A year back, we had just picked and dusted ourselves up after the disaster called 2013. Passenger vehicle sales were down with no signs of revival and we analysed factors that had led to the fall. Analysts at EMMAAA were of the opinion that sales were not looking up because the market was short on Freshness. Many mainstream models were stale and the customer had little enthusiasm to come to the showrooms – a fresh model is more likely to pull potential customers – eager or serious – to the showrooms.
In comparison, 2014 was a much better year from the Freshness perspective. A number of new models were launched by Honda, Hyundai, Maruti-Suzuki, Datsun, and Tata Motors. This helped in raising the overall freshness level of the industry and 2014 had a much better Model Freshness Index value as compared to 2013.
In 2013, the Industry Average MFI was 43.38; the same has climbed up to 53.01 in 2014.
Why is Freshness Important?
EMMAAA divides the typical lifecycle of a car into four distinct phases – Start Bang, Profit Plateau, Discount Slope and Ventilator Support. Out of these, the first phase is just at the start of the lifecycle. The Start Bang is the time when the model is very new, very Fresh and there is customer curiosity about the model. At the same time the launch, communication and marketing costs are high in this phase.
The Profit Plateau phase follows the Start Bang phase and this is the phase when sales peak. The vehicle is still Fresh in the market and its features, specifications and qualities ensure that most sales happen without any need for discounting. This is the phase when the profitability of the program is the highest.
The first two phases in the vehicle’s lifecycle are the most critical as they deliver the most profits for the manufacturer. These are the phases when the model is Fresh and the manufacturer can sell large volumes without the need for heavy discounting.
Once the vehicle is past the first two phases, the manufacturer needs a far more detailed strategy and much greater effort to sell the vehicles. This is the reason why the Freshness of a model is important for the manufacturer.
EMMAAA looked at model lifecycles and examined how many months every model has spent in the market. This is then taken as a ratio to the expected total lifecycle of the model, calculated using EMMAAA’s model intelligence. The ratio is then converted into a percentage value and subtracted from 100. The average of the same for all relevant models is taken as the value of the entire market.
This is termed as the Model Freshness Index (MFI).
In brief, the MFI is an indicator of the freshness of the average car in the market. The theoretical value of the index is between 1 and 100 and the higher the value, the fresher the models in the market.
On Day 0 of the introduction of the car, the Freshness is 100 and it declines continuously as the life of the model progresses.
As a mathematical formula:
As an illustration, a model in its 18th month of lifecycle and with an estimated life of 72 months has a freshness of 75. (100-24*100/72)
While calculating the MFI, EMMAAA does not consider any niche or low volume models. We keep a threshold of annual sales greater than 6000 units (average monthly sales of 500 units) while considering the constituent models of the MFI. This is done to ensure that a small volume model does not skew the index in any way since all constituent models in the index have an equal weightage.
This omission means that for 2014, all luxury cars are not a part of the index. The omission also rules out cars in the Premium segment (Toyota Camry, Honda Accord, Skoda Superb etc.) and the Executive segment (Skoda Octavia, VW Jetta, Renault Fluence etc.) also. Further, it also rules out most premium SUVs, barring the Toyota Fortuner.
Finally, EMMAAA also removed people carriers with mostly commercial applications like the Chevrolet Enjoy and Tavera, Tata Sumo and Grande and Mahindra Bolero from the mix as their sales is not much impacted by their lifecycles.
However, the Maruti Ertiga, Honda Mobilio and Mahindra Scorpio are included.
Freshness Index Value
Overall, EMMAAA considered 54 mainstream models to calculate the MFI for 2014. On January 1st, 2015, the MFI had a value of 53.01. This is more than the median value of 50 and indicates an overall freshness of the market in the year gone by.
In comparison, the MFI had a value of 48.35 on 1st January 2013 and 43.38 on 1st January 2014. A nearly ten-point higher value of MFI indicates that the mainstream model line-up in 2014 was significantly fresher than that in 2013. As a comparison, while five new models were introduced in 2013, ten were launched in 2013.
The Chevrolet showroom had a MFI value of 40.43, nearly 13-points lower than the average. Chevrolet’s score is pulled down by the soon outgoing Spark hatchback. The Beat is in the middle of its lifecycle while the Sail twins are still in the first half of their lifecycle. However, sales are already struggling and it would be difficult to sustain the Sail models through their normal lifecycle.
Datsun had launched the Go in 2014 and enjoys a freshness score of 83.05. This is 30 points more than the industry average MFI. However, response to the Go has been weak.
Fiat had a MFI score of 12, the lowest for any OEM. The Grande Punto is at the end of its current lifecycle. The Linea does not make the cut for the study.
The Ford showroom had a MFI score of 34.28, 19 points lower than the industry average. Ford is pulled down by the Classic which should have been withdrawn two years back. The Figo nearing the end of its lifecycle also weighs down on Ford’s MFI score.
The Honda showroom has a Freshness Index value of 71.8, 18 points higher than the overall market. The brand’s MFI has been improved by the launch of the Honda City and Mobilio models during 2014. The fresh showroom also helped Honda achieve its best ever sales volume in 2014 even as the overall market struggled. With the Jazz and Vezel lined up for launch in 2015 and 2016, Honda would be able to maintain its showroom freshness in the near term.
Hyundai enjoyed high MFI in 2014 due to the new Xcent, the still fresh i10 Grand and the new i20 Elite. The company’s decision to end the old Santro also helped in improving the showroom’s MFI. However, the aging Verna and i10 models dragged the MFI down a bit.
Mahindra launched the new Scorpio in 2014 and that improved the MFI. The company’s MFI of 69.03 was 16 points higher than the industry average. The high score was also helped by the unusually long lifecycles of most Mahindra products.
With a MFI score of 60.62, MSIL was seven points better than the industry average. While the Ciaz, Alto K-10 and Celerio were all launched in 2014, MFI was pulled down by the Ritz, Swift and Wagon R.
The Nissan showroom has aa MFI score of 50.98, a little lower than the industry average. While the Terrano is still relatively fresh, the Micra and Sunny are in the middle part of their lifecycle and lower the MFI.
Renault has three models in the showroom and a MFI score of 54.26, slightly above the industry average. It scores better than Nissan because the Pulse and Scala were both launched after the Micra and Sunny respectively.
The Skoda showroom comprises of the Rapid which is in the mid-point of its lifecycle. The brand’s MFI score of 53 was at par with industry average.
The Tata showroom has a MFI of 50.48, slightly lower than the industry average. While the newly launched Zest and the still-fresh Safari Storme raised the MFI, old generation models like the Indica V2 and Indigo eCS pulled it down. Tata’s policy of keeping old models running has lowered the MFI.
The German brand has a MFI of 41.93, 11 points lower than the industry average. The Polo and Vento are both in the second half of their liecyicles and the absence of new products is hurting Volkswagen, both in sales as well as on the MFI score.
What changes in 2015?
It is not possible to calculate the Freshness Index value of the market at the start of a year. This is because model cycles may fluctuate by a few months from the earlier estimated values.
EMMAAA estimates that 2015 will end with a Model Freshness Index value of 55.23, about two points higher than the value in 2014. This makes 2015 even better a year than 2014.
What helps in 2015 is the expected discontinuation of models like the Chevrolet Spark, Ford Figo, Ford Classic, Fiat Punto, Tata Indica V2, and Tata Indigo eCS. Some of these would be replaced by brand new models, raising the freshness index. A better Freshness is always a good boost to car sales and one may expect 2015 sales dispatches to better 2014 numbers by some margin.