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October 22, 1998


The Rediff Business Special/ Veeresh Malik

Why car-makers zoom in singing Aapka Bharat Mahaan

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Why are leading automobile manufacturers pumping so much money into the Indian car market? What sort of returns on investments, current or long-term, do these companies expect?

Industry analysts are groping for answers.

It is obvious that automobile manufacturers are not clueless enough to assume that there is this vast, untapped segment called the Great Indian Middle Class, out to buy cars by hundreds and thousands. Especially expensive cars, which, at the end of the day, do not add more value in terms of going from Point A to Point B in reasonable safety and privacy than do the smaller and cheaper models.

If some people think that Indians are willing to exchange value-for-money for a semblance of luxury, they need only look as far as the Maruti-800 to understand that social barriers cross reality very fast in India. Some of the richest and most powerful people in India ride around in small cars, content, while it is very often the wannabes who crave for the fancy cars.

Nevertheless, there are an estimated 8,000 people who will buy anything new, expensive and fancy, for the sheer novelty as well as to be one-up on the neighbour. An example is that every new large car launched in India recorded tremendous initial sales that tapered off to abysmally low levels within three to six months. The Thai-built Honda City is the latest instance.

Why, then, are the manufacturers in India?

Here's why. The Maruti Zen, for example, is sold in England under a different name, Suzuki Alto. The price accounts for transportation as well as taxes in the United Kingdom (which are as high on automobiles as in India), but is lower than what you pay for the same car in India.

What the buyer in the UK gets, however, is a superbly crafted car, better than the one in India in all aspects. Each Suzuki Alto that leaves the Maruti factory in Gurgaon is personally checked by a special team of inspectors drawn from the senior officers, which is all fine.

But then, guess where the rejects go and who buys them? They come into the already low-quality Indian market stream!

But even that is not all. While car-buyers in India get a 20,000 km and one-year warranty, lately stretched to unlimited mileage in a year, the British customer gets 60,000 miles and three years unlimited warranty!

Traditionally, for a car sold in Europe, about 35 per cent of the sticker price is put away towards marketing efforts which include, to a large part, after-sales service and back-up like leaner cars, longer warranties, batteries, tyres and other such items. Here in India the same figure becomes easily the margin. Can you, now, see the wide margins our Indian automobile manufacturers work at?

That is why the foreign car manufacturers are driving into India in droves, to take advantage of the lax implementation of all sorts of laws pertaining to motor vehicles. Nowhere else in the world will you find a market which gladly accepts a one-time product without back-up service as in India.

At a modest estimate, if you do a back-of-the-envelope kind of calculation, a simple profit margin of almost 30 to 40 per cent is what we have manufacturers looking at, given that most of them are into not much more than kit cultures.

So, in other words, it is a great gamble, with high stakes, to be in India. If you succeed, the margins are amazingly high, and if you don't, you will still recover your basic investment. Meanwhile, keep feeding poor Indians with substandard products and services and demand level playing fields, so seems the motto!

Take a look at these facts: Hyundai Atos (Indian equivalent is Hyundai Santro) offers three years warranty and unlimited mileage in the UK. So do Daewoo Lanos (Daewoo Cielo) and Daihatsu Sirion (Toyota).

Fiat Punto (Fiat Uno) and Ford Escort (Ford Escort) offer one year warranty and unlimited mileage. Honda Civic (Honda City) offers two years and unlimited mileage. Mazda 121 (Ford small car C-195) offers three years and 96,000 km. Mercedes-Benz E-Class offers one year and unlimited mileage. Mitsubishi Colt (Mitsubishi Lancer) offers three years and unlimited mileage. Peugeot 306 (Peugeot 309) offers one year and unlimited mileage. Vauxhall Astra (Opel Astra) offers one year and 16,000 km).

Warranties usually include full towing from site, exchange with loaner cars in lieu of out-of-order vehicles, per day compensation and other benefits like 24-hour assistance.

Compare (rather contrast) this with the warranties and terms offered in India: one year, some mileage and a lot of heartburn.

The car business seems to have been redefined in India: just put some steel, rubber and plastic together, forget the service and split before the decade is over.


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