Saturday, May 7, 2016

Lessons from Indian Utility Vehicle Segment: Five Principles of Market and Market Share Growth

India, from just 30000 passenger cars and utility vehicles about 30 years ago, currently absorbs over 2.8 million passenger cars, utility vehicles and vans; a number set to increase steadily, say, around 10 percent. In 2015-16, the total sales of passenger cars, utility vehicles and vans increased by 7.24 percent to 2,789,678. Sales of passenger cars increased by 7.87 percent to 2,025,479 units while the sales of utility vehicles rose by 6.25 percent to 586,664 units and of vans by 3.58 percent to 177,535. The share of utility vehicles in total passenger cars, utility vehicles and vans has reached a record 21 percent.  The utility vehicle segment has become diversified with multi utility vehicles (MUVs), sports utility vehicles (SUVs) and crossover vehicles (COVs). With certain excise duty concessions for utility vehicles less than 4 meter length, a new breed of compact SUVs has also emerged. Typically MUVs are 7 to 8 seaters while compact SUVs are 5 seaters. UVs are offered in both petrol and diesel versions; with diesel being the preferred mode in this segment. However, the Delhi developments on emissions and particulates, diesel has lost some sheen as the preferred option in this segment.

In the utility vehicle segment, Toyota with its Innova MUV remains a segment choice (against other MUVs such as Mahindra Scorpio and Bolero, Ford Endeavour, Tata Safari and Chevrolet Captiva)  although a number of other car manufacturers such as Renault, Nissan, Hyundai, Honda and Maruti have succeeded in building new franchises around their sleeker and more compact SUVs. Renault Duster and Nissan Terrano helped popularize this segment a few years ago but Hyundai Cresta and Maruti S Cross and Vitara Brezza have represented the recent challengers. The battle of utility vehicles is far from over. In the space of a few days this month, Toyota has introduced Innova Crysta as a new generation of MUV, phasing out the decade plus old Innova while Honda has just introduced its new compact SUV titled BRV. With these two introductions, and more in the offing from other manufacturers, the utility vehicle segment will keep growing strong. Notwithstanding the Delhi troubles for diesel vehicles, the utility vehicle segment will continue to grow. The Indian utility vehicle segment offers five interesting and relevant principles to drive market growth and market share growth, as discussed below.

New products make new markets

The first ever (and the only) utility vehicle ever known to the Indian market was Mahindra Jeep which was sold in a few numbers from the 1940s. Bajaj Tempo (now, Force Motors) introduced a desi version of Jeep, Tempo Trax, in 1998 which was not a great success. The first ignition in the utility vehicles market came when Tata Motors introduced the elegantly designed (by the 1990s standards) Tata Safari in 1998. Thereafter, Mahindra introduced its own designs such as Balero (2000) and Scorpio (2002). The real impetus to the Indian vehicle market came when Toyota introduced Innova, in 2004, as its successor to its first entry in 1998, a boxy Qualis. The next revolution took place when Renault introduced its sporty Duster in 2012 which caught people’s fancy as an urban SUV, an image fortified by Nissan Terrano further. Thereafter, other manufacturers jumped into the fray with sleek looking urban SUVs, including a steadfastly small car and sedan oriented Maruti doing so (with Ertiga in 2012. S Cross in 2015 and Vitara Brezza in 2016). Today, the utility vehicle, whether MUV or SUV, has become the preferred family car or second car option.

The Indian utility vehicle market which has grown from 2 percent of the passenger vehicle market to 21 percent of the market is another endorsement of the business truth that it is only new products that make new markets. The initial trepidation that existing players have when a competitor launches a new product is actually misplaced; as they themselves follow up the launches with their own similar or new products, new market segments will be created and expanded. This is true of utility vehicles as proven above, and would be true for any other segment or business too. In fact, the more aggressive such new product entry is the better it would be for market growth. Patanjali’s aggressive Ayurvedic product foray in India, long considered the home of Ayurveda but traditionally dependent on Western personal hygiene products, is bound to create a totally new market of AFMCG (Ayrvedic Fast Moving Consumer Goods Industry). The Indian automobile industry should logically look forward to utility vehicles more than doubling in sales every five years, until they reach an equilibrium with sedan sales.

New themes make new products

Newly introduced products will be perceived as new products only when they have novelty. Thematic novelty is one of the brig drivers of new product acceptance. In a utility vehicle scenario monopolized by World War vintage Jeep designs, Tata Safari offered a fresh thematic breeze. In a utility vehicle design space that was characterized by boxy exteriors and cramped interiors with low regard to finish, Innova brought car-like comfort and quality to the space. In a segment which catered to large families, Duster brought urbanism with easy navigation of crowded urban drive as a new theme. Ford Ecosport (2013), Hyundai Creta (2015), Maruti S Cross (2015) and Vitara Brezza (2016) and Mahindra TUV (2015), KUV (2016) and Nuvo Sport (2016) brought youthfulness and sharpness to utility space integrating more carlike features. At each turn of design philosophy, thematic novelty helps establish new designs as new products.

There is never an end of the road for novelty. Just as the customers would think that the choice is between a 5 seater urban SUV and a 7 seater family MUV (if spaciousness is desired in both options), Honda through its latest launch of BRV brought in the concept of a relatively spacious 7 seater urban SUV to commercialization. Through Innova Crysta, Toyota has tried to provide higher power and torque as well as advanced features and finishes with additional safety to family users. The challenge is to combine improvements in such a manner that they stand out together for thematic novelty. The next level of challenge is to bring in such novelty that would make an SUV, the first car rather than the second car. For example, cars that have inbuilt arrangements for child safety, including child car seats could be the next evolution to cater to urban couples with small families.

Global style with local substance 

Indian automobile industry is unique because of the strong presence of both Indian and foreign players. Companies such as Tata Motors and Mahindra & Mahindra have gone global with JLR and Ssangyong acquisitions (2008 and 2011, respectively). They have also continued their indigenous development efforts. Companies such as Maruti, Hyundai, Ford, Honda and Toyota have been essentially global companies with Indian presence; however, having seen the potential of Indian market, they have started designing products for India with Indian engineers. Despite having formidable global automotive engineering capability through JLR, Tata Motors just went through a completely ‘lost decade’ by not accessing modern global design thinking from its JLR engineering centres and persisting with dated approaches from its Indian development centres. Despite having strong global executive controls, Maruti, Hyundai and Honda have been able to engineer India specific but globally stylish designs that have found quick resonance with Indian customers.  On the other hand, some of the world’s largest automotive makers present in India such as GM and VW failed to make the grade in the Indian market due to reluctance to customize.

Indian requirements are stringent as acknowledged by Renault Nissan global chief Carlos Ghosn. In terms of durability, life expectation is almost perpetual while in terms of style, expectations are contemporary. The real differentiators for India are the requirements for high ground clearance and low turning circle, coupled with spaciousness to meet Indian body configurations. India also places considerable emphasis on fuel economy and low lifecycle costs. What adds competitiveness is localization. An Indian made car could cost a fraction of a similar imported car. Going forward, those manufacturers who can combine global contemporary styling with Indian cost competitiveness by working with Indian engineering teams would have a significant competitive advantage. It is indeed gratifying that Renault Kwid, Maruti Brezza, Hyundai Cresta and Honda BRV have been products of Indian engineering, albeit with global guidance. After a decade long hiatus, it appears that Tata Motors is also finding the right fusion of global and Indian engineering as demonstrated by Zest and Tiago cars.

Segmentation drives share

The traditional theory of market segmentation continues hold relevance in market share play. The more a company is able to segment its markets perceptively, the more dominant it can become in the overall market. From a time when utility vehicle category itself was seen as one segment of the passenger car market, today the utility vehicle category itself is seen as a total market with a few sub-segments of its own.  As a result, there has been a complete rejig of the market share pecking order. In the early days of the utility vehicle product expansion days, Tata led the duopoly with Mahindra. Later it was Toyota with Innova that led the market share charts. Today, the top five players are as follows (with market share percentages in the brackets): Mahindra & Mahindra (38), Maruti Suzuki (16), Toyota (12), Hyundai (11) and Ford (7). These five manufacturers have captured an overwhelming 94 percent of the utility vehicle market, elbowing out the once market leader, Tata and pushing down the subsequent leader, Toyota.

The above statistics also illustrate how the SUVs of M&M and Ford (assumed at 70 percent of their UV sales), Hyundai and Maruti captured close to 70 percent of the total UV market. More importantly, market segmentation and product engineering geared to segmentation has propelled Maruti Suzuki and Hyundai, both predominantly small car players, as the second and fourth largest players in the utility vehicles market at 16 percent and 11 percent market shares respectively. Segmentation and product introductions helped a traditional player like M&M retain its market dominance. By the same token, it is also evident how Toyota lost the game to an extent by refusing to play in the SUV segment despite the existence of a sprightly RAV4 in its product range and several others in the associated Daihatsu range. Interestingly, in the total UV space, M&M have 5 products, Maruti Suzuki 3, Toyota 2, Hyundai 2 and Ford 2 (overall, there are over 60 SUV models, past and present!). Clearly, with others such as Honda noticing the importance of thematic segmentation, there is still huge potential for market share growth for late stage entrants.

It is never too late

The Indian utility vehicle market provides a few important insights for leadership which has the responsibility for corporate strategy, marketing and product decisions of a company, usually the CXOs, CEO and boards of companies. Some insights are evident from the above discussion and are not repeated. A few additional insights are as follows. The larger and more global a company is, the greater is the risk of skirting opportunities. Several companies that were covered in this blog post would have triggered better market expansion and achieved better market share for themselves had they made proactive and region-specific decisions in a timely manner. Only two companies, M&M (in utility vehicle segment) and Hyundai (in sedan segment) have demonstrated such decision making capability. Secondly, customisation to local needs is not a concept that can be taken back to global boards and executed in overseas design centres. Rather it is a concept that needs local decision making, and local execution with local engineers and with local validation.

While timeliness makes a significant difference, it is never too late to make an entry and score success and sustainability. While Toyota would have been so high in the pecking order had it entered India along with Maruti such delayed entry has not prevented the company from creating a niche for itself years later. Similarly, Maruti would have had a great presence in the utility vehicles segment had it entered in the segment along with Toyota but the delay has not stopped it becoming the second largest player in the utility vehicles segment even after a highly belated entry with the highly acclaimed Ertiga, S Cross and Brezza. The same has been true of Hyundai Creta, and is likely to be true with Honda BRV. Delayed market entry can be offset by innovative product engineering. It is never too late to dominate markets with creative positioning of high quality products with thematic novelty.

Posted by Dr CB Rao on May 07, 2015

1 comment:

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