GM's Indian Mistake

A better route would be to focus on larger models and more prestigious marques.
Photographer: Sanjit Das/Bloomberg
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In a world where major automakers are losing their minds about the potential of the fast-growing Indian market, it's a refreshing change when a big player puts on its green eye-shades to take the contrarian view.

That's the approach of General Motors Co., whose Chief Executive Officer Mary Barra is scrapping a $1 billion investment in India and halting sales of Chevrolet models there altogether. Thin profit margins in the market -- overwhelmingly dominated by Maruti Suzuki India Ltd., with a 47 percent share -- could weigh on GM globally for years to come, she told Bloomberg Businessweek's David Welch.

The Best and the Rest

Maruti Suzuki and Hyundai dominate India's passenger car market share


Note: Volkswagen owns Skoda, and Nissan and Renault have a wide-ranging alliance.

It takes guts to quit a market that's expected to be the world's biggest in about four years, but the automotive sector is currently the least-loved in the S&P 500. Barra's focus on profitability is the sort of bold move that might inject a bit of spine into those limp valuations. Nonetheless, she's making a mistake.

Without doubt, Maruti Suzuki's size presents a fearsome obstacle to new entrants. It's close to impossible to take on such a dominant player without undercutting it on margin, and Maruti's operating profits have averaged 9.3 percent of sales over the past 10 years -- pretty much in the middle of the 9 percent-to-10 percent range that Barra wants to achieve company-wide by 2020. Almost by definition, GM could only grow in India by giving up profitability on a global scale.

Squeezing the Market

Maruti Suzuki's operating margins don't leave a lot of space for disrupters

Source: Bloomberg, Gadfly calculations

Note: Tata Motors India is the domestic segment, and doesn't include Jaguar Land Rover.

If only there was a way for foreign players to take on the Indian market without going head-to-head with such a behemoth. Luckily, there is.

While Maruti is a formidable adversary in every size class, it's in mini and compact cars that it really crushes the opposition. Such vehicles -- typically with starting prices of 500,000 rupees ($7,700) or less -- made up almost four out of five cars and utility vehicles sold under the marque last year. The place where foreign brands like GM stand the best chance of breaking through is in more prestigious mid-sized vehicles and SUVs -- and there the market is more open.

Take Hyundai Motor Co. It's the only foreign carmaker that's managed to break north of a 10 percent market share, and while it has some cheaper mini models like the 336,000 rupee Eon, it's in fancier vehicles that it shines. The i20 and Creta, which both feature crossover SUV variants, have been seeing the fastest sales growth locally, former co-Chief Executive Officer Choong-Ho Kim told an investor call last year.

Trading Up

Utility vehicles have been the best-performing segment of the Indian auto market over the last five years

Source: Society of Indian Automobile Manufacturers, Bloomberg Intelligence, Gadfly calculations

Note: Rebased. December 2011=0.

That matches the general trend in India's car market. Like the rest of the world, utility vehicles such as SUVs and pickups have seen the strongest volume growth over the past five years. Mini cars are in outright decline, not to mention the all-but-defunct micro-car segment characterized by Tata Motors Ltd.'s failed Nano.

Barra is right to feel trepidation about larger size classes, too. Even in mid-sized cars, Maruti has a 38 percent market share. In utility vehicles, the only major slice it's in where it's got less than a third of the market, storied Jeep-maker Mahindra & Mahindra Ltd. has 32 percent.

Beauty and the Beast

Maruti Suzuki's dominance in India's car market is fearsome. But it's not uniform across size classes

Source: Society of Indian Automobile Manufacturers, Bloomberg Intelligence, Gadfly calculations

Still, the fancier corners of India's car market are at least contestable for foreign players. If China is any guide, rising incomes will increasingly cause locals to trade up to more prestigious foreign brands.

Volkswagen AG now counts China as its biggest region, with more than a third of deliveries. It's looking to repeat the trick in India, announcing a partnership with Tata Motors in March. The other two 10 million-cars-a-year automakers are heading in the same direction, with Toyota Motor Corp. last year partnering with Suzuki Motor Corp. to give it an entree with Maruti, and the Renault-Nissan Alliance building on its tie-up with Mitsubishi Motors Corp.

Only GM is holding back. Should Barra's bet prove right, shareholders will thank her for many years to come. But in a world where the current big three car markets are contracting in unison for the first time since 2009, growth isn't a small thing to sacrifice. A decade hence, giving up on one of the world's major auto markets for the sake of a few margin points might not look like such a good call.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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