Mercedes Order By `Nothing Town' Shows Rise of India's Cities

When a Mercedes-Benz salesman in Pune, India, got a call from an obscure city six hours away asking to buy 100 cars, he thought it was a joke.

The request came from Aurangabad, a community of 2 million people best known for its caves and cotton. The city doubled in size during the past decade after investments by Siemens AG, which built a factory for telecom equipment, and SABMiller Plc, which constructed a brewery.

More than 100 members of the Aurangabad Chamber of Marathawada Industries and Agriculture ordered the luxury cars to grab some attention for what was once a dusty trading town, according to Sacheen Mulay, president of the local chamber of commerce and industry. Daimler AG, the world’s second-largest maker of luxury cars, took note after Mulay led a delegation to the Pune dealership and gave a PowerPoint presentation about their city.

“Aurangabad has grown like anything, and people still thought of Aurangabad as this nothing town,” said Mulay. “This is a place of potential buyers, new-generation entrepreneurs. People should take notice of that.”

Aurangabad isn’t alone in trying to get attention, reports Bloomberg BusinessWeek in its Oct. 1 issue. A Sept. 14 report by the Boston Consulting Group said multinational corporations typically invest heavily in the top 10-15 cities in countries including India, China, Indonesia and Brazil, while ignoring smaller cities with less obvious potential.

‘Next Billion Consumers’

So Aurangabad; Curitiba, Brazil; Xiaochang, China; and Yekaterinburg, Russia, are lumped together with the mostly poor, rural populations that few companies want to pursue, BCG found.

“You see these common themes happening concurrently across all these countries,” said Sharad Verma, a partner at BCG and co-author of the report.

“The next billion consumers, who are far above the poverty line, have high consuming power. They are just not coming on people’s radars.”

Cities with fewer than 5 million residents represent 83 percent of emerging markets’ urban consumers, BCG estimated.

By 2030, another 1.3 billion people will live in emerging- markets cities, driving 67 percent of global GDP growth. About 460 million people, earning between $5,000 and $10,000 a year, will join the middle class in the next five years.

Delegation to Mercedes

“Most companies are failing to recognize these opportunities,” the BCG report said.

Daimler organized a three-day roadshow for Aurangabad and ultimately sold 148 Mercedes models there. It also promised to build a service station in the city for its new customers, said Wilfried Aulbur, chief executive officer of Daimler’s India unit.

“We’re clearly focused on these tier-two and tier-three cities,” Aulbur said, adding that sales in January-August rose 84 percent from the same period a year earlier. India sales should rival those in the U.K. within a decade, he said.

Car sales are a good indicator of how much companies can gain from expanding in smaller cities, said Deepesh Rathore, managing director of IHS Global Insight India. August sales in India, the third-biggest Asian economy, were up 33 percent from a year earlier, the 19th consecutive monthly increase, according to data compiled by Bloomberg.

Sales trends from Maruti Suzuki Ltd., Tata Motors Ltd. and Hyundai Motor India Ltd. show that dealerships in smaller cities contribute significant sales from middle-class buyers, Rathore said. New Delhi-based Maruti has 802 sales and service outlets in India, while Detroit-based General Motors Co. has 207.

GM, Maruti

“The most successful car for GM sells 4,000 units a year, which compares to a moderately selling car for Maruti Suzuki,” Rathore said. “GM has such a limited sales and service network that there’s a big chunk of the population that they just can’t tap.”

Other Indian companies are moving quickly into smaller cities. Gurgaon-based PVR Ltd., a movie multiplex chain whose shares have risen 75 percent since 2009, is focusing on places most people can’t find on a map -- towns like Nanded, Ujjain and Vijaywada, Chief Executive Officer Pramod Arora said.

“We believe that smaller towns and cities offer immense opportunities, where the consumer base will grow at a phenomenal rate,” he said. “The bigger cities will taper off.”

PVR has 70 percent of its multiplexes in big cities like New Delhi and Mumbai, where customers pay as much as $10 to be ushered into slick lobbies with LCD TVs hawking popcorn and sandwiches.

In the next four years, that ratio will reverse, with only a third of PVR’s screens being in megacities, Arora said. Smaller theaters, charging $2-$4 in cities like Latur and lacking air-conditioned lobbies, will make the majority of sales.

Larger Malls

Daimler will deliver 148 cars to Aurangabad by Oct. 31. The owners then can drive to a new $66 million mall, one of Asia’s largest, built by Mumbai-based Provogue India Ltd., a men’s apparel maker, and London-based Capital Shopping Centres Group LLC, which owns nine of Britain’s largest malls.

The cities of Coimbatore, Indore and Nagpur will get malls next, Capital Shopping Chief Executive Officer David Fischel said.

“There’s phenomenal growth here,” he said. “In the time that it takes for a smaller city to grow from 2 million to 5 million, a big city will grow from maybe 15 million to 16.

“The demographics are just in your favor.”

The people of Aurangabad, where half the residents are under 35 years of age, are eager for places to spend money, according to Mulay. The city doesn’t have a bowling alley, hip nightclub or golf course, he said.

“There’s no place for leisure here,” he said. “We need more.”

To contact the reporters on this story: Mehul Srivastava in New Delhi at msrivastava6@bloomberg.net; Siddharth Philip in Mumbai sphilip3@bloomberg.net.

To contact the editor responsible for this story: Bret Okeson at bokeson@bloomberg.net

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