Harsha Jhunjhunwala, Samrat Singh Yadav, Muhammadu Muzzammil S ,Varshik Nimmagadda , Kaushik Subramanian | IIMS
Ralph Waldo Emerson had said that, “The civilized man has built a coach, but has lost the use of his feet.” This was way back in 1841, and today’s automobiles do a lot more than save our feet some trouble. Bugatti, the fastest and most expensive car, would be launched in India this year.
With every car brand looking at the Indian market, new models are being launched and efforts are being made to carve out a niche. Around fifty cars are expected to be launched this year. Among the most awaited ones are Renault Sandero, Ford Figo, Hyundai Santa Fe, Mitsubishi Lancer, Nissan Micra, Suzuki Kizashi, Skoda Fabia Sport, and Volkswagen Up! Etc.
Indian automobile industry has a long history. The first car ran in Bombay in 1898 and Jamshedji Tata was the first Indian to own a car. From the initial times of only imported cars (which we today know as vintage cars) to the license raj times of Ambassador, the industry has seen it all. The joint ventures of Japanese resulted in Maruti Udyog’s Maruti-800 in the small car segment. Post liberalization this industry has been growing leaps and bounds. The 21% sales growths and 15% auto industry growth even amidst the meltdown is hard to ignore. These figures have ensured that every auto-maker in the world has a plan for India. Audi plans to invest Rs 200 crores by 2015. GM has invested around 1 billion. Already, FDI inflows from automobile companies have grown 70% from $675 million in 2007-08 to %1,152 million in 2008-09. This year’s Auto Expo saw the largest ever overseas participation. Mercedes Benz India recently launched a new version of its luxury sedan S350 priced between Rs 80.5 - 82 lakhs.
There are many factors that make India such an attractive destination. The penetration of the car market is low with only 7 car owners in 1,000 people. The middle class is growing at 22% annually. The list of millionaires is becoming longer, giving hope to luxury segment. This segment is expected to double by 2015. Creation of huge markets is possible in India. Tata Nano did it last year. BMW plans to do it with the launch of X1 priced at Rs 25 lakhs, this year. Easy finance schemes enable people to acquire the best that they want- both Low interests from financial institutions and price discounts from the dealers. The growth in road infrastructure in terms of connectivity and quality is fuelling the automotive industry’s growth too. India has the added advantage of technological capability and availability of trained manpower at competitive prices.
Top executives are looking at different ways of promotions. Volvo used 3 Idiots for its XC90; Volkswagen used the recently concluded Auto Expo. BMW unveiled four new vehicles in the same Expo. GM is signing MOUs with banks to provide finance at both wholesale and retail levels. Ford is concentrating on the safety features in their cars. Nissan is sponsoring events. Honda has supplied its R&D team with saris from India, so that they can attend to issues pertaining to Indian women. Toyota has the tagline “World First, India First”. 2010 seems to be the year of “compact” cars. We have Hyundai i10, i20, Getz; Maruti Suzuki A-star, Ritz; Skoda Fabia; Honda Jazz and Chevrolet Spark. Chevrolet’s Beat priced at Rs 4-5 lakhs has all the features and the space on the offer. Global premiers of small cars are happening in India. In the coming year raw material prices are expected to rise and a possible roll back of government stimulus package is on the cards. Time will tell which company sails through the challenges and the competition to survive as the leader. “Every time I see an adult on a bicycle, I no longer despair for the future of the human race.” - H.G. Wells. We should hope that Indian drivers too will find their eyes moving towards the electric cars like Reva and Volt in face of the sustainability movement. Car makers, taking a cue from the general sentiments, have already started incorporating flexibility in their designs. This flexibility shall ensure that they can confer to the tougher emission standards (Bharat IV) with minimum changes. With more than 110 years behind it, the Indian Automobile industry has matured. Its steady growth has caught the attention of all the global players. In the years to come we would most probably see a lot of action in this industry accompanied with path breaking marketing strategies.
ALL THAT GLITTERS IS NOT SOLD
Having a great product alone does not guarantee success in a competitive market, but not having one almost certainly leads to a disaster.
Dominated by the Premier Padmini and HM Ambassador till the 80’S and the Maruti 800 in the 90’s, the Indian car market has certainly evolved in terms of the number of players and the quality of products. With dozens of national and international players looking to capture some part of one of the world’s most attractive automobile market, the importance of having that winning product cannot be overstated. Maruti 800, arguably the most successful car in the Indian market, delivered good mileage, easy handling and the joy of having a four wheeler, all at a great price. This one product made Maruti the leading car manufacturer in India without much of promotional support. M&M took the industry by surprise with the Scorpio. The company, which is a prominent player in the global tractor market and the leader in India, mostly outsourced all major components of the Scorpio to suppliers. The strategy worked wonders for M&M which had a winning product at their hands within five years of conceptualization, at a modest budget of $120 million.
Any discussion of product innovation in the automobile industry would be incomplete without a mention of the Tata Nano, the world’s cheapest production car. Constrained by a target Market price of Rs 1 Lakh, it took Tata Motors around 5 years to come up with the Nano. This 624cc car has 21% more space than the Maruti 800 while having 8% smaller exterior dimensions. The car needed little promotional support to capture media headlines around the world. More than 200,000 cars have been booked already and the car still continues to create buzz all over with the electric version and plans of launching a hybrid variant. Though the main attraction of the Nano continues to be its price tag, but this would have been impossible if it was not for the superior product design, R&D and ingenious innovation.
Like the several cases of great products doing the trick, there are umpteen examples of how not-so-great products have a hard time finding buyers. The Wagon R had to struggle in the Indian market initially because of its boxy shape which did not find much flavor with the Indian consumers, even though the car had good technical specifications. It took some redesigning and an aggressive marketing strategy from Maruti to make the car a success.
In the high end segment we have a whole lot of major players with a focus on cutting edge technology, contemporary styling and luxury. The Honda City has been around in the Indian market for over a decade and still continues to ride strong, while many of its competitors could not survive the test of time. The City has been continuously upgraded in all aspects ranging from the engine to the car design. This emphasis on the product has ensured that the Honda City has a loyal customer base and still makes a style statement. Companies like Mercedes, Audi, and BMW etc. primarily compete in the high end market based on state of the art technology. The same is true for brands like Bentley, Rolls Royce etc. which cater to the super rich.
With the whole world becoming more sensitive to the environmental changes, almost every car manufacturer is looking towards greener alternatives. The Reva, which is one of the world’s largest selling electric cars, provides a much cleaner alternative to petrol or Diesel. Further, the small size of the car makes it easy to drive in city traffic, and what’s more, the electric car runs at only around 40 paise per Km. Though the car is mostly exported right now, it would be incorrect to neglect its potential in the Indian car market. Hybrid cars like Honda Civic Hybrid, though expensive at the moment, have also engendered a lot of media attention. Such environmentally conscious automakers are first movers into what could be the technology of the future.
Companies like Honda and Toyota invest hugely in R&D to get the product right. This desire to constantly innovate has given them a name for superior technology and a leadership position in the market. There is no denying the fact that pricing, promotion and distribution are very important in every field of marketing, including automobiles, but getting the product right is something which is absolutely necessary.
PRICING STRATEGY IN THE AUTO SECTOR
The consumers of today have much more bargaining power than they had in yesteryears. The tech savvy consumer has access to the prices of all the products at the click of a mouse. Has this increase in bargaining power affected the automobile industry in any way? The answer is a definite yes. India being a less mature market for automobiles has become the battleground for global automotive majors. The pricing strategy has become one of the most important strategies adopted by the Indian automotive majors to gain their market share.
Pricing in the automotive sector depends on a lot of determinants including the type of communication. The conservative Indian consumer tends to rely more on the informal sources of communication like friends, relatives etc. than formal sources like magazines, brochures, ads etc. Thus, the perceived quality of the brand plays a major role. The pricing strategy adopted by the various manufacturers vary widely like the market penetration pricing strategy adopted by Maruti Suzuki to maintain its market share to the product quality leadership pricing objective of BMW.
If we look into the economics of pricing, car being a durable good are generally price elastic in the short run and price inelastic in the long run. The recent rise in inflation generally creates short run price elasticity. The inflation rates have been continuously increasing and have reached 7.31. This means that there is going to be cost inflation in the prices of the automobiles too.
The pricing methods followed by the different automotive majors also vary widely. General Motors employs target return pricing strategy with an ROI of 15 to 20 % on its products. Brands like BMW, Mercedes, and Caterpillar etc. use the perceived value pricing. Target costing followed by Tata Motors to achieve the dream of I lakh car has also been the latest buzz in the industry. The Tata Nano comes with an on road price of Rs. 1, 30,000 and is much less than Maruti 800 on road price of Rs. 2, 02,000. There are talks of Maruti fighting back with a price cut on the Maruti Alto or bring in an ultra low priced version of the Maruti 800 as the company will have to deal with only the variable costs on the car.
From the launch of the Maruti 800 in December 1983, the car had become the largest selling car in just five months from launch. If Maruti plans to face the Nano with an ultra low priced 800, then it should be careful about falling into the low price trap. The aggressive pricing may cause Maruti to get stuck with old technology. But on the bright side this might boost the sales amongst the rural Indian consumers. Hence Maruti should come up with an effective trading down or unbundling strategy.
Maruti follows the price point strategy having a car at all possible price points. The company has forty-six variants from the 2 lakh to 7.3 lakh range. According to Maruti this ensures that there is a car that fits every consumer’s needs but this can also cause a lot of cannibalization of its own products like what had happened between the Alto and the Maruti 800. The price wars have increased between the Maruti and Korean carmaker Hyundai especially after the arrival of Maruti Suzuki Ritz which has been positioned in between the i10 and the i20. Ritz has been eating away the market share of i20 in India, whereas Ritz (marketed as Splash outside India) was seen as a competition for i10 abroad. Ritz has also been strategically priced in the same range as the fastest selling Maruti car the Swift. The year 2010 awaits the much expected launch of the Maruti Suzuki Kizashi. Maruti has adopted value pricing policy for this car which comes loaded with features. The on road price of the car is expected to be around 12 lakh rupees but it is claimed that the car would be a competitor for the Honda Accord which is priced in the 20 lakh and above.
As Indian automotive majors grow and expand into foreign markets, with Mahindra and Mahindra group planning to launch the Scorpio in the US markets and Tata launching the Nano Europa we can see geographical pricing policies being adopted by these companies. But in India the high-low pricing policy still continues with the prices falling every festive season. Every day low price pricing policies adopted in certain mature markets are still unheard of. With the 2010
Auto Expo coming to a close and the expected launch of several small cars make the ‘pricing strategy’ the key to the lucrative Indian market.
CO-OPERATE OR PERISH?
Every once in a while comes along a tectonic shift in an industry that has the potential to change the way that the entire industry operates. These innovations change the fundamental underlying assumptions that have shaped the industry and its practices. The joint venture between Tata Motors and Fiat Spa seems to be the beginning of another age in the automobile industry in India. The cutthroat competition that has characterized the blossoming automobile industry in India seems to have given way to a more matured and sustainable approach to the whole process.
Fiat India was once known for the Premier Padmini that was based on the Fiat 1100 series, which was one of the most enduring models in the Indian car market. But the direct entry of Fiat Spa into India through its subsidiary Fiat India proved to be a disaster in the first ten years of its operations. The primary failure of its models like the Palio that it launched in the Indian market was lack of an insight into the Indian market. The distribution and servicing problems of the Fiat cars were cited as the major deterrents to consumers actually purchasing the cars.
Fiat decided to adopt its global strategy of having strategic tie-ups with other auto players to India and decided to partner Tata Motors in a joint venture that marked the beginning of the second phase of its operations in India. Fiat India Automobiles Pvt. Ltd, a 50:50 joint venture between the two partners was a result of this decision. The first act of this tie-up was the decision to distribute Fiat cars through co-branded dealerships across the country. This plan gave Fiat an instant access to a well established distribution network that helped it to widen its reach among its consumers and counter the distribution problems faced by the earlier regime. In return, Tata Motors would use Fiat’s extensive dealer networks to distribute its commercial vehicles and pickups in South America.
The above joint venture is a classic case of leveraging the strengths of both the players to counteract the weaknesses. The above alliance proved to be just a precursor for a deeper and more integrated relationship between the two partners. They entered into a manufacturing agreement with the Ranjangaon plant being jointly used by both the companies. One of the major strengths of Fiat has always been its superior engine technology and most of the Tata cars now come with a Fiat engine inside the hood. It gives both its members competitive advantages that the other companies will find hard to match. For example the market leader, Maruti will have to come up with cars that compete with both the efficiency of Fiat cars and the distribution might of the Tatas. Such strategic partnerships will usher in a new era of cooperation between the competing players who will look for strategic alliances as a way to improve the marketability and operating capability of their products. It becomes absolutely essential for new players entering the market as a joint venture would provide them with that much needed insight into the mind of the Indian consumer. At the same time, Government policies should be so framed that ensure that competition is not eliminated from the market due to the joint venture between the various players. The companies should also resist the temptation to enter into an agreement with any player and search for the best strategic fit to its scenario.
Cooperation seems to be the best way for companies to bring their best qualities to the table and provide the consumer with a better value proposition because in the end, everyone wants to sell cars and a consumer will only buy one if he finds value in it.
ADVERTISEMENTS IN TOP GEAR
"Stopping advertising to save money is like stopping your watch to save time." Anonymous
This quote encapsulates and highlights the value of advertising in today’s world of business. This holds firm even more, when read in the context of the automobile sector – the 4-wheeler category, which is characterized by cut throat competition and ever changing equations as far as market share and sales are concerned. Off late there have been a number of companies who have launched or are planning to launch new models in India. So what does a company need to do to get wee bit ahead of competition, differentiate itself from competitors, reach the top and sustain its position.
Here enters the colourful, vibrant world of advertising, be it print media, television commercials, out of home advertising or online ads. Maruti spent approximately Rs 195 crores and Tata Motors around Rs 180 crores in 2008 on advertising. Hyundai has an annual advertising spend of Rs 100 crores in India, and late last year auto companies including Maruti, General Motors, Volkswagen and Mahindra have increased their online ad spend significantly. This was because a J D Power & Associate Report had stated that over a third of prospective customers in India are opting for the internet to search for information on vehicles. The figure has risen from 21% in 2007 to 34% in 2009.
Now having established the significance of advertising in the automobile industry, let us look at some of the latest ads to hit the Indian advertising arena. We are going to take up one iconic brand in particular and see how effectively they have used the power of ads to their advantage.
It’s a more than well known fact that Volkswagen has launched its new Beetle in India and its advertisement campaigns have been the talk of the town. But before it launched the Beetle in December, Volkswagen decided to go in for a 360 degree communication campaign to create brand awareness and build up its brand equity. So on Nov 11th morning whole of India woke up to see The Times of India being hijacked by Volkswagen and its brands namely, Passat, Jetta and Touareg. For the first time, there was a print roadblock by a single brand in TOI. All editions of the English daily had only Volkswagen ads and each paper had approximately close to 16,000 sq.cms of print space. There were ads in The Economic Times too, which directed the readers to The Times of India. This was something out of the ordinary and instantaneously captured the attention of the Indian public. It was disruptive advertising at its best and it helped Volkswagen break away from the clutter of mundane ads being dished out by other brands.
This print roadblock was also accompanied by a television commercial which was also launched on the same day. This not only created the awareness about Brand Volkswagen but also created the much needed buzz before their big launch of the New Beetle in the first week of December. It was launched with much fanfare and a television commercial was also launched. This launch was followed up with a bigger promotional stunt on Christmas Eve. Volkswagen deployed a helicopter to unfurl a 10,000 sq.ft banner bearing the picture of the New Beetle and the manufacturer’s logo and fly over the skies of Mumbai. Volkswagen also undertook an OOH campaign at one of the busiest junctions in Mumbai. The campaign read – “Its official. Curves are back.” The hoardings were put up in such a way that, the Beetle came together from five individual parts to form the sixth completed part. Another innovative campaign was where Volkswagen put up a mechanical billboard with their logo and a small model car of the Beetle moved across the sign of “VW”.
Now if we observe these ad campaigns carried out by Volkswagen, one feature stands out and that is INNOVATION. This has been the hallmark of Volkswagen ads since time immemorial, right from the days of their simple yet path breaking black & white ads till date. Volkswagen has made sure that their advertisements are different in each and every aspect. This has ensured that it not only created hype about the New Beetle but also laid a strong foundation for its long term operations in India and its imminent launches including the Polo.
The idea of using Volkswagen and its campaigns was to drive home the power of advertisements and the number of creative and innovative devices available to companies to help them put their best foot forward and accelerate their march towards the summit.