeting the youth of the nation with the launch of new cars for their new target audience. The tagline, ‘mb feel it’ explains the new thought and calls the youth to come experience the new launches. For the initiative Mercedes Benz has brought in Farhan Akhtar, Chetan Bhagat, Irfan Pathan and Masaba Gupta as ‘reflections of the brand’. Through the initiative Mercedes Benz stated that they have proposed grow by many folds in the near future by targetting the youth. Part of the growth will be through the launch of small cars and the rest of the growth will happen through the market growth. The philosophy of ‘best or nothing’ in their own fields and spreading inspiration in their peer groups will be targeted.
The four of them are not brand ambassadors, they are just a face for Mercedes for the youth. We needed to target the youngsters as the average age of the consumers in India is lesser than Japan and China.” In India, Mercedes Benz’s advertising agency is RK Swamy BBDO, while MEC handles the media duties for Mercedes. The German based car manufacturer has also tied up with the Buddh International Circuit to launch a performance driving academy in India. Called the JPSI-AMG Performance Driving Academy, the academy gives a chance to racing enthusiasts to have a lap around the Formula 1 circuit in a Mercedes AMG vehicle. Commenting on the association, Mitra said, “We have 125 years of history of racing and are on of the most important racing brands globally. In India people are not aware about the performance image we share globally and so we launched this academy. We have been very serious about racing and once the Buddh International Circuit came in we got the infrastructure to launch our performance drive.”
Currently, the basic training course is available In India. In this course, racing enthusiasts can drive an AMG Mercedes around the track with the help of professional instructors from Germany. The instructors will train the enthusiasts to take the safest and quickest lap of the circuit. The training course is offered to enthusiasts for Rupees 75,000 per participant. International Brand Campaign is done through Print, TV, online and media communications
- Strategic pillars
- Constantly leading & profitable large cars
- New attractive compact cars (MB/smart)
- Delightful customer care
- Brand positioning and claim
- Green technology leadership
- Global footprint
- Powerful sales & service organization
The automotive industry is at the core of India’s manufacturing economy. India is positioned to become one of the world’s most attractive automotive markets for both manufacturers and consumers. The resulting benefits to society—in economic growth, increased jobs, and stability for families employed by the automotive industry—are considerable. What does this mean for motor vehicle businesses? The total cost of ownership of two-wheelers over the past few years has increased while that of entry-level passenger cars has declined, primarily due to rising fuel prices and lower prices for Sub-A segment vehicles.
This shift will result in increased entry-level passenger vehicle sales in urban areas. Hence, the Automobile manufacturers should focus on penetration of sales in rural markets where infrastructure is relatively underdeveloped. Automobiles will be attractive to younger consumers as a primary mode of transport; the product strategy must be focused on that segment. The automobile manufacturers must also work to further improve fuel efficiency. Automobile penetration in India is only seven or eight per 1,000 people, compared with nearly 500 per 1,000 people in mature markets. To increase this ratio, manufacturers should campaign for better infrastructure, further reduce the total cost of car ownership, and bring financing and insurance models up to modern global standards. To beat rising input costs, manufacturers must improve their net cost position by increasing productivity and performance. Indian auto manufacturers such as Tata must increase their global sales for faster recovery of their fixed costs and match the product cycle times of international manufacturers like Hyundai.
The government can help by mandating higher fuel efficiencies for passenger vehicles and by setting antipollution policies that take older cars off the road. The government can also address the heavy blow dealt by the economy to the motor vehicle industry by providing funds to improve credit availability, especially for noncommercial vehicle buyers. To further promote the market, manufacturers must adopt new technologies that improve comfort, safety, and durability. By promoting fuel efficiency, India can reduce its dependence on foreign oil. By reducing its fuel subsidies, the government could direct that spending to social programs. But to ensure that the benefits come to fruition, India and its automakers must act now.