Wheels of Misfortune

Monday, October 15, 2007

Small cars have had it good for quite a while, but the market could undergo a drastic transformation with the advent of ultra-cheap, small cars led by the Tatas’ Rs 1 lakh model.
The Tata car, the stuff of dreams millions of potential vehicle owners haven’t yet dared to dream, is slated to roll out of its factory in Singur, West Bengal, in 2008.

The state government has done everything in its powers to facilitate the project, from land acquisition to fiscal breaks. At the moment, details are under wraps.

Impressionistic media reports and hints from carmakers point to a stripped-down car perhaps with a 30-horsepower engine, in the range of 700 cc engine displacement with three cylinders. It will have a capacity of four or five passengers. Bosch is said to be designing a special fuel-injection system for the petrol version and a CRDi unit for the diesel version.

Industry response has been cautious. Practically all of India’s manufacturers offer or plan to offer a variety of small cars in different price ranges. For a long time, the Maruti 800 model of Maruti Udyog Limited has set the bottom price, now at Rs 2.16 lakh for the base model. Without taxes its cost can go down to Rs 1.4 lakh.

Currently, nearly all Indian small cars are in the price range of Rs 2-4 lakh. In relation to the global price range all these cars fall below the US $10,000 tag. The Tatas will add a layer at the base of the pyramid, with a production capacity expected to exceed 350,000 units annually.

Industry argues that if India does not enter this segment, the Chinese will. Its mantra is: build volumes at the lower end, at lesser margins, and remain profitable. The availability of local skills and material, frugal engineering and an indigenous manufacturing base is the right recipe. Decentralised assembly to feed regional markets, as Tata Motors has planned, can keep logistics costs to a minimum..

Rising raw material costs, especially that of steel, and production delays can force Tata Motors to raise the price though. Auto market watcher Murad Ali Baig says, “Rs 1 lakh seems unachievable. Buyers’ preference for comfort and performance and harsher standards will push up costs.” The margin of supplying components for small cars will have to be far too low compared to normal standards. But no one is coming out with data. The lowest cost of the base model may grip customer attention but its variants with improved features-power-steering and air-conditioning among others-may push up both prices and margins.

Even though most carmakers have begun eyeing the small car market in India, it is not clear who else might want to enter this segment. A price war may ensue. So far only Bajaj Auto Ltd, in a tie-up with France’s Renault group, has announced plans to make a Rs 1.2-lakh car. The ranks may swell with more players planning models priced somewhere between a high-end two-wheeler and Maruti 800. The look of the Tata car and customer response will be decisive.

Three players-Maruti Udyog, Tata Motors and Hyundai-have captured nearly 86 per cent of the car market in India. Global analysts CSM forecast that Tata Motors, aiming to close the gap with Maruti Udyog, will be number one by 2012. Maruti has not yet risen to the bait. The gossip is Maruti 800 might be reinvented to beat the competition. Hyundai has not ventured into the ultra-low-cost class.

Jagdish Khattar, managing director, Maruti Udyog says, “Our parent company Suzuki Motor Corporation, leader of minicars for decades, believes that given norms of safety and emissions, and the tax structure on cars in India, it is not feasible for us to manufacture and sell a car profitably for US $2,500-3,000.”

Khattar believes customers are upscaling. Within each car model variants with more features are preferred. Any company that wishes to tap the bottom of the pyramid has to deliver on several parameters, including cost of ownership, maintenance, quality, reliability and styling.

US and European carmakers have a small presence in the Indian car market-3.3 and 0.8 per cent respectively. General Motors has just about rolled out a small car model, Spark. Others desperate to get a foothold in the small car segment are tying knots with Indian partners. Renault has joined hands with Mahindra and Mahindra to produce a small car, Logan. Bajaj’s interest in a tie-up with Renault to produce a low-cost car is perhaps a strategy for the two-wheeler industry to diversify and de- risk business.

Continue reading “Wheels of Misfortune

Source: Central Chronicle (link opens in a new window)