Top Five Things that Worry Us

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We at IAR are a bunch of skeptics and critics. We like finding problems where none some exist. So while the entire industry is getting optimistic about the market, we sat down to look at the biggest issues that worry us today.

The industry may have shown a remarkable recovery in passenger vehicle dispatches in the last four months (May-Aug 2014) but analysts at EMMAAA are still worried about many things. Here are the top five worries on the top of our head. 

The breadth of the recovery 

The industry has shown a remarkable recovery since May 2014.  Passenger vehicle dispatches were up 2.76% in May, 11.23% in June, 6.52% in July, and 12.53% in August, on a year-on-year basis. That’s impressive by any measure. However, look deeper and the breadth of the recovery is extremely poor. Maruti-Suzuki, Hyundai and Honda lead the recovery while nearly everyone else is in the red.

Honda has new models that have allowed the company enter new segments, thereby improving volumes and ensuring that Honda enjoys high statistical growth when the Mobilio and Amaze are in their data honeymoon periods.

Hyundai has one of the freshest line-ups in the industry at this time and that is helping the brand. The Grand i10, Xcent and i20 Elite are all new in the market and enjoying a customer rush.

 

Different Grades of Recovery

Maruti-Suzuki is using its margin cushioning, its capability to squeeze the collective balls of its supply base to pad up its own margins, and its sheer brilliance in extracting even better efficiency out of its manufacturing operations, to throw big discounts in the A-segment. This has shored up the numbers, which have also been aided by the good response to the new Celerio and the evergreen numbers for the DZire and Swift.

Toyota too has managed to stay in the positive zone during May-Aug 2014 period with a 2.85% growth in sales.

Ford has lost whatever momentum it built up with the EcoSport at the other end of its portfolio – Figo. It barely manages to stay in the growth zone with a 2.52% increase in sales between May and August.

However, once we get past the numbers of these brands, the rest of the industry is mostly in the negative. The strongest of the laggards – Mahindra – has seen a decline of 10.04% in dispatches in the May-Aug 2014 period.

GM India And Tata Motors are heavily bleeding – sales for Tata were down 17.7% and GM India sales have crashed 32.8% in the last four months.

Ditto with Volkswagen and Skoda, which keep on battling inventory issues.

And then there is Renault-Nissan-Datsun, which have nothing to show for their entire R-N-D operations in India, except for the Renault Duster and its rebadged cousin Nissan Terrano. The much-touted Datsun Go has faced such a frigid response in the market that the media would soon start drawing parallels with the Nano. That is not a good turn of story for the brand and the company, and no positives, whatsoever, can be derived from the story.

In the end, it is only three brands that have led the revival in the last four months. That is terrible breadth for an industry with 19 mainstream brands in the market.  We are worried that the limited breadth of recovery is an indicator that the recent growth in sales is on a fragile foundation and we may still have some more months of pain left before a real recovery does take place.

Maruti’s A-segment discounts

The A-segment has been under pressure for a long time. In one of our previous analysis From A to B we had identified the issues that were making A-segment customers jump to the B-Segment. Contemporary technology, better features, optimal packaging, usable rear leg space and boot space, better infotainment-navigation systems, all make the B-segment more suitable for the requirements of the urban buyer. The B-segment customer also has a greater sense of pride and a feeling of greater social respect, as compared to an A-segment customer.

Global manufacturers also like playing in he B-Segment as compared to the A-segment as this gives them an opportunity to align model cycles – the same B-segment car finds a market in India, ASEAN, Japan, Australia, South America, Africa and Europe. Some of the special ones even attempt the North American market.

MSIL Mini-Segment Volumes

In comparison, the A-segment has little global appeal – Europe, ASEAN, India and Japan are the main markets. However, even within them, it is difficult to align models completely. The typical Japanese Kei-car is a pocket-rocket with small, yet turbocharged, engine and a CVT transmission. It is packed with features and often has quirky styling, which the rest of the world may often find unappetising.

On the other hand, the European A-segment cars are style icons, designed to carry fashionable ladies in isolation.

Both of these are too expensive for India and there is a clear mismatch between market requirements.

All in all, this puts the A-segment at a clear disadvantage and EMMAAA forecasts much slower growth for the segment as compared to the Compact segment.

Coming to MSIL’s Mini segment dispatch numbers, we have been flagging up the numbers since June 2014. Numbers were suspiciously high in June (52.1% growth) even as Hyundai volumes of the Santro / Eon declined. Since then MSIL has managed to largely hold on to A-Segment volumes and dispatches between May-July have been 9.18% more over previous year period.

However, it seems that the numbers have been sustained on the back of heavy discounting. In some cases, the discounts have been more than 10% of the model’s sticker price.

This heavy discounting is providing a false cushion to A-Segment sales. Normally, such heavy discounting is temporary in nature and is done with the hope that real growth would eventually return to the segment. In most cases, it is unsustainable beyond a few months.

With a new head in charge of MSIL’s sales/marketing operations, the company may decide to tone down on discounts and that would have an impact on numbers.

On the contrary, the segment may actually re-energise with economic indicators improving. Normally the bottom of the pyramid is the last to respond to an upswing in the economy and revival in the segment may just be a few months away.

Lack of competition for MSIL as everyone shoot themselves in the foot

The sheer lack of competition to MSIL is quite appalling. In a market with 19 mainstream brands, Maruti-Suzuki managed a 41.67% market share in the passenger vehicle market in 2013. It had a 45.22% share of the market in May-Aug 2014 period.

This freakishly high share of the market is as much a testimony on the quality (or lack of it) of competition as it is on Maruti-Suzuki’s efforts. Most manufacturers have started out with high expectations from the Indian market but a mix of poor quality local management, wrong product planning, tussle between global and local operations, and a complete lack of understanding of the Indian market has resulted in nearly all new entrants falling short on their plans. Most are nursing their wounds and local managers are now busy making new product plans with new assumptions, new forecasts and new market share estimates.

No prizes for guessing where some of them will again end up.

A look at recent product introductions is a revelation in how many manufacturers got the Indian market wrong. Volkswagen and Skoda have battled with high product and component prices, coupled with poor customer experiences, while Renault-Nissan-Datsun have suffered due to a lack of penetration.

MSIL market share

The Datsun Go, an interesting product, has lost the battle due to poor penetration. A car ideal for B-town buyers is being thrown at A-town buyers since Nissan does not have many dealers in the B- and C-category towns. The result, as expected, is a train wreck.

The automotive battle in the India market is being won and lost at the dealerships. During the slowdown of the last 18 months, MSIL took advantage of its well-oiled machinery and well-trained dealers to push sales in a difficult market, which was no longer pulling cars. The pesky Maruti dealers managed to irritate enough customers effectively and as a result MSIL exits the slowdown with a better market share than it had at the start of the slowdown. In December 2012, the start of the slowdown, MSIL had a market share of 40.11% in the passenger vehicle segment. This had improved to 45.95% in May 2014, the end of the slowdown.

Unlike the competition, MSIL knows how to milk success stories effectively. As an illustration, GM India and Ford have failed to hold on to the momentum they had built with the Beat and Figo respectively. While Ford has at least replaced the Figo’s success with the EcoSport, GM has lost it all and is now at the bottom of the pecking order.

The Tata ride is about to end….or restart

It’s something that we await with bated breath. Not much has been going well for Tata Motors’ domestic passenger car business – Nano sales suck, Indica / Indigo are only bought by taxi operators, the Sumo/Safari have been ousted by better rivals, and they probably have a small party in the office when Aria sales cross into the triple digit zone. Also, they have been running without a captain for some time now.

To add to the misery, none of the Tata dealers that we spoke to sounded exuberant about the competent Zest even though Tata Motors has claimed 10,000 initial bookings and media reports waiting lists for some variants. Depending on your mood and the day of the week, take that number with a pinch of salt or a shot of vodka.

With so many simultaneous disasters in the house, it would be a matter of time when someone higher up takes some drastic action – either downing the shutters on the domestic passenger car business or a complete upheaval of senior management. If media whispers are to be believed, the second is already in motion. To us, this comes across as an attempt to delay the inevitable. It’s not that Tata Motors domestic car business cannot be resurrected; it’s just that a half-hearted senior management upheaval is hardly the best strategy for the time.

The industry’s complete lack of innovation in hiring  

We have mentioned this many times in the past – the industry has not many ideas, imagination or ambition when it comes to hiring senior managers. A bunch of senior managers have happily played musical chairs for many years as opportunities (and pay-packets) exploded in the market with the entry of global carmakers.

Musical Chairs

These carmakers were happy paying top-dollar for experience, without any consideration for success, or the lack of it. Crafty senior executives walked from one disaster to another, enlarging their pay packets all the time.

The result is an industry devoid of innovation with many participants painting themselves in a corner. The industry does not attract new talent – Ranjit Yadav of Tata Motors is an exception. No bright bankers, FMCG guys, no geeks, no entrepreneurs, no consultants, no analysts, no…one new enters the industry, which is fast taking the shape of a coterie.

That leaves us worried about the future of the industry.

 

 

 

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5 Responses

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  1. Shree Harsha
    Sep 25, 2014 - 09:39 AM

    Your Analysis is “spot on” from the overall market perspective. Probably, you could bring an element of why consumers are prefering certain brands over others ..Is it because of Perceived Quality, Emotional connection with the brand, Better styling or a beleif that Honda has finally arrived in the Indian market, Secondly, a study on the current limitations of R&D within India and how the changing regulation dynamics from ARAI will affect Indain car Industry ..will be an interesting story as well.

    Reply
    • DR
      Sep 25, 2014 - 09:49 AM

      Shree Harsha, something on R&D is WIP. Look out for it in a few weeks.

      Reply
  2. Perspective
    Sep 25, 2014 - 04:17 PM

    Current growth trend is based on following SHORT-LIVED factors:
    1. Reduced excise duty (that is spurring demand for <4m vehicles that have had the maximum benefit) that will expire in months
    2. A positively received political outcome; though without visible effect on ground this could be short-lived
    3. A favourable base effect (remember that last year was the weakest especially post Fed taper, currency and inflation surge)

    ALL THE ABOVE EFFECTS ARE SHORT TERM and NONE OF THE STRUCTURAL FACTORS that drive demand have changed, for example cost of borrowing, inflation, and long/mid term policy changes.

    Which means. THE RUSH WILL BE OVER, SOON.

    Need no fancy charts and analysis for this ). Just a perspective.

    DW

    Note: New models support growth but do not drive it.

    Reply
  3. Paresh D.
    Oct 09, 2014 - 07:36 AM

    The chart on ‘Grades of Recovery’ shows a different figure (32.76%) for Tata Motors than that used in the article text (17.7%)!

    Reply
    • DR
      Oct 09, 2014 - 09:28 AM

      Well caught! Thanks for pointing out the error. We have corrected the graphic now. We take pride in our work and the mistake is regretted. Now kindly excuse us for a few minutes as we go sulk.

      Reply

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