Source: The Economic Times, Oct. 27, 2013
India’s Rs 3,40,000-crore automotive industry has a big problem this Diwali. Sales are down, customer discounts are steep, inventory is high, plant shutdowns are routine, and layoffs rampant. “This is the worst I have seen in more than a decade,” says Mumbai-based Ajay Srinivasan, director, at Crisil Research. From his perch in suburban Mumbai, Srinivasan keeps a close track of the auto industry.
Far away in Greater Noida, Gnaneshwar Sen, senior V-P (sales & marketing) of Honda Cars India Ltd (HCIL), too has a problem, albeit of a different kind. He is grappling with too many customers, long waiting periods and a severe production shortage.
“The demand is there but we are just not able to make more cars,” he shrugs. Honda dealers and staff are working their fingers to the bone as showroom footfalls this Diwali season show a 50% jump over a year ago. Bookings are two times those of last year, the sub 4-metre sedan Amaze that was launched in April has 10 weeks of back orders, and the compact Brio 15 days. From November, HCIL will add a third shift at its plant but Sen is worried that may not be enough.
“In today’s competitive situation, holding on to customers’ bookings with such a long waiting period is tough,” he says.
Not far from Sen’s corporate office, his counterpart at the two-wheeler business, Honda Motorcycle and Scooter India (HMSI) in Manesar, Y S Guleria is facing a similar problem of plenty. With 1.25 lakh bookings for HMSI’s two-wheeler, customers will have to wait two weeks for delivery. Ahead of the Diwali season, Guleria’s colleagues are working on Sundays. All scheduled leaves and holidays have been cancelled. “We are working hard to give the best to our customers,” he says.
BEST OF TIMES, WORST OF TIMES
For India’s auto industry, this may be the worst Diwali in a long time but for Honda in India it’s the best they’ve seen in decades. Both its two-wheeler and four-wheeler business are recording sizzling sales, and have waitlisted customers with plants working overtime.
While most auto industry executives are expecting a lacklustre Diwali amidst fears of pay cuts and layoffs, Honda executives are smiling from ear to ear, anticipating the fattest Diwali bonuses in recent times.
With good reason: between April and September, although industry passenger vehicle sales have shrunk by 5% and two-wheeler sales have inched up by 3%, HCIL’s sales surged 68%, with market share almost doubling to 5%; similarly, HMSI’s sales have grown 23%, with a healthy gain in share from 18.9% in 2012-13 to 22.7% in the first half of 2013-14.
And both companies are rising up the pecking order – HMSI has become India’s second largest two-wheeler manufacturer (it was at No. 4 in 2010) and HCIL has become the third largest passenger car manufacturer in the country (it was fifth largest till March 2013).
Barely three years back, things looked dramatically different for Honda in India. In cars, everything that could possibly go wrong went wrong. In 2011, Honda was the worst affected Japanese auto MNC as Japan reeled under the Fukushima nuclear disaster. It had its impact on India as well.
In September that year, just ahead of the Diwali rush, the company unveiled its biggest launch in India – the mass segment compact Brio. But the very next month, Thailand floods affected spares supply and stalled India production. “The hype that was built around Brio fizzled out. It was never the same,” says a HCIL spokesperson.
It did not get any better in 2012 as surging petrol prices meant the demand for diesel vehicles rose – in some categories to as high as 80% of total sales. But Honda, with no diesel offering in its portfolio, remained a bystander. Not surprisingly, in 2010-11 as industry sales rose 29%, HCIL’s shrunk by 4%. In 2011-12 too, as the industry grew by 4%, HCIL’s sales declined by 9%. “Those two-three years were quite tough for us,” recalls Sen.
Almost around the same time, Honda’s two-wheeler business in India too was going through a big recast. In end-2010, the company decided to exit its successful JV Hero Honda. Overnight, our market share in India dropped from 61% (Hero Honda and HMSI together) to under 20%, says Keita Muramatsu, president of HMSI.
So what changed? How did Honda get here? And is this turnaround just a one-car, one-scooter wonder story or are the changes deeper and more sustainable? Before answering that question, let’s get some understanding of the broader context in which the two Honda arms operate today.
A BUMPY RIDE
It has been a bumpy ride for the industry in 2013-14 so far. The passenger vehicle segment has shrunk and automakers across the board are figuring out ways to cope. Toyota Kirloskar, after taking production holidays for eight days in a month, will operate its plant on a single shift from November. European giant Volkswagen is reviewing its India investments plans. Many companies – from Tata Motors to Mahindra to Maruti – have laid off workers.
Car dealer association FADA says inventory is up at an alarming 40%. Despite deep discounts and a slew of freebies, sales have refused to perk up. Many companies, including Tata Motors (-35%), M&M (-13%), Nissan (-43%), Toyota (-23%) and Skoda (-42%), have seen negative growth so far this fiscal year. Things are slightly better for the resilient two-wheeler industry with sales growing at a modest 3%. But only just.
Domestic sales (in the April-September period) of leader Hero MotoCorp have barely risen at 0.58% while for Bajaj Auto they dipped by 11%, for TVS Motor by 4% and for Suzuki Motorcycle by 10%. Fearing worse, Yamaha is now delaying its Rs 1,500-crore Chennai plant.
Manufacturers were pinning all hopes on the festival season. But the initial signs are not upbeat, with dealerships that are normally bustling with the pre-Diwali rush, wearing an almost empty look. When this reporter went dealer-hopping in Noida last year pre-Diwali, the outlets were bustling. One Hyundai dealership was doing brisk business with busy-but-polite salesmen taking their time to attend to customers. It was different this time. The same dealership was almost empty – and it was the same story at Ford and M&M dealers.
Srinivasan of Crisil says based on conversations with dealers and companies, passenger vehicle sales will see a dip of 2-4% in October and November, considered one of the best months for car sales. Last year, these months witnessed a growth of 20-22% and hence the base effect will play some role this year.
Also, last year launches of Renault Duster and Maruti Ertiga ensured that the utility vehicle (UV) segment contributed with a robust growth rate of 50%. This time around, that segment is in the doldrums, shrinking by 16% in September and expected to register negative growth of 10% in the October-November period.
There is another big reason which may be playing a role in denting sales. According to Srinivasan, cost of ownership of petrol cars ( EMI, running, insurance and maintenance) has increased by a hefty 30% in the last three years. This has deterred a lot of potential car customers. Inflation too badly hit household budgets at every level “denting savings and disposable income and eating into that part of the wallet that would have been reserved for monthly instalments.
Then there are the supply side issues. Between 2008-09 and 2012-13, the competitive intensity in the car industry has sharply gone up. For one, the production capacity has risen from 1.93 million units to 4.9 million units. To make things even more difficult, the number of models in the popular mass segments like compacts has gone up from 12 to 21.
Not surprisingly, the average capacity utilisation is at its worst ” in 2010-11, it stood at 74% and has now dipped to 57-58%, according to Crisil data. In some models of utility vehicles discounts are as high as 10% of the price. Average discounts for cars hover around Rs 20,000.
THE OUTLIERS
So how are the Honda arms bucking the trend? It starts with having big ambition. For the Honda headquarters, India has moved up a few notches in importance, especially after the 2008 economic crisis.
The MNC wants to be No. 1 in the worldi¦s largest two-wheeler market by 2015-16. Facing headwinds in China, it also realises it needs to focus on building Indiai¦s car market, today the world’s sixth largest. As result, driven by a blueprint from HQ it has significantly re-jigged its India strategy. “They finally seem to be getting things right here,” says V Ramakrishnan, managing director, Frost & Sullivan India.
That is happening because of three big changes in Hondai¦s India operations. One, investments and focus both are coming in. HMSI has invested Rs 2,500 crore since 2011 to increase production capacity from 2.8 million last year to 4 million now; it plans to introduce one new model every quarter and has set up its first fully-integrated worldclass R&D unit in India outside of Japan. HCIL is investing Rs 2,500 crore at its Tapukara plant in Rajasthan to double capacity to 2.4 lakh units, and will launch five models in the next three years. With these launches, HCIL’s addressable market coverage will go up from just a tenth to half.
The number of Japanese expats visiting India and doing stints here has substantially gone up, say senior Honda executives. Early this year as part of a global restructuring exercise, it decided to shift Yoshiyuki Matsumoto, head of development, purchasing and production in the Asia and Oceania region, to India. He will control the region based out of India and help India operations localise sourcing without compromising on quality.
The second big change is that Honda companies are getting better at responding to the needs of the India market. And this is reflected at every level ” product, pricing, marketing and communication. A company that never believed in celebrity endorsements finally roped in Bollywood star Akshay Kumar to promote its bikes. Its normally upmarket English branding and advertising has also become more mass. For example, the twowheeler tagline “the power of dreams” ” now has a Hindi version ‘Sach Kar Denge Sapne’. Its TV commercial for Amaze has been released in regional languages.
Three, Honda realises that the weapons it needs to win in India have to be unique to the local market ” getting its product to price equation right is the biggest imperative on this battleground. HCIL learned this lesson the hard way when it overpriced the Jazz, a premium compact; slashing the price was too little, too late and the product flopped.
Also, for long, petrol-loving Honda had ignored the cheaper fuel, conspicuous by its absence with a diesel engine in the segments that matter most ” the mass compact and entry level sedans. Today, for the first time HCIL has a robust pipeline, with a new City, Jazz and an MPV ” all with diesel variants ” in the offing.
Globally, Honda has never believed in fighting on price. But in its 100 cc bikes, its models are priced close to its competitors like Hero MotoCorp. “The biggest shift I see is that Honda has begun to listen to people who know India well,” says Deepesh Rathore, co-founder, EMMAAA, an automotive consultancy firm.
Both Honda subsidiaries are also aggressively growing their footprint to deepen and widen their reach in India. For example, HMSI’s biggest weakness was its dealer network. Under Guleria, they have set up a separate team that is only focused on dealer rollout; consequently its touch points have today doubled from 1,000 in 2011.
One problem Honda never had was its strong branding and customer pull in India. “Even at its worst time, it retained its prestige and brand equity in Indian market. With new products and great pricing, it is recovering lost ground,” says Mohit Arora, executive director (Asia Pacific), J D Power.
CHALLENGES AHEAD
While the future looks bright, it has its own set of challenges. HCILi¦s growth for its part is largely a one-car wonder, with the Amaze accounting for over 60% of sales of 60,000 units (April-September, 2013). Clearly, it needs to build a portfolio with more winners.
The brand may be strong, but the problem for Honda as it touches more people is that it is beginning to mean something else than what it traditionally stood for. iI see the Honda brand in transition in India. Its positioning is changing,” says Arora. Honda has traditionally been a technology leader, a highly individualistic fun brand. “It now wants to be seen as a social and familial brand, which is very important in India,” he adds.
A two-wheeler dealer says in a rush to roll out dealerships, HMSI may have compromised on the rigour in vetting its channel partners. “HMSI dealers never held inventory. But today, inventory levels are high, especially among its channel partners in non-metro locations,” the dealer says. Guleria though claims that HMSI has the most efficient inventory turnaround in the industry. Both Honda firms have capacity constraints, which are reflected in the long waiting lists. Keeping customers waiting can backfire as expectations too increase – often beyond what the product can deliver – along with time.
The good news for Honda, partly, is that it appears to have dealers on its side. That didni¦t happen by accident. In the tough period that began in 2011, at least three dealers said HCIL did a commendable job of managing dealer problems and their profitability.
“They helped us grow new revenue streams. They are the most efficient company,” says a North India Honda car dealer who is a member of dealer association FADA.
