Great wall of China: Why Indian companies grapple to operate there

The Economic Times of India, November 28, 2013

It was a big reason why Apollo Tyres made the bold move this July to acquire American company Cooper Tire—an operation twice its size—and now it's a reason why it is looking to renegotiate or break that agreement: China. It's the world's largest market. It's also a market with rules and a mind of its own. Apollo is finding that out: workers of Cooper's Chinese subsidiary have slammed the deal, saying it does not comply with the country's laws, and its Chinese partner has offered a buyout.

Three others from the broad Indian auto sector who ventured into China in the past decade— Sundram Fasteners, Mahindra & Mahindra and Bharat Forge—have found out the hard way. Each is struggling to scale up and become relevant. "The China tractor acquisition was part of our growth plan to get a foothold into the world's second-largest tractor market," says Pawan Goenka, ED and president, Mahindra & Mahindra. "We could not have ignored our presence there."

But China, where the state is never far away, is not falling over itself to have Indian companies. Li Jia of IHS, a research firm in China, says Indian companies don't offer anything unique. "New entrants need to show their clients reasons to buy their product, which can be based on lower price, superior technology, better quality, etc," she says. Indian companies, she adds, have neither the brand pull of American and European companies, nor the immaculate cost management of Chinese companies.

Global auto majors started entering China in 1984, when it opened its auto sector. According to Synergistics, a China-based auto consultancy, only four JVs have disbanded, while 23 survive. Bill Russo, president of Synergistics, says China caps a foreign company's share in new auto JVs at 50%, but places no such restrictions on component ventures.

Indian companies have tried operating in this framework, but have faced a perception bias, cultural and integration issues, and lack of skilled labour. "Indian companies have been unable to build scale, and being over-calculative has left them with lower profits," says VG Ramakrishnan, MD of Frost & Sullivan, a consultancy. "They would rather invest in Latin America and Southeast Asia." China remains a long haul.

Mahindra & Mahindra

When Mahindra & Mahindra made its two drives into China, first in 2004 and then in 2009, it entered a market that was large but also incredibly crowded, with about 200 manufacturers rubbing tyres. Its first acquisition was that of Jiangling Tractors, a maker of low-horsepower tractors (18-33 hp).

M&M's plan was to ship Jiangling's low hp tractors to India and use China to develop business in Europe, US and Australia. But the low hp tractors did not take off in India and the Chinese market started shifting to higher hp tractors.

"Despite M&M's long-term commitment in China, there seems to be a management reluctance to go for the big investment," says Mahantesh Sabarad, senior analyst at Fortune Financials.

China, in tractors, has several common aggregate manufacturers, who are akin to contract manufacturers. Many have scale and are used by tractor companies to source aggregates (like engines, hydraulics and axles). "It is difficult to differentiate your product from that of a relatively small manufacturer," says Ruzbeh Irani, CEO of international operations at M&M.

Complicating this is the regulatory landscape. Agriculture in China is subsidy driven and influences tractor economics. In 2012, crop prices were lower, so were subsidies. Tractor companies had to resort to discounting, reducing profitability.

"The tractor utilisation window is also very short, given the cold climate in most of the country, especially the north," adds Irani. "Coping with the strain on the system in season time was a challenge."

The Huanghai Jinma brand—manufactured by the Mahindra Yueda JV, its second and bigger venture in China—is well known and sold through a network of 250 dealers. M&M is pulling levers: a new and more modern plant, improving quality, and new and more powerful tractors.

Going forward, M&M plans to strengthen its 100 hp-plus range and invest more in R&D. It even plans to import its Arjun range from India, something that Irani is looking forward to. "We will also be looking at the possibility of localising the tractor, with Chinese aggregates and components, as also with our own Chinaproduced engine," he says. Meanwhile, both ventures are making losses.

Bharat Forge

Bharat Forge's entry into China was part of a new strategy it unravelled for itself between 2004 and 2005. This saw the world's second-largest manufacturer of forging products spend $140 million to buy auto-component companies in Germany, Sweden, Scotland and the US, and form a joint venture in China with one of the nine state-owned groups there.

The essence of that strategy, termed 'dual shoring' by Bharat Forge chairman Baba Kalyani, was to establish manufacturing beachheads close to customer facilities to minimise risk of supply disruption and win larger contracts.

In this new scheme of things, China, a large auto market and fast becoming a magnet for global auto majors, was crucial.

The Bharat Forge management saw China, along with India, as a low-cost production base. However, its Chinese joint venture, with the FAW Corporation, has been struggling to deal with the pull back in demand, first that happened in the wake of the 2008-09 global financial crisis and, more recently, in China itself.

While Kalyani did not reply to an email questionnaire for this story, a senior company official who spoke on the condition of anonymity, says FAW Bharat Forging, in calendar 2012, has been affected by the fall in the commercial vehicle and construction markets in China.

Mahantesh Sabarad, senior analyst at Fortune Financials, a brokerage, says officials of the Indian company have told him that, because of the language barrier, they are unable to convey ideas to Chinese executives in the joint venture and implement strategies for growth.

By itself, FAW Corporation has good pedigree in China, partly because of its state lineage. It makes cars, trucks, buses and auto parts. It has JVs with Toyota, Vokswagen,General Motors and Mazda, among others. While that state connection can be an asset, it can also be a liability, says Sabarad.

Companies doing business with Chinese state-owned enterprises, he adds, must come to terms with their interests and priorities, which are heavily shaped by policy directives and are intuitively resistant to organisational changes. Many among the senior management are more 'state cadres' than professional executives.

"While there was a clear improvement opportunity for the JV, there was also a significant resistance to implementation," says Sabarad. "The excess manpower issue also could not be resolved."

Sundram Fasteners

Sundram Fasteners was one of the earliest Indian entrants into China, in 2003, when the world was feeling the first stirrings of the next economic powerhouse.

Back then, Sundram invested $13 million to set up a plant to manufacture high-tensile fasteners and bearings. This unit delivered revenues of Rs 97 crore in 2012—or 3.7% of the company's consolidated revenues of Rs 2,651 crore in 2012-13— and Rs 93 crore profits.

Those are small pickings and Sundram has no major capital expenditure plans in the near future. "While we had a firstmover advantage, China is a slow innings for us. And we are okay with it," says Arundathi Krishna, deputy managing director of the company. "China is a test match for us and not a 20:20."

Sundram drove into China with a threephase strategy in mind. The first was to tap China's capabilities as a low-cost manufacturing base, and export products to its existing global customers. The second was to start supplying to global auto majors for their units in China. And the third was to supply to Chinese auto companies.

According to Arundathi Krishna, the company has broken ground in the first two sets and it is now focusing on the third. "It's challenging as these companies generally like to buy from Chinese suppliers," she says. Adds Suresh Krishna, chairman: "This is taking a little longer than expected as customers are not readily known to us. It will take some marketing effort before successful penetration can occur."

The promoters say their current investment is in line with demand, and that they don't want to over-invest and then wait for orders. "Because of the global recession, there is a slowdown in the Chinese economy. But we are confident it is a passing phase," says Suresh Krishna. "For now, the profitability is adequate and we are sanguine that it will continue to grow."

Click here to read this article at economic times.com

Stuck in First Gear: Chinese Car Companies Struggle to Compete with Foreign Brands

CKGSB Knowledge, July 30, 2013

Foreign car makers are under attack in China while Chinese auto manufacturers have yet to achieve real success

Can foreign car makers in China continue to dominate the market while appeasing Chinese car companies?

CCTV, Chinaʼs powerful state-run television broadcaster, unleashed a torrent of faulty vehicle claims against foreign automakers in March. First, the network targeted Volkswagen, alleging transmission issues with some of its cars, which led to the recall of more than 380,000 vehicles at an estimated cost of $618 million. The broadcaster then attacked BMW and Daimler, who were accused of selling cars that produced harmful fumes.

The media’s indictment of foreign car makers dovetails with China’s policy to nurture indigenous players. From removing financial incentives for foreign car makers to requiring they launch Chinese car brands, Beijing has tried to curtail the seemingly endless popularity of non-local autos as domestic brands continue to cede ground to their foreign counterparts. Foreign auto manufacturers first set foot in the Chinese car market 30 years ago, fully aware that the state allowed their entry into the market on the condition that they enter into joint ventures (JVs) with domestic firms, who were expected to benefit from their technical expertise. Despite a lack of complete freedom, they’ve flourished ever since, but the latest round of government-sanctioned media criticisms may force foreign companies to change tack.

Slow Start for Chinese Cars

The Chinese car industry has grown rapidly since the nation opened its doors in 1972, shouldering past the US in 2009 to become the word’s largest. Domestic players have profited from this expansion, but their market share is receding compared to foreign car makers: the 30% portion held by Chinese car brands at the end of 2009 fell to 26% in 2012 according to financial research firm Sanford C. Bernstein.

This is not the turn of events China hoped for when it granted foreign auto manufacturers market access in 1984. Beijing knew its car makers were behind the curve on precision manufacturing, so it encouraged JVs with foreign firms to bolster domestic tech-expertise, hopefully leading to a globally recognized national champion.

“The joint venture policy towards the auto businesses in China has always been one of ‘youʼre a guest, youʼre invited and we will tell you the rules by which you must play,ʼ” says William Russo, (formerly a) Senior Advisor at consulting company Booz & Co.

In 1984, Zhao Ziyang, Chinaʼs then premier, said JVs would facilitate the consolidation of the auto market into three large and three small producers, with high levels of local content. Zhaoʼs vision has not come to pass. Different outlets give different estimates—The Wall Street Journal said there were 170 Chinese car makers as of April this year, while the International Business Times cited only 115 companies as of 2012, neither news outlet divulging the source of their information—the China Association of Automobile Manufacturers declined to confirm any specific figure. Either way, even the ballpark is well off from Zhaoʼs prescription.

Not only has consolidation not occurred, but local car makers also remain umbilically dependent on their foreign JVs for profits. Shanghai Automotive Industry Corporation (SAIC), Chinaʼs largest car manufacturer, owes 90% of its sales to its foreign JVs, according to a research paper from January this year called “Case Study: SAIC Motor Corporation” published by the US think tank Center for Strategic and International Studies (CSIS). And no Chinese car maker has managed to design and produce a single car that has won global acclaim.

In stark contrast, foreign car makers have thrived. “The Chinese car market is very orientated towards foreign brands. Three out of every four cars sold in China carry a foreign brand,” says Russo.

The China car market, now General Motorʼs (GM) largest, was the US companyʼs savior during the financial crisis, as sales in the nation helped it heave itself out of bankruptcy proceedings in 2009. Since the firm tied itself to SAIC nine years ago, it has amassed 14.7% of Chinaʼs market share, earning a profit of $1.5 billion in 2011 from its joint venture, according to GM China reports. Still confident of its position in China, GM aims to increase sales by 75% in two years to 5 million cars.

China is also Audiʼs most lucrative market. The German manufacturerʼs sales increased by 14.2% in the first quarter of 2013, to almost 103,000 vehicles and it is planning to open a new plant in Foshan, Guangdong province, which will have a manufacturing capacity of 150,000 cars annually when it opens for production at the end of this year according to state-run China Daily.

Still Second Choice

Chinese consumers are buying foreign brands over local ones, because domestic makers are finding it hard to shake off poor repute. “The challenge that Chinese car companies have is convincing their own consumers that Chinese companies in fact can make good cars,” says Russo.

A number of Chinese brand cars have failed foreign safety standards, sullying the reputation of Chinese car makers and making it difficult for indigenous brands to market themselves at home and abroad. Brilliance China Automotive, a firm tied to both Bayerische and Toyota, tried to sell its BS6 sedan in Europe in 2007, but earned only one out of five stars for safety from a German car association, which said the driver would have little chance of surviving a side collision.


(Source: Youtube, Youku video here.)

Chinese car companies find it tough to ratchet up the quality, in part because they lag on research and development spending. “Most Chinese companies are thinking five to six years out with their R&D spending and trying to compete with international companies that are already thinking 20 to 25 years out,” says Nat Ahrens, Deputy Director and Fellow of the Hills Program on Governance at CSIS.

This thrifty approach means Chinese car companies have less to spend on nurturing innovative engineering and design. Instead of creating a car from scratch, which would allow them to claim half the patent rights, Chinese JV partners take existing foreign vehicle blueprints, make a few changes and call it a new JV auto: GM and SAICʼs first JV car, Baojun 630, is built on the old Buick Excelle, while Dongfeng and Nissanʼs fi rst Venucia vehicle is fashioned after Tiida. By taking the path of least resistance, Chinese JV companies demonstrate to the consumer their reliance on foreign tech for quality, which does little to raise confidence in their own brands.

Chinese brands are gaining ground on locally made foreign brands as sales have grown steadily in 2012

Driven to Distraction
The relative success of Western brands against languid domestic ones has sparked indignation and embarrassment among Chinese commentators. In January, Communist Party mouthpiece The Peopleʼs Daily blamed foreign companies for the sluggish performance of domestic players, writing, “Most Chinese car companies involved with JVs have not received the technology they were promised.” In September last year, former machinery and industry minister He Guangyuan said JVs are “like opium” and likened Chinaʼs JV policy to a negative addiction. “So many years have passed and we donʼt even have one brand that can be competitive in the auto word,” He said.

But some feel that Chinaʼs expectations of tech transfer were too high. “I donʼt think any promises were broken, these contracts are laid out very clearly on what was going to be transferred and what wasnʼt… I donʼt think that there was any deception on the part of the foreign partners,” says Ahrens. “You canʼt force technology transfer.”

Market Remodel

As the strength of Western brands has grown, China has pushed back by trimming the incentives and freedoms of foreign automakers. In January last year, China said it would no longer promote investments from foreign car makers through preferential tax treatment and streamlined approval processes, increasing costs for foreign manufacturers.

The month after, Beijing excluded foreign car makers from a newly released list of approved vehicles for government use. While this measure will have little impact on the profits of foreign car makers such as Audi and Mercedes (brands that were included on previous lists), it signaled Beijingʼs determination to freeze out nonlocal competition. In April of the same year, Maxime Picat, the Director General of Peugeot-Citroenʼs Chinese joint venture, said Beijing was threatening to restrict the firmʼs manufacturing expansion plans unless it launched local brands.

The squeeze on foreign auto manufacturers is likely to put a strain on existing JV relationships, making the negotiation process for new deals increasingly delicate. The conflict inherent in a joint venture between two would-be competitors is clear. “A foreign companyʼs interest is not to nurture a local company so that it is as successful or more successful than itself. It will undoubtedly withhold some of its crucial technology,” says Teng Bingsheng, Associate Professor of Strategic Management at the Cheung Kong Graduate School of Business. At the same time, domestic firms are bartering with access to the largest auto market in the world at a time when foreign firms, whose own markets are drying up, can ill afford to be choosy. Under government pressure, the biggest challenge for an existing foreign JV partner will be how to relinquish enough intellectual property to placate Beijing, while at the same time, invest sufficient amounts in R&D to maintain its lead over local and other international players.

But Chinaʼs actions are not likely to wean consumers off foreign brands as the central issue is one of demand not supply. “Government policy cannot change the nature of demand. Chinese consumers will spend their money on the brands they prefer and there is very little that can be done to force Chinese consumers to buy Chinese brands,” says Russo.

This Chinese consumer preference is likely why state media reports went after foreign car makers to begin with, to damage their brand equity in hopes of restoring balance between foreign and domestic brand preference. But it will take more than a few quality-control reports to undo the brand resonance of foreign cars. Chinese brands will have to spend a significant amount of time garnering consumer confidence before they become as popular as well known international car makers.

The Chinese government’s distortion of the market may also have unintended consequences. The launch of new domestic brands by forcing JVs will add another level of competition to an already fragmented market and take business away from Chinese companies who are already struggling to build their market share. By ramping up competition, China in fact weakens the position of wholly domestic brands like Chery and BYD, thus stifling their own plans for a national champion.

“For example, if GM launches a domestic brand, customers that would otherwise be buying a Chery or BYD car will see a car coming from Shanghai General Motors [the GM joint venture with SAIC] and will buy that instead,” says Russo. “So they [the State] are going to eat their own young.”

Just a Fender Bender

Despite Beijingʼs cooling approach to foreign car makers, the countryʼs leaders are unlikely to stifle them completely. “At the end of the day, the government wants to see the domestic car industry succeed, but many of the Chinese companies depend on successful foreign joint ventures to contribute to their profitability and they wonʼt do anything to harm those companies, because that would ultimately harm the whole industry,” says Russo.

In spite of the complications, foreign car makers are finding their tie-ups beneficial in some ways. GM is using SAICʼs low-cost vehicle technology to vault into emerging Asian markets. SAICʼs technology for producing cars priced as low as $4,800 is central to GMʼs plans to plugmiddle-class needs in India and Indonesia. Also it has been reported that BMW and Chinese Brilliance brand Zhi Nuo—which roughly translates as “The Promise”—may start exporting their vehicles to Europe.

The governmentʼs latest measures to suckle a national auto champion are unlikely to seriously dent foreign makersʼ prospects in the short-term. Ultimately, consumer choice determines the winners and losers and the Chinese are increasingly buying foreign brand vehicles. Also, the structure of the market is so dependent on symbiotic JVs that separation in the near term would damage both parties.

The biggest long-term threat to foreign car makers in China is competition from increasingly sophisticated Chinese brands, whose manufacturing skills are developing steadily. Nissan and Honda, two Japanese brands known for their attention to detail, stated publicly that they now outsource heavily to local Chinese suppliers. Quintessentially precise Mercedes-Benz-manufacturer Daimler opened a trial engine production plant in China in May. A decade ago, this would have been unthinkable given the quality of production in China.

Experts draw comparisons between the fledgling Chinese car market and the early Japanese one. In the 1970s, consumers largely thought of Japanese cars as cheap machines. Now, Japanese manufacturers produce premium lines. Hyundai was originally well known for its affordably priced cars, and now makes very innovative, high-quality products. “Great Wall, Geely and Shanghai Auto are capable of making good, quality cars and give an indication that the Chinese car industry will be able to produce a globally competitive car company,” says Russo. “Itʼs a question of time.”

Click here to read this article at http://knowledge.ckgsb.edu.cn

Amaze works wonders for Honda's brand makeover, more launches lined up

The Economic Times of India, June 16, 2013

Hironori Kanayama, President of Honda Cars India, Ltd.

The plush showroom in Noida is abuzz. Monthly footfalls have surged from 200 early this year to about 500. From worrying about poor sales, the dealer is now grappling with a three-month-long waiting list. Business hours are often extended and not just at the Noida dealership to manage the customer surge.

It wasn't always this way for Honda Cars India Ltd (HCIL). A slew of missteps from mispricing premium hatchback Jazz, to ignoring the mass market and, subsequently the diesel segment when the price differential with petrol widened coupled with a few natural calamities elsewhere like an earthquake in Japan and floods in Thailand hit HCIL hard. Between fiscal years 2007 and 2013, market share steadily dropped from a peak of 4.44% to a low of 2.74%. Volkswagen's Vento and Hyundai's Verna eroded Honda's leadership position in sedans, where the City once ruled the roost; and models like the Hyundai Elantra and Toyota Camry began giving Honda's Civic and Accord a run for their money in the executive sedan and premium sedan segments, respectively.

"Honda was an aspirational brand, rich in features and looks. But it also came across as an overpriced and highly decontented [industry terminology for removal of features] vehicle," says V Ramakrishnan, managing director at Frost & Sullivan India, a consultancy firm. The short point: Honda wasn't getting anything right: neither product, nor price nor positioning.

It required just one launch to turn things around. The Amaze, launched just two months ago, has helped HCIL, according to SIAM, jump one place to No. 5 in May, ending the month with a share of 5.63% of the Indian car market. With total sales of 11,342, HCIL's sales grew 9.8% in May over a year ago in a sluggish market where competitors like Maruti (decline of 13%), Toyota (decline of 35%) felt the brunt.

"This is our counterattack. Amaze is our first weapon. We have many more," says HCIL CEO Hironori Kanayama. Adds Jnaneshwar Sen, senior V-P (sales & marketing): "We have managed to hit the sweet spot."

It may be just one model that has reversed HCIL's fortunes, but to create that winning product called for a complete overhaul of the company's DNA an exercise that began two years ago.

Thinking Frugal

Honda's biggest challenge was to learn new and cheaper ways to develop and produce cars in India. Earlier, Honda developed global models and then tried to localise for each new market. For the Amaze, inputs from India began trickling in right from the beginning of the R&D process.

Between the Brio hatchback launched in 2011 and the Amaze, HCIL worked aggressively to contain costs by developing local vendors without compromising on quality.

From 102 vendors at the pre-Brio stage, HCIL's vendor base has now grown to over 200 (the majority of them non-Japanese), helping Honda achieve 92% localisation. Aditya Auto is one of HCIL's newer vendors, which began working with the carmaker three years ago. HCIL was looking for a cost-efficient way to produce window regulator systems in India that met its quality parameters. It had traditionally used a wire type rope mechanism that was imported from Thailand but was costly.

"Honda gave us targets and asked us to give them solutions. We fundamentally changed the design of the window regulator," says Mihir Jayaraman, the vendor's business unit head. In the process, Jayaraman also brought the cost down by 35%. The decade old vendor, which has annual revenues of Rs 250 crore, now also supplies to Honda Thailand.

City vs Amaze Buyers

HCIL also reworked its branding and marketing strategy. It began by first understanding how the Amaze buyers would be different from say a City buyer. The latter is typically a well-todo discerning customer who enjoys the finer aspects of life, for whom brand is important, who is a trendsetter (and hence experimental) and has reached a certain status hence takes certain things for granted.

The Amaze buyers, HCIL reckoned, would be more conservative, seeking products that offer peace of mind; that meant not just an affordable price tag but also a reasonable cost of ownership. For them, status, comfort and safety are important. Also, more Amaze owners would tend to drive their cars than City owners; and more of them would be in Tier II cities.

That's one big reason for HCIL expanding in smaller cities from 150 outlets in 90 cities to 162 in 102 by the end of this fiscal year. Alongside, the showrooms, which have always been plush and spacious with plenty of glass and chrome are getting an informal touch. Now salesmen in T-shirts add a touch of warmth and casualness to the customer care experience. "We learnt a lot from the Brio. We want customers to get the Honda brand experience with a more warm and approachable feel," says Sen.

In an attempt to change the traditional customer base from chauffeur-driven to ownerdriven, HCIL has spruced up the owners' lounge at its service centres by enlarging it and adding more facilities like PCs, TVs, and snacks and coffee counters.

To change the perception that Honda is an expensive brand and only for sophisticated (City) customers, HCIL has introduced a Rs 9,996 maintenance package for up to two years or 40,000 km. "The Amaze compares well with the Dzire on maintenance costs," adds Sen.

Brand Makeover

Honda also rejigged its advertising and marketing strategy. "Honda had a very inward-looking mentality," says an advertising executive who has worked on the Honda brand for close to five years. The decisions were largely driven by Japanese expats whose understanding of India and Indians was often poor. "Its ad campaigns were very English, very conservative, very print-driven and often did not realise the power of TV in India," adds the adman who did not want to be named.

Traditionally, Honda believed that technology lay under the bonnet and hence stressed on engineering excellence. "But the Koreans changed the game from being what's under the bonnet to equally about what's on the dashboard. But Honda was cussed, stubborn about it," recalls the executive. It would show more car angles than consumer benefits. So the brand became inaccessible even as other companies like VW came and created a marketing buzz.

"The reins are now with the Indians. I haven't met the Japanese even once," says an ad executive working on the Amaze account. HCIL's typical ads were high on gloss, with brochures and designs that were very European with skyscrapers in the backdrop. Even the Brio campaign "It loves you back" was for an English speaking audience.

In contrast, the Amaze campaigns showcase a slice of a regular Indian's life, with kite flying, Holi colours and India Gate thrown in. And they're now TV-driven. The ad film was shot in two settings — one in the north and the other in the south and has been dubbed in 14 Indian languages to cater to a very heterogeneous market. The objective clearly was to have an imagery similar to that of Maruti's advertising. "Their campaigns suggest they have got the insight right. They have become a friendlier brand," says Naresh Gupta, managing partner, Bang in the Middle, a boutique advertising firm. Gupta, an ex-Dentsu executive, had worked on the Honda account earlier.

The Global View

HCIL's newfound drive in India ties in with its global ambitions. By 2017, Honda is looking at sales volumes of 6 million cars with emerging markets bringing in half of them.

Getting the India act together is an imperative particularly when Honda is struggling in the other emerging market that matters, China, where its market share has slipped from 5.5% in 2008 to 3.2%. "Honda made a strategic misstep in China in 2008 mainly by scaling back its expansion plan after the financial crisis; it was illprepared for the soaring demand in China that followed post-2008," says Bill Russo, a senior adviser at consultancy Booz & Co.

Back in India, it is still early days, but HCIL will take heart from one statistic: some 88% of the customers who visited Honda showrooms to check out the Amaze had never owned a Honda car. "The Amaze is bringing a lot of new customers into the Honda fold. It is a great source of future business for us," says Sen. And roughly a third of Amaze customers are from Tier II cities.

What has always been HCIL's trump card is that those who bought Honda cars had few problems with them. In the JD Power rankings on parameters like customer satisfaction and product quality, it's always been ranked amongst the top 2.

"Honda may not have the sales but it always enjoyed great equity among Indian consumers," says Mohit Arora, executive director, JD Power Asia Pacific. "Now, with new models they are fixing their biggest problem of the right product-price equation. Maruti should be seriously worried," he adds.

Subhabrata Ghosh, CEO, Celsius 100, a consulting firm focussed on the auto sector, says the task of moving down the price spectrum is easier than going bottom-up. "Honda is a socially aspirational and emotionally satisfying brand. It is not very difficult for a brand like that to come down a step below and become accessible to a broader set of customers." In contrast, Maruti has found it tougher to move from the mass market into more exclusive segments.

There will be new challenges along the way. For instance, the new set of customers will use their cars more conservatively than Honda's earlier buyers of the more premium cars; Amaze buyers will look for a replacement only after 5-7 years as against the more affluent City customer who will typically buy a new car after 3-5 years, says Ghosh. At the same time, with more customers coming from smaller cities, where road conditions may not be the best, there could be compromises on preventive maintenance.

Even as HCIL succeeds in expanding its customer base, its famed attributes of maintaining quality and reliability will be tested like never before. The Makeover...

More launches
After the Amaze and a diesel engine, new launches include an MPV, SUV and diesel variants by 2015

More investments

Rs 2,500 crore to double manufacturing capacity to 2.4 lakh by 2014

More local vendors
Vendor base is up from 102 in the pre-Brio phase to 200-plus now to boost localisation and control costs

Sharper India thrust
Y Matsumoto, in charge of development, production (Asia, Oceania) drafted to India to beef up local expertise

Sharper brand message
From English ad campaigns, ads now have an Indian touch and are in seven local languages; dealers & customer care have been re-jigged accordingly

Sharper dealer connect
From a decentralised set up, a new software now connects all dealers giving Honda real-time customer & complaints data

Savvier service
Owners' lounge at service centres being spruced up to cater to new buyers



CEO Speaks On Honda India's biggest challenge: We are weak on our cost competitiveness. We are improving it but we need to work on it harder.

On market share: Our target is not just to become big in India or grow our market share. We want to be the most trusted company. We want to expand our universe in India but also maintain and further increase our quality and customer care.

On Honda India and its global relevance: India is a very unique market, very different than even other emerging markets. Half the market here is of hatchbacks. I am not sure how transportable to other markets are the lessons we learn here. We do not have big export plans - not more than 10%.

On his management style: I have my food in the plant canteen. I queue up and often have Indian food. My rationale is if my people are looking left, I cannot look right. That is wrong. It creates hurdles. I have to be part of them. We need to move in the same direction. I often do direct meetings with people below to get their views.

On his toughest challenge: When I went to Honda China, quality, sales and service was a huge concern in 1998. We used to import Accords then. By the time I left we were exporting cars to Europe. Our quality there became world-class.

Click here to read the article at The Economic Times of India

Five reasons why auto world is shifting to emerging markets and what it means for India

The Economic Times of India, May 19, 2013

The dichotomy at times is hard to fathom. The India auto industry closed 2012-13 with a sales dip of 6.7%, the first drop in 12 years. The outlook for 2013-14 isn't much brighter, with industry experts and analysts predicting a growth of 3-5%.

Over the past decade, the demand and hence the manufacturing landscape in the auto world has begun shifting from the developed to the emerging world.

Yet talk to top honchos of auto MNCs and you get a different picture. Honda sees India as an important leg on which global growth rests. Ford Motors CEO Joginder Singh says the Detroit carmaker remains buoyant about the country's long-term potential. Ditto for Nissan and Toyota.

The apparent disconnect between the sales slowdown in India today and auto MNCs' long-term ambitions has a good explanation. Over the past decade, the demand and hence the manufacturing landscape in the auto world has begun shifting from the developed to the emerging world.

Here are five reasons why this shift is happening and what it means for India:

1) The Rise of Asia

According to estimates of Brooking Institution, a US public policy research organisation, the US' and Europe's share of the world's middle class — today at around 50% — will dip to 22% by 2030. In Asia, it will more than double from 30% to 64% by then. This shift is already reflected in the automobile industry.



About a decade back, in 2002, Asia's contribution to global production capacity in the automobile industry was 15-20%. Today it accounts for over half. China has become the top country in car sales, beating the US. Auto MNCs, lured by this huge growth potential, are shifting production bases to Asia to be closer to their customers. India with a capacity to produce 3 million cars is the third largest.

With vehicle penetration in India at a low 13 per 1,000 people (compared to 45 per 1,000 for China) and a growing young population, it should soon overtake Korea as the second-largest car producer in Asia, after China.

About a decade back, in 2002, Asia's contribution to global production capacity in the automobile industry was 15-20%. Today it accounts for over half. China has become the top country in car sales, beating the US. Auto MNCs, lured by this huge growth potential, are shifting production bases to Asia to be closer to their customers. India with a capacity to produce 3 million cars is the third largest.

2) Global Platforms, Global Lifecycle

Almost all auto companies are looking to reduce the manufacturing complexity in their product portfolio. They are laying thrust on global platforms — using the same base globally to churn out a range of vehicles. For example, Volkswagen's Polo (a compact) and Vento (a sedan) are based on the same platform. It is now also developing a sub-four metre Vento — on the same platform — specifically for India. It is reportedly considering an MPV and a compact SUV on the same platform.

Increasingly the auto world is seeing a global convergence of the product lifecycle. More and more auto firms are now doing global launches of their products in different markets and also phasing them out simultaneously. For example, Ford EcoSport will soon debut in India as part of its global launch.

"As platforms become globalised, there is less pressure to locate production close to any one market. We're seeing surprisingly strong manufacturing centres developing in North America, particularly the US and Mexico. Of course China, Korea, parts of Southeast Asia and Europe will continue to be strong production hubs," says US-based Jeremy Anwly, vicechairman of Edmunds.com, an auto advisory portal.

3) From High Cost to Low Cost

It helps that production costs in most developed countries like the US, Japan and most western European countries are sharply higher than the emerging markets. Perhaps the only exception is Germany which has maintained its manufacturing edge due to its relentless focus on technology, its thriving manufacturing ecosystem and its focus on high-end cars.



As a result, auto MNCs are shifting their production bases from high-cost economies like the US and western Europe to low-cost countries like China and India. Analysts estimate that producing cars in India today may be 15-20% cheaper than in the US. In fact, there are many countries like the Czech Republic and Argentina — with no primary domestic demand — which are emerging as low-cost export hubs for the regions.

"Rather than setting up duplicate production bases, OEMs are increasingly seeking to gain efficiencies and scale by establishing a production base in the most efficient place — where they can minimise cost and maximise revenue," says Beijing-based Bill Russo, senior adviser, Booz & Company, a consultancy firm.

4) FTAs Shift Balance

Many countries are signing regional or bilateral free-trade agreements (FTAs). The US has signed one with Mexico, India has signed with the Southeast Asian countries. India's FTA with EU though has run into a controversy. The US has signed FTAs with a range of countries, including Mexico which is fast emerging as a car export hub in North America. Turkey is also emerging as production hub, partly due to its FTA with countries like Korea.

5) Convergence of Demand & Norms

At a macro level, there is some convergence of the kind of vehicles that consumers in different markets need. Europebased Mark Fulthorpe, senior manager, IHS Global, says environmental and efficiency norms in different countries today are much closer than they ever were in the past. This means companies have to align their cars with policy norms that are in a much narrower band.

Also, globally, there is a clear shift in consumers' preference for smaller, compact and fuel-efficient vehicles, says Haig Stoddard, a veteran auto analyst with US-based Ward's Auto. All this means that auto MNCs have to deal with a far less heterogeneous policy environment and consumer demand — allowing them more room to pick their production location.

How Maruti keeps meeting India's demand & what makes Swift and Dzire so popular

The Economic Times of India, August 19, 2012

Click here to read the full article

The MUV segment in India is currently at 16% of the total car market. But it is set to grow rapidly. In Indonesia, MPVs comprise 30% plus of the market. In China too, this segment is growing rapidly. "Their popularity seems to coincide with a changing consumer profile. Second-time Chinese buyers use their vehicles for multiple purposes like travel, family activities where MPVs serve well," says Bill Russo, president, Synergistics Ltd, a China-based consulting firm with focus on the auto sector.

India will surely follow China in the preference for MPVs. Maruti was the first one to realise its true potential and launch a product to cater to this segment.

How BMW, Mercedes & Audi stack up and what their strategies are

The Economic Times of India, March 25, 2012


BMW



Brand positioning: 

The luxury car brand targets younger customers. Often self-driven, it lays thrust on speed and emphasises on driving as pleasure. Its advertising campaigns often show the car being driven around. Its tagline is "joy forever". 


India Strategy: 

BMW is aggressive and fast, and its Indian journey proves that. Within four years of its launch, the company unseated Mercedes to become the top-selling luxury car in India, its market share has moved up from 9% in 2006 to 42% in 2011. 

Appealing to the younger buyers (average age of a BMW buyer is 40 years), it has introduced a varying product range at different price levels, starting with its cheapest model X1 available at Rs 23.7 lakh. It will further strengthen its portfolio by bringing in its MINI range, a new 3 Series and the new M5 sometime soon. On the back of all this, the country head Andreas Schaff is hoping to make India among the top 10 countries for BMW globally in the next 10 years. 

At its Chennai plant, BMW assembles 3, 5 series and X1 while others like X3, X5 are imported as a fully built unit. But with growing sales, it may set up its second plant by 2015. It might also scale up its manufacturing facility from just complete knock-down (CKD) kits. Their local component sourcing, currently low, will rise. Already, they have a global sourcing team here to cater to their global needs and have identified 20 vendors so far. This number should go up in future. 

Its marketing strategy has largely been to create touch points like professional golf tournaments, wine tasting sessions and events with fashion designers. Last year they organised an Xperience Drive in Gurgaon which brought in international trainers with a live performance by the Australian Raw BANG. A test course, with 10 obstacles, was especially designed to bring out X range's special features. 

BMW is growing its dealer network and hopes to touch the 60 mark by 2015. With 80% of its cars being financed by its own financial services arm, BMW financing is a brisk business. Its recently launched used-car business BMW Premium Selection will soon be available across all its dealerships. 

Mercedes-Benz

Brand positioning: 


A symbol of power. The ultimate car for those who have arrived and is almost always chauffeur driven. The brand symbolises social status with the tagline "The best or nothing", says Pradeep Saxena, executive director, TNS Automotive. 


India Strategy: 


This is the oldest and the best luxury car India has known. It set up India operations in 1994 and has the best infrastructure among the three in terms of dealer reach and domestic component sourcing which stands at around 34%. But the leader has been on the backfoot ever since younger and peppier BMW unseated it in 2009. 


Mercedes is now reorienting its India strategy to target the youth. The company is working on its model line-ups, marketing and brand positioning to keep them aligned. For example, the luxury brand is now increasingly emphasising on performance and sportiness of its brand in India. It is now closely associated with F1 in India. Further, the company has brought in performance cars from its AMG stable to appeal to young Indian buyers. 


It is planning to invest Rs 350 crore as part of its strategy to introduce new small and compact cars in India by 2015. The company is expected to bring in its B-class, front-wheel-drive small family car sometime around the festival season (October-November) this year. Currently Mercedes' cheapest car is the C-Class. 


With B-Class hatchbacks, it will lower the entry threshold. The B-Class hatch, owing to its styling and agile contours will be positioned as sports tourer. During the next few years, Mercedes-Benz has planned the introduction of most of its 10 new global cars in India, and for this it is considering assembly of its SUVs ML, GL and GLC-Class here. 


The company has recognised the need for more compact cars in countries like India and China and assembling them in local markets is considered beneficial. With better localisation of content, they will have a pricing edge over others. On the back of all this, as Indian luxury car market expands, the company is hoping to sell around 55,000-60,000 cars (from current 7,430) by 2020. This is part of the bigger plan for Mercedes to regain its top slot in India. 

Audi

Brand positioning: 


Like BMW, it targets young buyers who love to drive. The car emphasises design and style rather than speed (BMW's thrust). Positioned as a well-engineered stylish car, its tagline is 'Vorsprung durch Technik' in German, meaning 'Lead by Technology'. 


India Strategy: 


The second largest luxury car seller in the world and the third largest in India is nurturing some serious India ambitions. By 2015, Audi says it will be the largest luxury car seller in India as well as the world. Currently they have a marketshare of around 20% but they are the fastest growing luxury car company among the three.


In 2012, Audi is widely expected to beat Mercedes and wrest away the No. 2 slot on the back of volume driver Q3's launch this summer, which will lower Audi's entry threshold. The Q3 will compete with BMW's X1, a model which has given BMW a significant jump in volumes. 


Audi is also looking to launch more volume models by 2013, among which the A3 sportback (large hatchback) is being considered after a recent customer meet. Expected to push Audi's entry pricing further down, the A3 competes with Mercedes' B-Class. The B-Class is scheduled to be launched in India soon. In 2012, the German luxury carmaker will launch an improved version of the A4 sedan, apart from the Q3. 


Audi head Michael Perschke is hoping to sell a minimum of 50,000 cars by 2020 (5,511 in 2011). This will involve "deep indigenisation" as volumes grow. The biggest weapon that Audi has vis-a-vis the other big two is that it is part of the bigger Volkswagen Group which has and is investing big sums on plant and infrastructure in India. Audi and Skoda share an assembly plant in Aurangabad while parent company, Volkswagen, has commissioned a full-fledged production facility in Chakan. 


"In China Audi leads because of its first mover advantage, localisation and good adaptation to the local market," says China-based Bill Russo, founder, Synergistics. Now it is getting its India act together with at least one "heavy-hitting" launch every year, starting with Q3 this year. 

Vehicle Dependability Ranking* 

(Long-term quality) 

1) Mercedes-Benz 

2) Audi 

3) BMW 

*Dependability Ranking: It measures problems experienced during the past 12 months by original owners of three-year-old vehicles. It checks 202 different problem symptoms like dependability of body, features, accessories, interiors and powertrain.

Vehicle Apeal Ranking** 

(Extent of delight with feature contenting and vehicle styling and layout) 

1) BMW 

2) Audi 

3) Mercedes-Benz 

**Apeal Ranking?: The ranking study examines how gratifying a new vehicle is to own and drive, based on owner evaluations of more than 80 vehicle attributes including feature and instrument, comfort, style and performance of the vehicle. 

Clearly, Mercedes-Benz has performed well in quality in the recent past, both in terms of initial quality and longer-term quality. BMW performed better in terms of feature contenting and delighting consumers via styling and vehicle layout. Audi, positioned close to where BMW is pitching itself, has grown rapidly in the recent past to become the second largest luxury car seller on the back of successful launches and better value offering in its cars. 

Click here to read the article at The Economic Times of India