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The Rediff Business Special/Crossfire

'How can the market grow in India?'

Rediff On The NeT has made arrangements to carry the transcript of the popular television programme Crossfire. We present the eighth of the series, which debates whether there is room for another small car in the increasingly competitive automobile market in India. The programme features the joint managing director of Maruti Udyog Limited, Jagdish Khattar, and automobile expert Murad Ali Baig. The moderator is editor of A&M magazine, Sreekant Khandekar.

Sreekant Khandekar: Good evening and welcome to Crossfire, a weekly programme of debate of business and economic issues. Tonight's subject is -- Who will survive in the small car market? Recently we saw the launch of two small cars, Hyundai's Santro and Daewoo's Matiz: one more, Tata's Indica, is to be launched later this month. So is there any space? The Indian car market saw a revolution in small cars in the year 1984. Will '98 be remembered as the second revolution? Let's take a look at some figures:

In 1983-84 the Indian car market consumed 40,000 cars. Maruti Udyog entered the fray and transformed the scene. By '96-97, the market had expanded ten-fold to sell more than 400,000 cars. Of the total market, Maruti's share is 82 per cent by virtue of its absolute domination of the small car market. The rest of the pie is shared by several manufacturers who mainly make mid-size cars.

Now will Maruti's hold be threatened by new entrants or will the market expand to create room for all? To discuss these issues we have with us Jagdish Khattar, joint managing director of Maruti Udyog and Murad Ali Baig, a leading automobile expert.

But first let us listen to the views of the S G Awasthi, managing director, Daewoo Motors India and Chetan Parikh, market analyst and director, Jeetay investments.

CP: The Indian car market, especially the small car market, is going to face a lot of competitive activity in the next five years. Eventually, there will be a consolidation in the industry. But what must be noted is the fact that there are a lot of multinationals in the fray who have a lot of resources, so the entire process of consolidation may take a long period to complete. Even under the most optimistic assumption of the land, it will take a long time before the manufacturer catches up with the supplier.

SGA: Competition is good for the market, it is good for the customer and it is good for the economy. To that we will be cost competitive, we would offer a product which would meet the customer's demands. Eventually, the customer will not have to compromise. That is going to be very good. The market is going to change qualitatively.

SK: Mr Khattar, let me start with you. Would you agree that '98 will be remembered as the second revolution in the small car segment in India?

Jagdish Khattar: Well, in some ways, yes, because we had restricted models in the small car market. Maruti had, of course, two models -- the 800cc and Omni -- in this segment. We are selling about 250,000 per year. For those who have launched it will ....customers will have more choice in that segment.

SK: Murad, do you think with the launch of two new cars, there would be any substantial improvement over what Maruti already offers?

Murad Ali Baig: I think for the first time we have got advanced technologies in terms of fuel injection, multi-value engines coming into the small cars which were up to now available in the prestige cars only. But it will take probably two to three months before the impact is felt.

JK: The technology which is being brought by these manufacturers is being made available by Maruti for their export products not now but for the last four-five years! Our Zen, which is known as Altos, has got most or all these features because this is what is required in Europe. One of the reasons why we have not introduced these technologies in India is because of the Indian conditions. If you look at the quality of our fuel, the amount of adulteration that takes place in our fuel supply, these technologies will not be able to deal with those.

MAB: I have talked to the people in Honda and Daewoo. All of them say that the fuel has caused slight problems but not much. They have made some adjustments in the calibrations of the fuel injection systems and they say they had a few glitches, but they were able to handle the system.

JK: They have been advised to have additives to take care of the fuel problems.

MAB: In some of the models...

JK: Whichever model it is required in, I am not saying that this technology is not required, it is required....

SK: You are not going to introduce it?

JK: We will introduce, but the point is...

SK: But the problem of the fuel will not go away.

MAB: I think it will improve.

JK: There will be more awareness. I think the oil companies are also gearing up to it. As the quality of fuel improves, we will have these models. Ultimately there is something known as the appropriate technology for Indian conditions...

MAB: As far as the fuel injection is concerned, this is an arguable point but as far as the multi-value engine is concerned, that is what Altos does not have. The multi-value engine gives very roughly 20 to 30 per cent more power, but it also gives wider torque bend. As a result, the derivability is very easy.

SK: Everybody is wondering how Maruti is going to respond. Doesn't Maruti feel threatened? Is it going to reduce the prices?

JK: Look at it this way. Maruti in the last one year has upgraded four of its models. It involves a lot of planning and these decisions were made almost two years ago. More importantly, in most of these upgradations we have not passed the cost on to the customers. In a way we have improved the value for money.

SK: Are you saying you have already done what you had to respond in the anticipation of the competition?

MAB: There certainly has been an improvement. People want change but as far as the engine is concerned, both Santro and Matiz are two cars with substantially increased capacity, power and derivability. And as far as the TELCO car is concerned not much is known. But these two will make a phenomenal difference to the market.

JK: Baig, in the automobile industry with models, there is constant improvement. Nothing comes overnight. There is a gestation period. We have done certain things. Others are in the pipeline.

SK: What can be expected first? I think, the whole country is waiting for the reaction from Maruti.

JK: I won't be able to indicate what we are going to do but certainly one can rest assured. Let us look at the track record of Maruti. When you mentioned that in 1983 the total market was 40,000 Maruti came up with a capacity of 100,000. There were doubts then whether Maruti would be able to sell 100,000 cars, but we did. We were in a dominant position as you mentioned. Despite that over a period of 12 years we introduced six models.

SK: You have been through the learning curve in India. What are the big problems you reckon that the new entrants are going to face in India?

JK: If you look at it today, by the end of 1999, the total capacity that is being created in this country would be over a million units.

MAB: Certainly...

JK: The demand would not be beyond 60,000 to 70,000. So I think it will be ... There will be problems.

SK: What is the minimum capacity utilisation that the car plants ought to have, if not 100 per cent?

JK: I will answer the question in a different way. To survive one must have international capacity, economies of scale. Why is that required? So that if you want your vendors to have economy of scale, to provide you components at competitive prices, they need volumes. The wider and deeper your dealer network, the better it is for customers. Vendors also need volumes. So internationally, a manufacturer should have a production capacity of something between 200,000 to 250,000.

SK: But many of these entrants that are coming in already have that international capacity, don't they?

JK: 250,000 means I have to double the capacity even today.

MAB: Both Hyundai and Daewoo have 120,000 capacity. When Maruti started it had a capacity of 100,000. The capacities can go up, provided there is a demand. Most of the capacities are on a single shift. They can increase the shift without too much investments, but the problem is will there be market?

SK: Would you agree with that?

JK: I agree. Yes, the capacity will be in excess. Many, many producers will not be able to reach their economy of scales. We have at least 12 manufacturers who are here or are about to be here. I agree with analysts that there would be a consolidation and shakeout. I don't foresee more than five or six players remaining after a few years.

SK: Do you think that exports will make any difference in terms of keeping capacities of the plant?

MAB: Certainly, in my discussion with many car-makers one thing is clear. India is one of the few developing countries which has a matured steel industry, and produces good quality castings and forgings. Cars require a lot of castings and forgings. These are the items they would be able to export.

JK: Everyone thinks that it will be an ideal place. But I don't think we have the infrastructure for it. We are exporting cars for the last seven to eight years. Are you aware that for us to send a car from New Delhi to Nava Sheva, we have had to set up repairing facilities at Nava Sheva port because by the time the car reaches there, it is not free of defects.

MAB: Correct, but I am talking about...

JK: We don't have the infrastructure. We don't have core competency. You are talking about raw materials? We don't have all the raw materials required for the components. We are importing them today. Every manufacturer who comes in wants to export. But export where?

MAB: But Daewoo is exporting back to Korea...

JK: That is the internal arrangement that they have. But what is happening in Korea? Their own capacities are underutilised! You know the market there. It is very easy to say that you are exporting to Korea but I don't think there is much scope for it. I am not saying it won't be there, but it is a very, very difficult thing.

MAB: Most car producers tell me that they have looked at the Indian car potential on one factor -- forget rural India, we have 50 million households in urban India! But we have only four and a half million cars. Even if you discount the number of taxis and corporate cars, the potential of the market is substantial. But the only point is that the cars were too expensive in the past and were not available.

Now with availability, the second-hand car market is lending a lot of people to move from first to second-hand cars rather than for new cars. We are going to see a change which we have not seen in the past.

SK: Well, a huge component of the price of the car is the duties. Are they likely to come down?

JK: I am coming to that. How can the market grow in India? First we need better infrastructure. Because it goes without saying that we need better roads, better highways, better everything. Otherwise all these cars are no good. We have two-wheelers whose cost let us say is Rs 50,000 and we sell 2.5 million a year. We sell 800 cc cars priced at 200,000, we sell 250,000. If you were to make a curve, if 200,000 were to come closer to 50,000, the closer it would come, the more will be the market because we are very price-sensitive in this country. But how is it possible? Out of the cost of a car a customer pays today, nearly 60 per cent is excise, sales tax, octroi and other things.

SK: What changes do you want?

JK: In developed countries, value added tax is not more than 15 per cent at the maximum. Here we are talking of 60 per cent. So if the car market is to grow, the prices have to come down. Affordability has to improve. Then you can see the growth. That cannot be done by the manufacturers. The government has to play a role and decide whether this is a priority sector or not.

SK: What do you think the government will do? Will there be any pressure if all the car manufacturers urge the government to reduce taxes?

MAB: I am not sure that it affects the government directly, but the point is that the government has missed the real opportunity. The automobile sector has been the main engine of economic growth. The growth of America, the revival of Japan, Korea and Germany was driven by cars.

But in our country, under Gandhian simplicity and socialist thinking, the car has been viewed as an item of eliticism and therefore taxed to death. If the auto industry becomes a priority, it would do a phenomenal amount for economic growth of the country. It is also an amazing, useful educator. With every car that goes into the market, people learn about the technical education that is not taught.

JK: We need to have an auto policy through which maximum possible growth can take place and the government can also earn revenue. The automobile is an important element in industrial growth because it's not just the automobile, it is 7,000 components that go to make a car. That is the growth.

SK: So will one of the strategies of Maruti be to watch the competition bleed?

JK: Certainly not. It will be, I believe, like sharing the poverty because we will also have to react. We won't let them take over volumes, certainly not.

SK: Murad, do you think the new entrants will hurt Maruti?

MAB: Yes, definitely, they will hurt and as they hurt, whether they will drop the prices or they invest more in marketing. Whatever it is, Maruti will have to respond and every company will take some share of the market. I think it would be very difficult to hold on a 82 per cent share which Maruti holds now. They are going to fight all the way down. They have the technology. But how soon they will introduce and what will they introduce? It is going to be a hard fight.

SK: So, will they hurt you or not?

JK: I mean when you have competition, it is bound to have an effect. I don't think we can continue with the 82 per cent market share which is unbelievable in this world. But we are going to see that our volumes are maintained.

SK: Thank you so much for being with us for this episode of Crossfire.

EARLIER CROSSFIRE TRANSCRIPTS:
• 'Unless the government does its business on infotech, you can't create an infotech society'
• 'Industry should have its own consumer complaints cells'
• 'PSU divestment is degenerating into a fund-raising exercise'
• Opening up the insurance sector: 'Will financial infrastructure be with Indians or with MNCs?'
• Takeovers, mergers, acquisitions: 'Companies still treated as family property'
• Is the tariff structure hurting Indian industry?
• The BJP's national agenda for governance

Kind Courtesy: IN TV

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