An Indian Tango for the auto challenge

Early this week, Toyota confirmed reports that it was withdrawing its SUV Qualis from the Indian market and launching a new multi-utility vehicle called Innova. The decision had little to do with lack of consumer interest. Qualis was dominating the market and had a record sale of 4,000 vehicles in December 2004. Toyota has redefined the game in the lower end of the market by injecting new technology and a new product. It saw the demand for SUVs at an inflexion point and the Indian SUV consumer?s emerging interest in technology as well as new products hitherto popular only in middle and high-income countries.

Whether this observation is right or wrong is not the point here. If Innova fails, Toyota could respond by launching yet another product. What is impressive, is Toyota?s ability to anticipate and even create shifts in consumer preference, by launching new platforms well before older ones have ceased to add to the company?s bottomline. It has the innovation and technology to feed most market segments, except perhaps the lowest rung.

The two big Indian auto companies, Tata Motors and Mahindra are not nimble enough to compete in this aspect. To say this is not to detract from their effort and success. Both have shown impressive growth in sale of vehicles, topline and bottomline growth. Yet, it cannot be ignored that the quality of their vehicles trails miles behind competitors such as Toyota. This is evident from the fact that the two-decade-old, obsolete Qualis could outsell recent launches such as Scorpio and Sumo. Despite the technology gaps, Tata and Mahindra have succeeded in notching profits because the segment in the Indian market that responds more to price than to refinement has been large enough to sustain them.

But there are reasons to believe the nature of the Indian market could change faster than expected and the ability of foreign auto majors to redefine the segment in which Mahindra and Tata operate could increase substantially. The main factor that would increase competitive pressure on Indian auto players is the size of the market itself. Auto sales in India have crossed a billion and are set to race towards the two billion mark in another five to seven years. As the Indian market matures, consumer preference would shift towards better driving experience and greater awareness about technology.

At the same time, growing sales would provide economies of scale to foreign auto companies. At present, Suzuki and, to some extent, Hyundai, are the only foreign companies that can provide price competition to Tata and Mahindra, as they have economies of scale. But soon, Toyota and Honda and even GM and Ford would be able to play the volume game and bring down their production costs. They would be able to bring superior technology at a price equal to, or marginally higher than what Tata and Mahindra offer. The segment in which the Indian companies operate would shrink. They would have no option but to fight harder for their segment and take the battle to other segments of the market as well.

There is also the possibility that Toyota and Honda could synergise their strategies for better market penetration. There is speculation that Honda may not introduce the mid-size Civic to provide breathing space to Toyota?s Corolla, and Toyota would refrain from launching RAV-4, the SUV that can challenge Honda?s CRV in India.

This may or may not be true. But Tata and Mahindra could actually consider enhancing their competitiveness and sustainability in the long run. India?s auto sector is critical both to GDP growth and India?s manufacturing ambition. It is time Tata and Mahindra discovered that pooling their energies for technology and product development provides a great recipe for serving the country and their companies, all at the same time.

Standing alone, neither of the two Indian companies has the resources to match the ability of foreign companies to launch new products. For example, Hyundai?s R&D budget for the year 2005 is close to $2 billion. The budgets of Toyota and Honda are far bigger. These companies have a number of engines and platforms that can be married to launch myriad models to satisfy different consumer needs and aspirations. Indeed, companies such as Honda are so advanced that they downscale their technologies to adapt them to market needs.

To move in that direction, Tata and Mahindra could undertake joint development of petrol and diesel engines, transmission and gearbox technologies etc. This does not imply they give up competing with each other. Rather, they can synergise their strengths, opt for some competencies and also choose their market segments. For example, Tata could support Mahindra in developing diesel engines and the latter could support the former in developing petrol engines or some such combination and both could share the fruits of their labour.

This is an endeavour that needs wider support, particularly from the National Manufacturing Competitiveness Council (NMCC) and the CSIR. Mr Krishnamurthy could motivate the finance ministry to provide long-term funds through IDBI to support such development, as such funding has ceased after the demise of the DFIs. Dr Mashelkar could bring the knowledge network to the table and the R&D teams could be spread across Tata, Mahindra and CSIR laboratories. An extension of this idea could include component makers.

How does one begin? A lunch with Ratan Tata, Anand Mahindra, V Krishnamurthy and Dr Mashelkar could be a great launch. I would love to be present, if only for the food.

The author is an advisor to Ficci. These are his personal views