Auto makers shift into new areas for growth

Written by Reuters | Mumbai, July 31: | Updated: Jul 31 2008, 22:25pm hrs
When Tata Motors, India's top bus and truck and former locomotive maker, unveiled its first car, the Indica hatchback, 10 years ago, a chorus of detractors said they could not pull off the transition.

More than 1 million Indica cars later, Tata Motors has just completed the purchase of the luxury Jaguar and Land Rover brands and will soon launch the world's cheapest car, the Nano.

So scarcely an eyebrow was raised on Wednesday when Mahindra & Mahindra Ltd, the top utility vehicles and tractors maker, said it was entering the two-wheeler market, the world's largest after China.

Mahindra, which had already forayed into cars with the no-frills Logan sedan last year in a venture with Renault, is just the latest in a long line of Indian vehicle makers that have stepped out of segments they had parked in for years to cash in on booming demand.

"Two-wheelers is a natural fit and a natural extension for us," Vice Chairman Anand Mahindra said after announcing the group would take over the assets of two-wheeler maker Kinetic Motor for 1.1 billion rupees.

"Two-wheelers is a 'bottom of the pyramid' opportunity and it will be a big trigger for growth as we will address a whole new population," he said, using a term coined by economist C.K. Prahalad to refer to the business potential among the poor.

Indian vehicle makers rolled out more than 1.5 million passenger vehicles, 7.2 million two-wheelers and nearly half a million commercial vehicles in 2007/08.

Rising incomes, an improving network of highways and stricter emission norms are expected to boost demand across the board, with passenger vehicle sales set to top 2 million by 2010 and two-wheelers expected to hit 9 million by the same time.


So Bajaj Auto, which made the switch to motorbikes from scooters more than two decades back, is building a $2,500 car with Renault and Nissan Motor to take on Tata Motors' similarly priced Nano, and will also make a light truck.

The Hero Group, the world's top bicycle maker, which has a stake in No. 1 motorbike maker Hero Honda Motors Ltd, now has a venture with Daimler for trucks. Two-wheeler maker TVS Motor has branched into three-wheelers.

"These firms are cash rich after years of growth, and are looking to expand their business further and tap other segments," said Pradeep Saxena, senior vice president of research group TNS Automotive.

"They are also being led by a younger generation that is more open to risk taking, and less sentimental about change," he said.

Certainly, there are easy synergies in sourcing, sales and distribution, but transitions have not all been easy so far.

The initial roll-out of Indica was far from successful, with Chairman Ratan Tata joking he was afraid to walk his dogs in the early days of the launch because angry customers would accost him to complain about parts that rattled and doors that did not shut.

But those problems were quickly fixed, and Tata Motors is now the No. 3 car maker behind Maruti Suzuki India Ltd and Hyundai Motor Co, and expanding overseas.

"No one imagined a truck maker like Tata could make such a success of cars," said Abdul Majeed, a partner in the automotive practice of PriceWaterhouseCoopers.

"Their example has given other firms the confidence to extend themselves. Plus, there is a realisation that anyone that wants to be a part of the global automotive map must take these risks."


The risks are many: such moves require large investments, cutting-edge technology and an overhaul of processes to take on the incumbents. Joint ventures with established players helps cut the risk somewhat, Majeed said.

And there is also a danger of Indian vehicle makers over extending themselves in the race to ramp up capacity, as high costs of raw materials such as steel have hit margins, with rising interest rates and fuel prices also depressing demand.

But this is a cyclical industry, and temporary downturns will not deter ambition, said analyst Ian Fletcher at Global Insight.

"Where there are the biggest risks there is certainly potential for huge rewards, and Indian firms seem to have a great deal of self confidence when it comes to entering new business segments," he said.

"Whether this will work for them in the long term is difficult to say, as there are many more established companies that have been just as diversified, but have now decided to focus on what they deem as the core strengths."