Indian Automobile Marketing: A Three Layer Demand Model

The Indian automobile market has grown to be one of the largest and fastest growing markets in the world, with an annual production of 20 million vehicles comprising domestic sales of 17 million vehicles and export sales of 3 million vehicles per year (2011-12 data). The domestic sale comprises over 13 million two-wheelers, and nearly 3 million cars and utility vehicles, with other categories of vehicles constituting the balance. The rapid growth has put an enormous pressure on the already congested and inadequate road system in India but that does not seem to deter either the customers or the manufacturers. Clearly, however, a combination of rising incomes and increasing number of players with a liberalized import system has led to the growth in the market. Compared to other developed markets, however, the scale and scope of the market has not motivated either the customers or the manufacturers to seek or introduce more relevant marketing approaches, respectively.

It is not an exaggeration to say that the automobile dealerships in India typically have showrooms no bigger than what white goods manufacturers have (after adjusting for the size and variety of products). It is also commonplace to have representative models on display rather than comprehensive product range. The approach of having large sales yards through which customers can have walkthroughs and have reviews of multiple models at a glance is also non-existent. Salespersons typically tell only the broadest of the features and let the customers decide on purchases on their own. Much emphasis, on the other hand, is placed on media advertisements, often with celebrities to build corporate brand equity and develop product differentiation. Typically, therefore, a pre-decided customer enters a narrowly equipped dealership to make a purchasing evaluation without much choice.

Constituents of demand

This blog post hypothesizes that most consumer goods have three layers of demand. The first is a steady state replacement cum augmentation demand which is related to economic factors of the society in terms of population growth, GDP growth, job growth, purchasing power, urbanization, rural modernization, transportation needs and infrastructure growth. This may be called the economic demand. The second layer of demand relates to the pull of new products and models whereby superior technology as expressed in a number of design and performance parameters, including the styling of the car, create additional demand, for both replacement and augmentation, over and above the economic demand. This may be called technology demand. The third layer of demand is purely seasonal related to festive seasons, New Year sales or simply discounts. This may be called promotional demand. In an ideal industrial situation, the bulk of the demand should be driven by the economic demand with technology demand and seasonal demand providing impetus to move demand to the next trajectory.

In the context of India, with a population growth rate of 1.3 percent per annum and a GDP growth rate of 5 to 8 percent, and with all other parameters following a growth trajectory, the automobile demand can comfortably cruise at a rate of 10 to 16 percent. This has, in fact, been the trend too. However, the inter se ratios of economic demand, technology demand and promotional demand are sub-optimal. The author of the blog post believes that the economic demand must be 60 percent, technology demand 30 percent and promotional demand 10 percent of the total demand in an ideal socio-industrial situation. The author hypothesizes that in India, these proportions are at 60, 10 and 30 percent respectively. In other words, there is a strong manufacturer induced push to demand, which also tends to be seasonal. While the effectiveness of the marketing departments in creating such seasonal push is commendable, it needs to be further titrated in terms of its constituent push factors

Economic demand

The economic demand for automobiles is heavily driven by two wheelers, given the nature of income patterns, road conditions and inadequacy of public transportation. Nevertheless, passenger cars have emerged as a strong growth sector aided by new models. Looking to the future, there are both gloomy and bright sides to the likely movement of economic demand. The bright side is that the huge annual sales of 17 million two wheelers presents a huge opportunity to the car makers to double their sales to 5 million annually if only they are able to offer an economically viable alternative to the two wheeler usage. In addition, the trend to possess a second farm home or opt for weekend travels boosts the demand for a second car, especially in the utility vehicle segment. The gloomy side is that with the roads highly congested and parking spaces severely restricted, potentially the limits to growth in automobile population have already been reached. From an ideal perspective, the public transport must really be boosted in terms of both quantity and quality so that excessive use of automobiles, two wheelers at least, is moderated.

Given the current restraints, the economic demand can be sustained only if a significant part of it is taken over by replacement demand rather than augmentation demand. This paradigm is also closely linked to the industrialization or professionalization of the used car market. Rising oil prices, growing environmental concerns and the stricter emission norms (BS IV) would serve to enhance the demand for new cars as replacement with better performance characteristics, especially emission, fuel economy and drive. At the same time, unless more manufacturers and dealers come into the used car market in a big way (Toyota has made a good start with the UTrust program), it would be difficult to make used car sales a meaningful demand option (rather than a customer exigency option as is currently in vogue). The shape and scale of the replacement demand can only be sparked with appropriate technology strategies of the company, which would be reflected in terms of technology demand. In an ideal scenario again, the technology demand should funnel itself equally into replacement demand and augmentation demand.

Technology demand

Technology driven demand is what keeps the economic demand buoyant. While economic demand grows on sheer socio-economic factors (cars were indeed sold in India even technologically the models were outdated), it is the technological profile of the automobile that determines the level of technology demand. The smaller size (sub-four metre length) and fuel economy of the cars are often incentivized h through excise duty concessions by the government. This, often, presents a skew in the development of cars with relatively price-inelastic larger models being largely imported (as completely built units or kits) and only the lower end, mass produced cars being indigenously manufactured from the component stage. While at first glance this may seem appropriate for India’s economic and road conditions, lack of a manufacturing scale across the models does deter the Indian automotive industry from becoming globally competitive in future.

The Indian car industry is driven completely by global names. The good thing about this is the ready access of models and manufacturing plant. The challenging thing about this is the lack of indigenous R&D to the extent desirable. There is evidence from the track record of Tata Motors and M&M that investments in indigenous research and development do contribute to product development. Toyota Etios and Maruti Suzuki Ertiga are pointers to what customization to a market can accomplish in terms of product portfolio. If the parent corporations and the Indian subsidiaries arrive at a paradigm by which annual product updates and refreshes are developed locally and new model introductions are done globally, there could be benefit to local and global corporations as well as local and global consumers. The Indian industry should view local development as a clear strategy to achieve a larger technology induced demand, enhance replacement demand and finally keep integrating the technology demand into economic demand.

Promotional demand

Promotional demand to stimulate sales or clear stocks, or even pave the way for model upgrades is not unique to India. Even the most developed markets deploy the tactics most vigorously. The sharp drop in prices of Apple iPhone 4 and 4S ahead of the launch of iPhone 5 or the lowered pricing of the vintage BMW 3 series car in the wake of the new replacement are clear examples of firms realizing that customers are alive to new technologies taking shape. That said, long festive season promotion is an approach which is probably unique to India. The months of October to January typically emerge as the manufacturers’ sweet spot in terms of promoting higher demand on the plank of celebrations and auspicious occasions. When the seasonal promotion is combined with new product introductions, the marketplace can, in fact, turn lively. This festive season alone the Indian car manufacturers have begun the introduction of over 20 new models, some of them brand new introductions. Intensity of competition and increase of demand, coupled with lower prices could boost a seasonal increase in demand.

The manufacturers, however, have to seriously consider if the Indian automotive dealer infrastructure is geared to do justice to the promotion of multiple products. As mentioned earlier most Indian dealerships have little or no display yards as the dealerships in the West have, or the way even a space starved country like Japan has. The dealer showrooms can hardly display four or five models as compared to ten or fifteen which most manufacturers would have (ignoring the variants). The approach of salesperson explaining the full features on a dedicated basis is also, by and large, absent. Most dealerships do not also have customized sales and service solutions which recognize that a substantial proportion of cars in India is driver driven. This emerges as a blind spot given the increasing sophistication of the new breed of cars that are being introduced in India. Most promotion is done by manufacturers that too through newspapers and television advertisements, oftentimes with movie celebrities as brand ambassadors. The manufacturers would need to relook at dealer economics and enable a more holistic marketing, sales and service paradigm to integrate dealer point selling into the economic demand and technology demand processes.     

The three layer demand model

Automobile marketing is a complex amalgam of socio-economic factors, technological factors and consumer need factors. While the sheer power of economic development provides the motive force for the expansion of the Indian automobile industry, understanding the demand paradigm in terms of economic demand, technology demand and promotional demand as proposed in this blog post would help the automobile manufacturers, global and Indian, to come with proactive and responsive strategies that optimize the long term demand-production models. There is considerable talent in the country, economic, engineering and marketing, to sub-model each of the demand layers and come up with firm-specific strategies which could collectively foster healthy competition in the Indian automobile market, and also enable the Indian automobile industry achieve global competitiveness.    

Posted by Dr CB Rao on October 20, 2012