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`A segment shift is happening in car market'

N. Ramakrishnan

`You have a segment shift because people buy as much as they can afford. For the money that they could previously afford a small car, they can now buy an Ikon. Around the world as auto markets mature, you see this segment shift from one-litre cars to 1.3- and 1.5-litre cars and as they mature, even two-litre cars. We have seen that in Asia and in Europe. While India may not have shifted as quickly as China, there is every reason to believe that the shift is occurring.'


Mr David E. Friedman, MD and President, Ford India

Automobile manufacturers in India are happy. Sales are up and the market sentiment is positive. There have been some new launches. Ford India, which has set up a Rs 1,700-crore plant at Maraimalai Nagar, about 50 km south of Chennai, introduced an upgraded version of the Ikon at the beginning of the year.

The most significant change is the local power train. This has helped Ford India introduce an Ikon variant at less than Rs 5 lakh (ex-showroom). It believes that there is a definite segment shift happening in consumer purchasing behaviour, thanks mainly to attractive financing options.

Mr David E. Friedman, Managing Director and President, Ford India Ltd, talked to Business Line about the industry, developments in component sourcing, free trade agreements and the opportunities they present for Indian manufacturers.

Mr Friedman, who holds a bachelor's degree in International Relations and an MBA in Finance and Economics, joined Ford Motor Company in 1986 at Dearborn, Michigan. He came to Ford India in end-1998 and was Vice President - Finance and Systems, before taking over the present post in September 2001.

Excerpts of the interview:

Not many of the launches this year have been in the sub-Rs 4 lakh level — by far the largest market. Are manufacturers missing out on this?

The combination of lower taxes and dramatically lower interest rates means one can buy an Ikon Flair (costing about Rs 5 lakh) for the same EMI as one bought a small car three years ago. What you are seeing is fairly revolutionary.

You have a segment shift because people buy as much as they can afford.

For the money that they could previously afford a small car, they can now buy an Ikon. We have seen this. As a percentage of the market, the smallest cars have come down. The absolute numbers have not dropped.

The fastest growth has been in the three-box cars. Not surprising, because people are able to move from the small cars to the larger full featured cars for the same EMI. Companies are now going to focus where the growth is.

But are you not talking of a much smaller base in the three-box car segment compared to the small cars?

There are a number of small cars and some powerful brands. Maruti, Hyundai, Tata Motors, Fiat — this gets rather saturated. You have steep competition in a segment that as a percentage of the market is at best stagnant. Around the world as auto markets mature, you see this segment shift from one-litre cars to 1.3- and 1.5-litre and as they mature, even two-litre cars. We have seen that in Asia and in Europe.

You think that kind of a shift is happening in India?

It is happening. Certainly the heart of the market in China is the 1.5-litre or up to two-litre cars. The Suzuki used to make the 800 (the Maruti 800 here) in China. And, while the 800 sales in India have been stagnant, in China that model was discontinued some years ago. While India may not have shifted as quickly as China, there is every reason to believe that the shift is occurring.

Does it mean that Ford India will not come out with a car in the mass market? GM has come out with a hatchback...

If you want to bring in a new model, especially a popular price model, it has to be new and distinctive. You want to do so at good volumes so that you are able to get a good business equation. That is a fairly sound guideline.

You still import at least 10 per cent of your components... steel, for instance. At what stage are your talks with Tata Steel for sourcing body steel?

Most car manufacturers import surface steel because of the need for corrosion resistance and the quality demanded by today's high technology paints. The capability to make the most sophisticated surface steel is being installed in India. In a couple of years we would see domestically manufactured surface steel for auto manufacturing. That is an area the Indian steel industry has the potential to excel in. The upfront investment is significant.

Tata Steel is one of those with a programme to install that technology in India. We also import some electronic components such as the engine control module and some sensors. These products are made in high tech, high investment manufacturing facilities with almost no labour. Those parts are not available in India. I think with the growing auto industry there is potential for some of them to be made in India.

One aspect that you harp on is that the Ikon is a car specifically made, designed for India. There are other models not specifically designed for India but are doing well. Is that an important factor?

It is an important factor in that other cars may well be appropriate for the Indian market. Cars that are specifically designed either for India or for Indian conditions are what are important for the consumer.

When you look at specific issues — road conditions, fuel conditions, usage, issues like monsoon flooding, heavy duty use of the horn — all these need to be factored in for a vehicle to successfully operate in India.

You are going to specifically design it for India or at least take into account the conditions that exist here and tailor your vehicle. You have to do one or the other or you are going to have durability problems or usage issues.

Would this be the major guiding factor for future Ford launches?

When we bring a car, we are going to bring it right. All those conditions need to be factored in. Vehicles from the Ford stable need to meet these demanding conditions when we evaluate them for India. If you look at the vehicles we have brought — the Ikon, the Mondeo or the Endeavour — we have specifically kept in mind that these vehicles have to run in Indian conditions and meet the usage pattern of the Indian customer.

On global sourcing of components, most car manufacturers source from India parts that are at the lower end of the technology spectrum. What do component manufacturers need to do to migrate to higher technology components being sourced from them?

The Indian automotive market has only recently demanded higher technology components. There are still gaps like surface steel and electronic components. The competitive advantage for Indian components is clearly those with labour content. Labour content is going to put you a bit lower down in the technology chain. The products with labour content like stampings, forgings, and springs are areas where India has demonstrated cost advantage.

The recent Free Trade Agreement (FTA) with Thailand seems to have divided the automobile industry — the vehicle manufacturers and the component makers. There are those who feel that it is good for the industry and others who think that Indian manufacturing will take a hit. What is your take on that?

The progressive companies — auto or component manufacturers — will see the advantage in being able to have access to markets that today they do not have access to.

Competition is increasing in both auto and component businesses. The best way to compete is to get world-class scale and level of operations. You do that by expanding your sales, by investing in technology, and you can compete anywhere in the world. I have no doubt that we have the cost structure and the capability that is as good as any and we can compete globally in multiple markets.

There is every reason to think that the Indian manufacturers will be successful exporters and if you are a successful exporter, you will also be successful in your home market. Progressive companies realise this.

I have talked to component manufacturers who are quite excited about this. Indian participation in Asean (Association of South-East Asian Nations) markets is quite low. Here is an opportunity for us to be able to compete and get a piece of what is a rapidly growing auto market. Competing in that market will make us stronger in the own home market.

There is a fear that the FTA will lead to the demise of Indian manufacturing. There are some who say it has been pushed by a couple of car manufacturers from the region who have built up huge capacities...

I will stop you before you even finish the question. We just talked about global sourcing. That global sourcing from Europe or the US or Japan can go anywhere it wants to. If they are sourcing from India and not Asean, it is probably because India is competitive. If India can compete for American business, for European business, why can it not compete in its own neighbourhood? It does not add up. If you talk to the progressive companies and the ones that have been building their export business, and ask them if this is good, they will tell you, "absolutely" because there are barriers to Indian companies being able to compete in certain markets. These bring down the barriers. They will be able to go after business in the same way they are going after business in the US and Europe. And they are competing with these Asean companies today for the export business. They are competing with Chinese companies. If you think logically, it makes no sense.

With the WTO there was this fear that the Chinese would flood the market with their cheap motorbikes. What happened? Indian companies post-WTO are looking at setting up operations in China. Two-wheeler companies are actually thinking of setting up plants in China.

Indian companies are looking at getting in a foot in the door, not holding them back from coming here. Some of the people who are going to be in China are the ones who were complaining two years ago that the Chinese were going to flood this market. Now they are trying to find a Chinese partner so they can flood the Chinese market with Indian motorbikes.

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