Budget 2012-13 and Auto Industry...

This year budget seems to be not giving enough momentum to the Auto Industry. Growth witnessed in last couple of years may be totally missing in this year with the various proposals in the budget.

Most hurting factor could be the increased Excise Duty which will ultimately result in increase in the cost of acquisition. To meet its fiscal deficit targets Govt. is determined to reduce its subsidy on petroleum products and that means increase in fuel prices. These will be the negative drivers for the auto industry.

Car market is just out of blues from a disastrous year and now Tractor market is plunging. It seems the bumper crops of last year, are becoming roadblocks in the growth of Tractor demand. Due to excessive supplies of crops, rates have started falling and the farmers are not having enough money to buy more Tractors.

CV has already started struggling for the numbers. Other than Diesel Cars, nothing else looks to be growing. Are we headed to tough times ahead. To maintain momentum of reducing poverty we need another 5 years at least of high GDP growth of around 8% plus.

EON threatening many small cars of A, B and B+ segments

Normally this date is considered inauspicious i.e. 13th. Still Hyundai went ahead with its global premiere of EON. The car as per the company has been created with Indian customers in mind and then it will be globally introduced. The car is having great features in this segment. We can place this in B segment but with its agressive pricing, it will be easier for it to attract customers of A segment and B+ segment as well.

Hence it is a potential threat to all the cars in these three segments. The car is having fluidic body and is definitely capable to turn heads around. Interiors are way ahead of others giving you the feel of being in C-segment car. Another plus in favour of this car is the average which company claims it is having 21 kmpl. My company MD with 6 feet plus height was able to accomodate himself with small discomfort on the rear seats.

Maruti will be definitely facing the biggest threat to its not only Alto, but also for other models llike Estilo, Maruti 800 and even Santro itself facing threat of cannabilization. Hyundai is currently facing capacity constraint with its numbers fixed at 630,000 cars per annum. It is already running at almost full utilization will be left with only one option to sacrifice exports over domestic demand to win market share.

Why Auto OEM’s are not passing commodity increases to the market?

Very simple they don’t want to lose market share to their competitors. They are ready to see poorer bottom lines but not willing to accede a small pie to other players. Marketing is a war and here you win by outshining your competitors – a famous saying by Al Ries and Jack Trout.

But is the Government also accepting the OEM’s methodology of increasing the demand by either themselves artificially absorbing the increased cost of commodities or by making their suppliers absorb the same.

Government has realized one thing that they cannot allow growth to happen at the cost of inflation. If inflation is high, they will keep increasing the interest rates and that will apply the brakes on the growth. Auto OEM’s are crying foul due to less takers available in the market to get their cars financed at a higher cost.

OEMs could have got their bottom lines also improved had they passed on the increasing commodities prices to their customers and artificially inflated demand would have also gone down.

Capacity Ahead of Demand

What a nice vendor conference we had at Cummins today. I can't resist the tempetation of posting in my blog so that the various takeaways get permanently printed in my memory.

The theme of the conference was build your "Capacity Ahead of Demand".

We were presented with a great deal of information by the MD of Cummins - Mr. Anant Taulikar - who explained that how Cummins focus shifted from the "Technology obsessed company" to "Right technology at right cost". He also presented how North America dominance is ending in Cummins business and action is shifting towards India and China.

Kudos to their leadership also for targetting to keep 1-1.5% of their earnings parked for education and social justice for the community.

He also captured the following Macro Trends in the automotive industry:-

a. Emission Standards - Getting stringent and stringent
b. Energy Availability - Getting scarce & scarce and hence fuel efficiency will always be in great demand
c. Globalization
d. Infrastucture Growth

He related how all these above trends throw opportunities for their company but the same is true for all the players of auto industry. He focussed on bringing Acceleration to:-

- Growth mindset
- Opportunities abound
- Be ready for future
- Execute well
- "what we have been" to "what we will be"

He forecasted that in India their growth will be at CAGR of 22% from 2010-2015. Minor hiccups will be there but the overall scenario will be like this. Hence there is an urgent need to make the capacities of vendors in line with the growth demand. Mr. Ignacio also highlighted that invest in capacity and capability. Further everyone said that capacities need to be calculated on 5 days/week basis. Sweating the assets is not desired.

Their CFO - Mr. Ravi Batra presented few very interesting slides that how Indian Economy growth is going to be in region of 9.0-9.2% from 2012 to 2017. He concluded that "Business is not entitled to anyone, but has to be earned"

As expected the panel discussion was the icing on the cake, in which the favourite topic was foundry industry to expand due to its wafer thin margins, long gestation periods, high rejections, highly uncertain business environment etc.

Mr. John Flintham of Amtek highlighted the challenges in expanding the capacities ahead of demand due to high cost of finance; high inflation; uncertainity; manpower availability; power shortage etc. People also suggested some kind of partnership between the company and vendors, but as expected no customer will be willing to come forward and share the business risk of the suppliers.

Lot of learning for Auto Guys.

Who is threatening Ëtios now ...

Suddenly competition is now shifting from the "compacts" segment of automobile industry to "Mid Size" segment.

Compact segment has witnessed high decibel noise from its major players like Maruti, Hyundai, GM and lately Ford and Nissan are also able to get themselves listed into the consideration set of the potential buyers. Volkswagen Polo is also knocking on the doors with its premium image in the market.

However it seems now the action is drifting towards the Mid-size segment. This segment was dominated by Honda City, which seems to be losing in a big way in this FY2010-11. From last year share of 16.44% (till Feb'10), it has gone down to 13.29%. Maruti with its Dezire and SX4 (and now Diesel version as well) has been able to just retain its share.

Major gainers are Toyota and Tata. Toyota with its newly launched Etios is already running much behind in its production capacity to meet the demand. But the real surprise is Tata, who had been able to revive the interest of the buyers with its Manza and able to achieve growth rate of 64% y.o.y (till Feb'2011). Toyota has been able to position itself nicely this time with Etios with the best price-value equation.

Now the biggest challenge is going to come from the biggest loser in this market i.e. Ford. Loss of market share was >5% (till Feb'11). Ikon was too old to catch the fancy of buyers and similarly Fiesta was the lone fighter from Ford stable and customers were too tired of this model also. Today customers want constant thrill, excitement, new featurers, high noise etc. and this was no more in Fiesta (even though its Diesel version is offering best mileage). Hence Ford decided to re-launch this model somewhere in the mid of current year.

Danger will be to Maruti, Tata and Toyota who are definitely going to lose share to Ford. Ford has taken more than 12 years to understand the Indian buying behaviour. Now it seems with Figo like positioning they can become the real threat. Let us watch out the fun in this segment....

SIAM 50th Annual Convention

This time the title of the convention was "Dynamics of Managing Growth: The next phase of the Auto Industry".

We heard speakers from Mahindra, Tata, Ford, Toyota, Volvo, Force Motors, TVS, Piaggio, Arvin meritor etc.

This event was full of giving us insightful ideas. However, every one present there was talking about the extreme growth being witnessed by India post 2008-09 recession. All the segments are growing at the rate greater than 25% and the big question was how to handle it. Resources are becoming scarce day by day. Major resource shortfall is expected and that can put a road block to this 5th Gear high speed growth movement.

Major resource crunch is expected in the following areas:-

a. Capital Resource
b. Human Resource
c. Material Resource

Obtaining capital to expand and add capacities to meet the growing demand at a time when there are always uncertainity hanging. Overseas markets are yet to come out of recession fully. Predicting everything rosy will be a big risk.

IT is directly threatening the availability of engineers for Auto Industry. Wrok environment further sometimes put strain on our youngsters who are attracted towards the fast moving career IT industry. Yes, pace is slower in Auto as compared to IT, but definitely far more stable.

Hence gearing up for future requires multi-dimensional wisdom with less focus on technology as advised by Anand Mahindra.

How successful will be the penetration of Tata Small Car

We are waiting desperately for the small car from Tata's stable even under the constant politically vitiated business environment of West Bengal.

Questions that come to our mind - What will be the success prospects of this new small car. Will it be able to create its own position? How will people perceive it - a real alternate to bikes? Will it be able to meet the aspirations of Tata?

Let us first try to understand market. This Car is being positioned towards customers who are currently using bikes and cannot afford a 4-wheeler. Hence it is a step through. It means it is not going to address the "esteem needs" of the people. It is only going to address the "utility needs".

Hence people can never use this car as a status symbol. On the worst side, it will tag the user as a "better poor".

Let us see the bike users. One big segment is that of yuppies, young, stylish, macho image projectors, willing to flaunt their mobiles and girl friends. Will they be interested in picking "Poorman's Car".

Now there are other users of bikes as well who are needing it for "Transportation Needs" and "Safety Needs" to save their lives on unruly roads. They are the target customers. But how will this Car penetrate this market. This segment is having clear-cut need, however this segment is not going to accept any "technically incompetent" product.

This segment is exposed to the finest technology in terms of Japanese Bikes and anything that does not come up to their expectations is going to suffer. Tatas have history of launching products which are rarely technically competent (ACE is an exception).

Further product life cycle concepts says that the penetration levels are poor when the new product is launched. It does not require tremendous advertising. It requires good "word-of-mouth". Will Small Car get that word-of-mouth.

Remember, we rarely praise things and we are fond of criticizing and when we have a product which does not fulfill our "Esteem Needs", we tend to criticize that more.

If price is the only USP, why Maruti's M-800 is fairing so badly in the market.

We will discuss more on this Car. We will see what are the expectations of Tata with it and how this will fare on that.