India: The new low cost car destination

One of the largest business conglomerates of India, Tata Group, is all set to start the production of its awaited Rs 1 lakh car in India. The prospect of owing a car at just Rs. 1 lakh is exciting for the burgeoning middle class which has discovered a penchant for individual mobility. The prospects of low cost car market has not only opened up a new segment but has also laid the foundation of a new battleground for the automobile manufacturers. This article discusses the changing landscape in the Indian automobile industry.

Maruti Udyog is the largest car manufacturer in India and its success is largely attributed to its flagship car Maruti-800 that targeted the middle class. Maruti-800 is the current entry-level car offering and it costs around Rs. 2.2 lakh. In the two wheeler segment, motorbike is the coveted choice with prices varying from Rs. 30,000 to Rs. 75,000 and here exists a gap. With the changing lifestyle and growing disposable income of the Indian middle class, there is a growing penchant towards individual mobility; however there is no offering from any automobile manufacturer in the price range Rs. 75,000 to Rs. 2.2 lakh.

Tata’s 1 lakh car seems to fill this gap and this has left other automobile manufacturers pondering on the possibility of offering low cost four wheelers. Recently, Kolkata based Global Automobiles announced that they are exploring the possibility of launching a sub Rs 1 lakh car1 in India and Delhi based tractor company, Sonalika, is also developing a car with similar price targets.

According to a study published by Roland Berger (a consultancy), the market for basic, low-cost cars promises to be one of the fastest-growing vehicle segments over the next few years2. Moreover, J D Power, which is a global marketing information firm that conducts independent surveys of customer satisfaction, product quality and buyer behavior particularly in the auto industry, feels that such a low-price proposition, costing nearly half of the current entry-level car offering, is capable of bringing a “structural shift” in the dynamics of Indian auto market3. Going by the expert’s opinion, low cost cars will put pressure on both the middle segment in the passenger car market and motorbike segment in two wheelers market.

The two wheeler market is bound to feel the heat because low cost car is not beyond the reach of the consumers spending in excess of Rs. 50,000 on motorbikes. The Indian two wheeler market is huge and is estimated at 6 million units. Even if the low cost cars grab a conservative 10% of two wheeler market, it is huge. It will also result in a price pressure on the two wheeler manufacturers. However the leading two wheeler manufacturers in India like Hero Honda and Bajaj remain unfazed by the competition from low cost cars and according to them they have the advantage of lower maintenance and operating cost4. Two wheelers have a distinct advantage of higher fuel efficiency and it would be interesting to see how the low cost car manufacturers will woo the consumers given the unstable oil prices.

The structural changes can be in the form of extensive price cuts of small cars, new offerings in the similar price range or eroding the market of small cars forcing them to look at middle car segment.
Indian car market is booming and over 75% of this growth is attributed to the small cars even as the demand and market for medium size cars is growing. The flag bearers of the small car market are manufacturers like Maruti, Tata (Indica) and Hyundai with Maruti the clear frontrunner. Maruti’s market share in Indian passenger car market currently is around 50% and a large portion of their top line comes from small cars in the price range 2 lakh to 5.5 lakh. Maruti is expected to be worst affected by the low cost cars; however, Maruti has maintained that the low cost cars are not going to impact Maruti and it will only result in narrowing the gap with the two wheelers5.

Amidst all the hype and publicity, Tata group is determined to roll the first low cost car in India in 2008 and only time can tell whether experts are right, claiming structural shift in Indian automobile market, or the existing two wheeler and four wheeler manufacturers are right.

References
1. www.blonnet.com/2006/11/18/stories/2006111805930200.htm

2. www.ft.com/cms/s/8c05df30-a03b-11db-9059-0000779e2340.html

3. www.accessmylibrary.com/coms2/summary_0286-13619092_ITM

4. inwww.rediff.com/money/2006/dec/12tata.htm?zcc=rl

5. in.rediff.com/money/2006/jun/16inter.htm

6. www.automotivedigest.com/view_art.asp?articlesID=21211

7. www.nextbillion.net/tata-develops-cheap-car-for-india

8. www.economywatch.com/business-and-economy/automobile-industry.html

9. http://www.rediff.com/money/2007/mar/30tata.htm