India's Traffic Jam Just Got A Lot Worse
Ratan Tata, the head of India's $8.5 billion Tata group, was beside himself with joy. On Dec. 30, at a packed debut party at Bombay's lush race course, he launched India's first homegrown car, the Tata Indica. The chairman of the group best known for making trucks and steel boasted to the assembled industrialists and employees: "No one thought we could do it. But we have delivered on our promise." Tata is also delivering on another promise: to make his car affordable to India's middle classes. The price of the tiny Indica, which has a 1400-cc engine: $6,200.
But Tata faces a glutted market. Last year, carmakers in India--including General Motors, Ford, Honda, Hyundai, Daewoo, Mitsubishi, Peugeot, and Fiat--sold only 383,000 cars, less than half the cars their local factories were capable of producing, according to ABN Amro. Even so, capacity will rise an additional 30% this year, with Tata accounting for half of the increase.
CHEAP, CHEAP. The road ahead will be rough. The appearance of the Indica has prompted a round of price cuts by competitors, most notably the makers of the Maruti 800, which is jointly produced by the government and Suzuki, and which commands 85% of the compact market. That's the market Tata is going after.
The price war means India sells some of the lowest-priced cars in the world. The Maruti, its price now discounted 11.5%, costs just $4,400. Not to be outdone, Italian carmaker Fiat said it would price its new 1000-cc Uno at $5,600, 15% lower than previous models. Says Maitreya Doshi, head of Fiat's joint venture partner, Premier Automobiles Ltd.: "We have to respond in this game even if it means taking a hit." Hyundai Motor Co. and Daewoo Corp., however, refuse to lower prices on their Santro and Matiz compacts. But the pressure is intense. "India is price-sensitive," says analyst Hormazd Sorabjee of Sorabjee Automotive Communications. "The Indica has come in and upset the market."
Yet none of the carmakers intends to scale back. What they can't sell in India, they hope to sell abroad. Hyundai has begun exporting auto components to Korea. "Investors who are here believe [India] could be a springboard for the rest of Asia," says B.V.R. Subbu, marketing director for Hyundai Motor India Ltd. Tata also plans to export the Indica to Europe and Southeast Asia.
Maruti, which already sells 18,000 premium small cars to Europe every year, plans to beef up capacity, too--despite having cut production by 20% in December because of declining demand. The company expects discounting to reverse the trend. What Maruti loses in lowering its profit margin from 15% to 11% it hopes to make up in volume. "We had to take a major step to expand the market and increase volumes," says Jagdish Khattar, joint managing director of Maruti Udyog Ltd., predicting a 20% increase in sales in 1999.
MONSOON TEST. These ambitions sound alarming, given how huge the capacity overhang already is. The auto industry may get a boost if the Indian government comes through with a proposal to scale back its punitive 50% tax on autos by 10%. India's car tax is the highest in the world. But it's hard to see how a tax cut will get all these factories operating at close to 80%, the level where big profits are made.
As for Tata's Indica, the real test will come in July through September, when cars in India have to operate in bad weather. "Everyone is waiting to see how the car will perform through one monsoon season," says R. Amarnath, an analyst at ABN Amro in Bombay. He predicts the Indica, in which Tata has invested $470 million, will be a drag on earnings for the Tata unit making the car, Tata Engineering & Locomotive Co. (Telco), until 2001. But Telco marketer Rajiv Dube says the company intends to break even after one year, and hopes to capture 25% of the small-car market.
Meanwhile, Maruti can afford a few setbacks. The company had operating profits of $256 million in fiscal 1998 on sales of $2.2 billion. It can probably hold on while the price wars drag on and its competitors suffer. It's funny: When companies such as Ford and Fiat came to India, they hardly expected the kinds of price wars they faced back home. Now they must deal with all the perils of an emerging market--and all the discounting of a developed one.