Startup losses keep most foreign carmakers in the red

Written by Roudra Bhattacharya | New Delhi | Updated: Jan 8 2013, 07:19am hrs
Global carmakers may have made their presence felt in India with snazzy models but when it comes to profitability, everyone other than South Koreas Hyundai and Japans Suzuki is posting losses. Later entrants like Ford, Renault, Skoda and Honda, together with a few other players, are estimated to have piled up total accumulated losses of R5,000-6,000 crore.

After posting a loss of R140 crore in FY12, Ford Indias accumulated losses are now among the highest at R1,344 crore, according to data with the registrar of companies (RoC). The US-based car maker also had to report to the Board for Industrial and Financial Reconstruction after its losses eroded over 50% of its net worth at the end of FY11.

Honda Cars FY12 losses almost trebled to R604 crore as lack of diesel models and a production slowdown due to component shortage hit sales. However, neither Honda nor Ford is very new to the Indian market both started passenger car operations in 1995 but entered the high-volume small car market quite late.

Though German auto major Volkswagen posted a R332-crore profit in FY12, accumulated losses till date stand at R662 crore. Both Renault and Skoda saw losses widen in FY12 to R231 crore and R33 crore, respectively. In fact, Renaults accumulated losses stood at approximately R361 crore as of March 31, 2012.

Management believes the losses incurred by the company are primarily startup in nature and have been incurred in connection with the redesigning of the companys business strategy and towards establishing the Renault brand image in India. Based on the projections for next four years, the management is confident that the company would be able to earn sufficient profits in the future to recoup the losses incurred, a Renault India filing with RoC said.

While data for GM, Nissan and Toyota Kirloskar were not immediately available, analysts believe these companies are also likely in a similar situation.

VG Ramakrishnan, managing director at Frost & Sullivan, South Asia, said that getting a 10-12% market share in India will become increasingly difficult going forward. But these companies will need to continue investing for the future and establish a vendor base matching Hyundai or Marutis cost structures. To make money, these companies need annual volumes of at least two lakh units, he added.

Initially, most of the smaller players like Volkswagen and Honda had adopted a top-down approach in India to reduce investment size. The idea was to start selling premium, larger cars, which is an easier bet when establishing a new brand as the sales network would be limited to the top few cities. Besides, profit margins would be higher.

But now things are getting tougher for them as they decide to take the incumbents on in their own turf, the mass market of small cars and entry sedans that account for 86% volumes in the car market. They have now been investing heavily on capacity expansion.

However, the expansion plans come at a time when input costs have gone up and consumer demand itself is sluggish leading to underutilised capacities and the search for export markets. Total passenger vehicle sales between April and November 2012-13 were up 9.62% (to 1.75 million), but the sub-segment of cars grew only 1.28% (to 1.24 million). Industry executives and analysts estimate that the first half of FY14 will be sluggish as well, with growth picking up only around September, 2013.

In fact, apart from Hyundai and Suzuki, the other two carmakers to post profits are home-grown Tata Motors and Mahindra & Mahindra. Analysts maintain that the competition is basically between incumbents both Maruti and Hyundai have been early starters in India who have built vast dealer networks and points of presence across the country.Maruti Suzuki, Hyundai, Tata Motors and Mahindra together have presence in the countrys 629 districts and command 76% of the sales of passenger vehicles.