Sunday, January 13, 2013

Common Production and Dual Branding or Design and Manufacturing Innovation: Multiple Approaches for the Indian Automobile Industry

Something unique is happening in the Indian automobile industry. Renault Nissan Automotive India Pvt Ltd, which has a major presence in India with a large manufacturing plant in Chennai and an all-India marketing presence, is implementing a unique business model. Cars and utility vehicles developed and supported with components from Renault and Nissan global network are manufactured in Renault Nissan state-of-the-art manufacturing plant in Chennai and are sold under different brands through Renault and Nissan marketing networks, each product being offered with minor specification variations. Nissan Micra small car is offered as Renault Pulse hatchback, Nissan Sunny sedan is offered as Renault Scala upscale sedan and Renault Duster SUV will soon be offered as Nissan Nuv. Nissan Evalia utility vehicle is being launched as Style by their joint venture partner, Ashok Leyland.

Common product and dual branding in a homogenous market is not uncommon in other industries such as electronics and FMCG but is certainly a new feature in the automobile industry. That India is home to this experiment through Renault and Nissan is a matter of interest and satisfaction to the observers of the Indian automobile industry. The industry has been witness to shared marketing (Tata and Fiat), shared components and aggregates (Maruti Suzuki and Fiat) but the example of one company marketing a common product with minor modifications as two products is unique. This clearly is different from different marketers sourcing the same product for sale as different products, a feature common in the branded generics market of the pharmaceutical industry of India, and also in the branded white goods and electronics industries of India. Renault Nissan unique business model certainly necessitates greater examination of the business model of common production and dual branding.
Benefits of scale
The crux of sustainability in any industry is scale. Scale is of even greater importance in the automobile industry which requires lakhs, if not millions, of product runs to recover the costs of machine tools and dies, especially those related to high technology components and systems such as engines and transmission boxes and stylistic parts such as body panels. While sharing of components across the globe is commonplace in the automobile industry, setting up plants in specific countries is a high cost endeavor, requiring country specific strategies. Renault Nissan, for example, is said to have earmarked Rs 4500 crore in India (over 7 years) for its 200,000 capacity plant set in an area of 640 acres. Most of the production (almost 80 percent) is currently heading for exports. Aiming at a market share of 10 percent means that the company would need further capacity hikes and investments to meet a potential 800,000 capacity mark.
Having common design platforms and common manufacturing infrastructure enables Renault Nissan as a unified company, and also as two different companies, Nissan of Japan and Renault of France, reap significant advantages in a volume constrained and competition intensive country like India. As a result, Nissan and Renault have been able to sell about 40,000 cars each in 2012 in the domestic market while having a common production base of 80,000 cars. It is evident that this strategy provides economies of scale. Potentially, this strategy can be utilized by Tata Motors in respect of Jaguar-Land Rover up-market model range,  although the product overlap is unlikely to be anywhere near that of Renault Nissan. This brings us to the question of whether common production and dual branding should cover non-overlapping, partially overlapping or fully overlapping product portfolio. In other words, should economies of scale be accompanied by economies of scope?
Options of scope
Given that most global car companies are full line producers, the true economies of scope accrue when both the brands offer the full portfolio. In this approach, differentiation becomes tenuous and requires ingenious solutions. Renault Nissan has sought to adopt a strategy of minor upgrades serving as differentiators even as both companies offer the same product platforms. Sunny car of Nissan is upgraded, for example, as Scala sedan of Renault with a minor luxury touch. Any strategy of splitting the product range, for example small cars and sedans with Nissan and luxury vehicles and SUVs with Renault would not provide the same level of economies of scale and scope, possibly according to Renault Nissan. There are, of course, arguments for and against this hypothesis, again based on the experiences of the Indian automobile industry.    
Marketing focus could provide an alternative view.  The experience of Maruti Suzuki has proved that it is possible to be a mass producer of small cars and A, B and C segment sedans. The experience of Toyota Kirloskar has proved that it should be possible to touch a sale of 100,000 units per annum just on the basis of a well designed utility vehicle, Innova. There is, therefore, the possibility that Renault and Nissan could adopt completely different marketing foci, and still derive the economies of scope at the plant level. Potentially, the reintroduction of Datsun brand by Renault Nissan could help in such differentiation. In a sense, it could be seen as existence of two companies of non-overlapping product portfolios in one company. Potentially, this could be seen as a choice between maximizing production economies (common full line product portfolio) versus maximizing marketing economies (split product portfolio).

Design, the integrator cum differentiator
If the possibilities of economies of scale and scope have to be combined, only design offers some significant potential. There are two considerations of design that have promoted the trend of exclusivity amongst the diverse car makers. The first one is the proprietary nature of designs which is prompted by business considerations. The second one is customized nature of designs which is aimed at performance optimization. The first barrier can be overcome by cross-licensing of technologies and sub-products, a trend that is widely seen in the electronics industry, and could be emulated by the automobile industry. The second barrier requires creativity of design with design platforms that are applicable not just for one model but more for a small group of contiguous models. This means that a 1500 cc engine in naturally aspirated, turbocharged and turbocharged-intercooled options should power three distinct car models which require power of 100 PS, 130 PS and 160 PS and torque of say, 140 NM, 200 NM and 260 NM. While diesel engine and heat recovery and recharging technologies make the paradigm within grasp in respect of engines, the challenges could be higher in respect of other vehicle systems, but not impossible.
The first of the challenges pertains to the chassis. A typical ladder type chassis provides maximum flexibility to change wheel base, front track, rear track and width while a typical monocoque in situ welded chassis offers the most inflexibility as every curve and anchor point is preformed.  The new trend of hydro-formed chassis could offer a mid-point. If the designers keep in perspective that typical length of automobiles in A, B and C segments would range between 4000 and 4600 mm and width would range between 1400 and 1600 mm, and the length in B, C and D segments would range between 4400 and 4800 mm and width would range between 1600 and 1800 mm, it would be possible to design and develop chassis that are trended out of certain common profiles.
The second of the challenge pertains to ensuring structural strength and overall form factors appropriate to different segments. The consumer acceptance of “family look” across the full portfolio (as in the case of Audi Q3, Q5 and Q7) favors design exponents to be creative and effective with flexible C Post and other designs. Development of flexible stamping systems has enabled the Japanese automobile firms develop panels and stampings of different shapes, thicknesses and strengths with efficiency. With the greater spread of aluminum as a material for automobile manufacture, greater flexibility could be achieved in this domain. As technologies for cross-metal welding develop in future, the possibilities could be immense.  
The third of the challenges pertains to design of flexible transmission, suspension, safety and steering systems. Probably, this would be one area where compulsions of customization would override the benefits of design flexibility, as these systems have to be matched finely with engine power and torque profiles, segment ride and safety criteria and traffic navigation conditions. This rules out, for example, use of a 5 speed manual box across all models. Customization of transmission systems, in fact, enhances engine performance and overall vehicle performance. Fortunately, manufacture of these systems has become such a specialized manufacture that judicious resort to in-sourcing of such specialized systems provides economies of scale and scope to designers and manufacturers.
The fourth of the challenges is one of designing interiors such as seats, lights and trim as well as vehicle electronics. These are typically outsourced completely by vehicle manufacturers although the designs have to dovetail with vehicle profiles. The availability of modern and flexible molding technologies and clever packaging would help such component suppliers become scale and scope efficient. The challenge here is probably high as the vehicle designers frequently seek “product refreshes” which typically involve exterior and interior trim and lighting systems.  The elevation of the component industry to mastering high scale and scope is a challenge by itself, regarding which enough attention has not been paid, at least in the Indian automobile industry. The relatively small and medium scale of evolution of the component supply industry in India has been a kind of structural limitation in the past but need not be so now with the increasing volumes of end-products.
Multiple approaches
While Renault Nissan business model of common production and dual branding is an innovative way of reaping economies of scale, there is a need for more involved and design driven approaches to combine design customization and manufacturing flexibility to ensure economies of scale and scope that are structurally internal to the firms and the industry, rather than dependent on market branding. Firms could also pursue more flexible and collaborative strategies of sharing internal systems without compromising the overall differentiation and competitiveness. Collaborative ownership and alliances together with innovative design and manufacturing could help the Indian automobile industry achieve sustainable economies of scale and scope, and become globally competitive.  
Posted by Dr CB Rao on January 13, 2013              

      

2 comments:

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