Wednesday, June 01, 2005

India to the Rescue?

Is it possible for the two largest automakers, Ford Motor and General Motors, to maintain its market strength within the automotive industry via the previously ignored India market? The two are currently facing financial and competitive challenges around the globe which are depressing recent earnings and sales, and one of their strategies is to put the full court press on the rapidly growing India market. You can be sure that there are plenty of doubters of their strategies, as evidenced with the recent downgrade of their debt by Moody’s and S&P to below investment grade status…and from what we can tell there is good reason for worry if either Ford or GM are counting on the Indian market to contribute significantly to profits anytime soon.

To date, Ford and GM have been unable to keep up with their competitors in the Asian markets (both have a measly 3% market share even though they have been in the market for more than seven years) which is led by Maruti (50%), Tata-Motors (16%) and Hyundai (15%). The infamous SUV and light truck vehicles that have led the US automakers to large market share and profits in the US do not apply in India and both have struggled to come up with viable solutions. Up until recently both companies have relied on the same old pricey mid-sized cars they sold elsewhere, gambling that middle-class incomes would rise and the consumers would be in the market for larger cars. Unfortunately for them, they were only half right. Incomes did rise, but consumers didn’t upgrade nearly as fast as expected. Just as importantly, the ones that did upgrade, upgraded to newer Asian models with more style and better technology. A quote from a Ford representative says it best: “We saw a car like the Escort as being at the heart of the Indian market. If you took a standard emerging-market template, it seemed like a logical conclusion…what we found was is that in India, unlike in some of the other emerging markets, the segment shift happened much more gradually”. They missed, plain and simple. A new strategy was needed.

The new strategy was not to abandon India. India is the third largest growing market in the world – and the third-biggest market in Asia in terms of unit sales after China and Japan. Over the last 18 months, India’s economy grew at a 6-8% clip. According to the International Organisation of Motor Vehicle Manufacturers, OCIA, India’s car production in 2004 grew 30%, while the next closest economy, Brazil grew at only 17%. The new strategy was to go to market with products that the customers were demanding. In order to crack the India market GM and Ford would need to come to market with more affordable cars tailored to local tastes and needs (re: cheap and small). And that is exactly what Ford did with its introduction of the Ikon. It promoted the car as having enough head room for a turban and only costing 450,000 rupees (only 50,000 rupees more than most mini cars). This led to an uptick in sales, leading them to expand the line to more than six models covering the entire mid-size car range. Last year alone they sold 40,000 Ikon, compared to 2,300 Escorts in 1999.

Problem solved right? Wrong, they only have 3% market share and the market is competitive as ever. Automotive market analysts in India say that “Ford and GM could have been market leaders if they had introduced their latest models, priced competitively, five or seven years ago, however, now they are just behind the ball as the market has become a lot more competitive”. With competition comes falling prices, combine that with a regulation change that lowered excise duty taxes (which increase competition) and now we have even tighter margins and fewer opportunities for profit.

So the conclusion seems obvious, there is no way that India is going to save GM or Ford anytime soon. So why haven’t Ford and GM given up? Because neither Ford nor GM are in this market for its short-run potential. The Indian market currently only represents about $6 billion in revenue. If Ford had 100% market share it would only increase its total revenue by 3.5%. So, while winning 20% of the market would be a huge success, it wouldn’t even dent their top line growth. The bottom-line then, this is a long-term play…according to a source at Toyota "Toyota believes that India will be one of the biggest markets in the world in this century”. That’s right folks, this CENTURY. By the time it does happen, Ford and GM want to be established players not late entrants (as they are already perceived) in order to take advantage when the market does move to larger more profitable cars that are right in these US manufacturers wheel house. Any money spent by Ford or GM in this space should be chalked up to R&D.

Baruah McGrath and Shelly


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