It’s called the second half of the Bell Curve and it’s the anti-thesis of copulation — you start just before the climax and end up flaccid.
In the automotive context, it represents the natural lifecycle of a vehicle program. Sales start nearly at the peak and end the lifecycle at a low, often with a lot of feet dragging, till the next generation mercifully replaces.
The curve is the most important aspect of the automotive industry and often the most overlooked ones. Profitability of OEMs, suppliers and dealers are all dictated by the curve and how the brand is able to shape it. The winners make a Tibetan plateau out of it while the losers draw Mount Everest.
More to clarify all this later.
The Four Parts of the curve
We at EMMAAA break the curve into four parts — Start Bang, Profit Plateau, Discount Slope and Ventilator Support. While the names of the four parts of the curve are self explanatory, the profitability of the vehicle program varies across each part.
The Start Bang has the vehicle selling at very close to its intended sticker price and sales volumes enjoying the initial momentum which takes them to the peak in an ideal lifecycle. However, the brand is incurring marketing, PR and advertising expenses and profitability is slightly affected by these.
The Profit Plateau — and there is a reason why we call it that — is the second part of the lifecycle when the vehicle is still fresh, sales volumes still close to the peak, and marketing costs have come down considerably. The model is still selling at close to its intended sticker price. Admittedly, things are at maximum profitability and executives wish time would stand still.
Alas it doesn’t.
The customer is finicky and the competition a spoilsport. Soon newer models enter the fray and your hot new car is just lukewarm at best. The customer needs to be convinced and you start using discounting as a marketing weapon. The vehicle program has now entered the Discount Slope. Profitability is hurt by the discounting as well as a slight increase in marketing costs and sales promotions. This is the time when sales executives get on the phones and tell the dealers to push it. The dealers huff-and-puff but (for good programs) still shuffle cars out of their gates.
This is also the time when the brand tries to hoodwink the customer by changing the lamps, putting some stickers, and introducing an orange colour. This is complemented by the moniker ‘All New’ and a hope that the customer was living under a rock for the last three years. Professionals call this process a mid-cycle facelift.
Then comes Ventilator Support, also called old age, and unfortunately, most cars age very much like Shobha De.
Kicking & screaming and dragging their feet.
There is a lot of pain for all parties involved. Sales executives and zonal managers get on the phone and push to dump more inventory on the dealers. Right after this call is over, the dealers mention the executives using expletives normally reserved for fast buddies after a night of binge drinking.
In this stage of life, the model is now offered with heavy discounts. Profitability is low and everyone worries about getting rid of inventory as the replacement is around the corner.
Looking at the four stages of lifecycle of a passenger car, it is apparent that if a brand can somehow elongate the Profit Plateau part of the curve, the profitability of the program will improve.
Any management consultants reading this may pause for a minute now and copy-paste the above for future use in a client presentation.
This longevity of the Profit Plateau is the key reason why Maruti’s stock price has multiplied a zillion times since it went public. Look at the sales graphs of the first generation Swift; Then the second generation Swift; then the first generation D’Zire; then the second generation D’Zire; the Alto generations; the WagonR generations; the Ertiga; or the Ciaz. Everyone has a maddening stubbornness to them. Once they have done the Start Bang, they cling on to the Profit Plateau like leeches, sucking out every bit of profitability out of the program.
In most cases, Maruti models completely skip the Discount Slope and Ventilator Support parts of the lifecycle, exiting the lifecycle at the second stage itself. The company can then leisurely reinvent them with a new name like DZire Tour and sell some more to taxi operators.
Compare this to a Honda, or Fiat, or Ford, or GM, or any other multi-national brand. Most have a short second stage in their model’s lifecycles, soon ending in phase 3 and spending a large chunk of their lifecycle on ventilator support.
This is not to say that all MSIL models are successful with long second stages of lifecycle. The Ritz and the S-Cross stick out and so did the Zen Estilo and the Versa earlier. However, with most models Maruti-Suzuki has turned the practice of elongating Profit Plateaus almost into an art form.
Also not everyone else’s models are a failure. The Mahindra Scorpio and XUV 5oo have fairly long Profit Plateaus as well. One of the strongest Profit Plateaus has been the Toyota Innova’s. Honda City in its second, third and fourth generations hasn’t been too shabby as well.
Importance of the Profit Plateau
The Profit Plateau and its length is important. If you can maintain the second stage of the lifecycle at a consistent high, say within 90% of peak program volumes, everyone is happy. The manufacturer has high profitability, supplier plants run consistently and dealers shuffle units quickly. The predictable nature of things also means that everyone goes home on time.
A good consistent program for a mid-size car would star life at 4000 units a month, would touch a peak of 6000, come down to 5000 units a month and stay there for a long time. It would then fall to 3500 units eventually before being replaced. The supplier can plan its production, the dealer does not need to worry about inventory.
Now compare that to a program that dips from 5000 units a month to 700 a month within two years. Everyone involved goes bald fairly quickly.
We understand that every brand has its successes and failures. However, when you have a one-off failure, everyone understands and moves on. Compare that to brand which has a one-off success.
The Long-Term Impact of the Long Profit Plateau
If a brand has consistently long Profit Plateaus, suppliers are assured of their profitability. The programs automatically turn into high volume ones and the supplier is willing to pawn his house to give you the best costing possible. You can take the attractive costing and offer an attractive price to the customers even after enjoying an industry-topping margin.
The happy customer ensures that your models have high demand and further extends the Profit Plateaus.
Rinse & repeat.
The Long-term Impact of the terribly short Profit Plateau
What happens if you are at the other end of the spectrum? You haven’t done well in life, flunked at model launches and think India is a piece of cake that you can eat anytime you come off the diet. In most cases your vehicle lifecycles draw the northern face of Mount Everest on the graph.
This in turn ends up antagonising the supplier and the dealer. The dealer is stuck with his investment and, frustrated by your tepid efforts, focusses more attention on managing his real estate portfolio.
The supplier is a gruesome story altogether. He is bleeding due to the false PowerPoints your senior executives shared two years back. You promised 60,000 and delivered 20,000. The result is that his plant is running under-capacity. In this case also he has pawned his house, just to meet business expectations.
The long-term impact is that the supplier will now take all your future RFQs with a whole lot of salt. Within their offices, they laugh at you and debate on the factor by which they should reduce your RFQ. In our forecasting – and I am not making this up – we use an RFQ Discount Factor to help suppliers decide on the actual volumes.
The worst part is the pricing. When the supplier is not sure of your volumes, you can be sure that he will never offer his best costing to you. This triggers a chain reaction that kills your pricing power and turns off the customer from your showroom.
Rinse & repeat.
Actually, let’s call it the vicious circle of the multinational brand forever fighting for his 3% share of the Indian car market.
In part 2 of this write-up, I look at the Bell Curve again and examine ways in which brands, not called Maruti or Hyundai, can wiggle out of the vicious circle.
Author: Deepesh Rathore is a Director at Emerging Markets Automotive Advisors (EMMAAA)
Disclaimer: The views and opinions expressed in this article are solely those of the original author. These views and opinions do not represent those of The Indian Express Group or any employees.
Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.