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Small Cars, Big Bets

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PEOPLE'S CAR: Tata's

small car Nano

Who's afraid of the Nano? Brihanmumbai Municipal Corporation (BMC) chief Jairaj
Phatak, for one. He's worried about the city's roads getting choked with more cars.
His worries – and that of other city planners – are only set to grow. Between now
and 2011, small cars are going to take over Indian roads.

Not all will be as affordable as the Nano. Some will cheque out for over Rs 7 lakh
and more, but the list of new compact cars is long and winding: Skoda's plush Fabia,
Fiat's ultra-premium 500 or Cinquecento, VW's Up!, Honda's Jazz, Suzuki's two new
models -- the A-Star (out in October) concept and Splash -- and Toyota's Yaris.
Chevrolet, Toyota, Bajaj-Renault and Ford are others gearing up for the small car
market.

So what's making practically all car makers drive down the small car road? Growing
affluence, for sure. As incomes rise, notes Scott McCormack, Ford India's vice-
president (marketing, sales and service), the first stop is a small car. B.V.R. Subbu,
CEO of Argentum Motors and former Hyundai India president, believes the demand
for affordable small cars will come from small towns and for those driving in traffic-
clogged metros. Many small cars are second and third cars for
rich families that own luxury cars. "Everybody is looking at the volume segment,"
says auto columnist Murad Ali Baig.

A small car is defined as a car "with length less than 3.8 metres with no limitations
on the engine sizes." The definition has an impact on the excise duty paid on the
vehicle and, therefore, the overall cost. The Maruti Alto, the Swift, the Wagon R, the
Hyundai Santro and the Tata Indica are all small cars but they're really compact cars
of around 4 metres length. They too are an extension of the small cars segment.
Small and compact cars make up more than two-thirds of the
market. Last year, notes Baig, 76 per cent of vehicles sold were hatchbacks.
The Nano, however, will ride in solitary splendour for the time being. The sticker
price for the standard model (without air-conditioning) is likely to be around Rs 1.2
lakh, including tax and freight. That's half the price of the Maruti 800 and three times
that of an average motorcycle. Apart from the Maruti 800, no other car is now priced
in the Rs 1 lakh-Rs 2 lakh bracket. From all the evidence that's available, the new
small cars that are in the offing will be priced higher.

Most companies with big plans for small cars are mum on their pricing, but right now
no one is thinking of hawking ultra low-cost cars in India. Rajiv Bajaj, managing
director of Bajaj Auto, who unveiled the company's Lite concept car a day before the
Nano got a rousing reception, told The Telegraph that the car would not be a Rs 1
lakh one, declining further comment. Toyota's small car has a 1,000 cc engine.
Honda's Jazz is expected to sell for Rs 5 lakh-Rs5.5 lakh. Competition is hotting up
in the Rs 3 lakh-Rs 6 lakh segment of small cars, notes an industry veteran.

Others are pitching it higher. Fiat's 500 or Cinquecento will launch in India with a
price tag of over Rs 12 lakh. Fiat will position it as a style accessory. Skoda's Fabia
that also launched at the Auto Expo is a spacious small car that kicks off at Rs 4.99
lakh and peaks at close to Rs 8 lakh for the premium variants.

Sylvian Bilaine, managing director, Renault India, which is partnering Bajaj on the
small car project, admits that the Nano has opened a new segment which is still
undefined. "At the price that they said they would keep, it is a fantastic challenge
they've taken." And set for the rest of the automobile industry, he may well add.

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on Automobile
The pricing of the Nano is going to change life for Tata Motors' rivals as well. Subbu
is sure that from 2009 the prices of existing low-end models will come down. That
will put pressure on the profitability of companies. The small car segment,
McCormack points out, is extremely price sensitive and he admits that the Nano's
pricing "will potentially stake out new ground." Rivals will have to keep a very tight lid
on costs.

Both Maruti Suzuki and motorcycle manufacturers have admitted that their sales
could get affected. Baig, however, feels it won't have a huge impact on two wheeler
sales. Less than 5 per cent of motorcycle buyers will switch, he insists. Baig feels
the Tata act won't be easy to copy. "It is a feat of clever engineering." Actually, not
everyone may want to copy it. The industry veteran argues that the impact of the
Nano on the small car market will depend on the Nano's performance. "Price is
based on performance specifications. The on-road performance of the Nano is still to
be seen." Other companies, Baig says, will wait and watch while working on the
engineering of their respective cars. "People want the best car in a price band," he
points out. Maybe that's why the Bajaj-Renault feasibility studies are exploring ways,
as Bilaine puts it, "to get something on the road which will satisfy all parameters and
get the price right."
But does it make sense, then, to have so many players in a particular segment and
for them to come in much after the path-breaking Nano? "Being first is important,"
says Bajaj, "but getting the product right in terms of performance is more important."
The Bajaj-Renault car, he promises, will have twice the fuel efficiency of other cars.
"We will create our own space in a different way," say Bilaine, who is sure there is
room for everyone in the small car market. Agrees McCormack, who insists this
segment will still be the largest even when people graduate to bigger cars and push
up their share in the market. Ford, he says, had factored this in when it decided to
get into the small car space, which will be a new product segment for the company
in India.

The key to success, says the industry insider, will be design, specifications,
manufacturing efficiency, performance, marketing network and after sales service.
"Competition will not be on price alone, but on these parameters."

Indian car makers will certainly be in for a bumpy ride -- though the car buying public
will drive away with better deals. The collective dust threatens to engulf BMC's Jairaj
Phatak.

Additional reporting by Manjula Sen and Airban Das Mahapatra

 

Summary
The majority of growth in the global automobile industry in the coming decade will come from
emerging economies such as India, China and Eastern Europe. And the largest contribution to
growth of auto market in these countries will be the fast-growing small car segment. The
increasing disposable of middle class population is the key driver of small car market in
developing nations. However, in developed regions like the US and Western Europe, stringent
environmental standards are increasing the need for more fuel-efficient cars.

India is likely to evolve into a global hub for small-car manufacturing. Currently, India is one of
the largest producers of small cars with the small car segment accounting for about three-fourths
of the Indian car market. The fast-growing small-car market has encouraged several global auto
companies (Renault Nissan, Toyota, Hyundai) to announced plans for launch of small cars in
India. With the launch of Tata Nano, the stage is set for around a dozen new small and compact
cars to be launched in India in the next two years. Maruti Suzuki India, largest passenger car
manufacturer in India, has more than sixty percent share of the domestic small car segment.

The small car demand in China, was not very encouraging 2007, but is expected to bounce back
in 2008. The narrow price gap between small car segment and medium car segment has made
medium segment cars a more attractive choice for consumers.

Mini-cars account for more than one-third of the total volume sales in the Japanese auto market.
Suzuki and Daihatsu are the market leaders in the small car market in Japan. A large number of
Japanese consumers are moving from luxury cars to mini-cars due to environmental standards
and increasing gas prices.

The report analyzes the small car market in India, China and Japan, besides providing an overall
view of the global market. The report also profiles the major small car manufacturers, with a
discussion of their key business strategies. It also analyzes the major trends prevalent in the small
car market.

Report Buyer Review

"This report gives a qualitative analysis of the small car market in small car market in India,
China and Japan. It finds that the largest contribution to growth of auto market in these
countries will be the fast-growing small car segment. Compiled by Koncept Analyctics, this
excellent report provides an all-encompassing overall view of the global market as well as 4
fully featured profiles of the leading car companies, including Maruti Suzuki, Hyundai, Tata
Motors and Daihatsu "

Reviewed by NS, 05 Sept 2008

Content
 1. Introduction
o Passenger Car Classification
o United States
o Europe
o China
o India
 2. Market Overview
o 2.1 Global Market
o Production of CVs & PVs in Developed Vs Developing Regions
o Worldwide Small Car Sales & Share
o 2.2 India
o Breakdown of Car Market by Segments
o Passenger Vehicles Sales by Manufacturer
o Passenger Vehicle Sales - Market Share
o Small Car Sales - Market Share
o 2.3 China
o Comparative Vehicle Sales
o Passenger Vehicles Market Share
o Breakdown of Car Market by Segments - Market Share
o Breakdown of Car Market by Segments - No. of Models
o 2.4 Japan
o Passenger Vehicles Market Share
o Mini-Vehicle Market Size
 o Mini-Vehicle Market Share
 3. Market Trends
o 3.1 New Players in Indian Small-Car Market
o 3.2 Localized Production of Global Companies
 4. Company Profiles
o 4.1 Maruti Suzuki India
o Overview
o Business Strategies
o Launch of New Models
o Service Network Expansion
o 4.2 Hyundai Motor India
o Overview
o Business Strategies
o Launch of New Models
o Investment in Production and R&D Facilities
o 4.3 Tata Motors
o Overview
o Business Strategies
o Launch of New Models
o Strategic Acquisitions & Alliances
o 4.4 Daihatsu
o Overview
o Business Strategies
o Medium-term Business Strategy
o Strong Asian Focus
o List of Tables
o US Passenger Vehicle Classification System
o Car Classification System in India
o Passenger Vehicle Sales in India by Manufacturer (2007-08)
o Leadership by Car Segments in India
o Upcoming Models in India
o Maruti Suzuki Passenger Car Sales (2007-08)
o Tata Motors Passenger Car Sales (2007-08)
o Daihatsu Vehicle Production (2004-07)
o Indian Automobile Production (2001-07)
o Indian Automobile Domestic Sales (2001-07)
o Indian Automobile Exports (2001-07)
o List of Charts
o CV & PV Production in Developed Vs Developing Regions (2006)
o Global Auto Market - Small Car Sales & Share (2005-12E)
o Breakdown of Car Market by Segments (2003-10E)
o Indian Passenger Car Sales - Market Share (2007)
o Indian Small Car Sales - Market Share (2007)
o Comparative Vehicle Sales in Japan, China & US (2006)
o Chinese Passenger Car Market Share (2007)
o Chinese Market Share of Car Segments (Q204-Q207)
o Chinese Model Count by Segment (2004-07)
o Japanese Passenger Car Market Share (2007)
o Japanese Mini-Vehicle Market Share (2002-06)
o Japanese Mini-Vehicle Market (1997-12E)
o Comparison of Average Cost per Vehicle in Japan