By Vaasu Mittal
The automobile sector of India is one of the core drivers of the economy and it’s role in changing the transportation scenario in the country has been phenomenal. From the times when a car was only accessible to the dons of bollywood movies to the present times as thousands of cars flock the highways every day like pigeons crowding a field, the automobile industry has come a long way in terms of affordability and accessibility. Being the backbone of the manufacturing sector, it has become an integral part of our daily lives as even doing something as simple as walking to our closest grocery stores sounds arduous and exasperating.
The automobile industry has shown exponential growth of more than 3 times over the last three decades. Having faced the Covid-19 pandemic with solid resistance and innovations, the automobile industry has proved its fundamental strength and resilient operational efficiency, awarding it a comparison with the Great Wall. But it has also seen its fair share of collapses which we will discuss in this article along with its journey and way forward.
The Exit of Ford and other US Automakers
After the exit of General Motors and Harley Davidson in 2017, Ford India Ltd is the next US automobile giant to close down its operations in the country. Ford admits of having operating losses of more than $2 billion under its belt and an $800 million write-down of assets in 2019 which forced the US automaker on its knees. And that, dear friends, brings us to an important question here- What could be the factors affecting the shutdown of these automakers in India who actually pack bags full of dinero through global sales? The puzzling question which arises is that – HOW CAN AN INDUSTRY SHOW TREMENDOUS GROWTH IN ABSOLUTE NUMBERS AND STILL FIND MOST OF ITS CONSTITUENTS STRUGGLING SHAMBOLICALLY.
According to industry experts, Ford went wrong in three aspects- product design, market positioning, and investment decisions. Firstly, Ford proceeded with its original designs which were in accordance with the US market, a left-hand drive, unlike India which is a right-hand drive. For instance, the Ford models were designed in such a way that the driver had to get down, move to the left side of the car and then be able to open the boot, which was certainly a tedious task.
Secondly, Ford did not study the Indian market and looked at it from a US point of view. The small cars market was the fastest-growing segment in the passenger vehicle category which was capitalized upon by Wagon-R of Maruti Suzuki and Santro of Hyundai, both capturing sizable market shares. Ford failed to do so because it did not have a small car in its global portfolio and kept adding models like Figo, Fusion, EcoSport, Endeavour, and Freestyle which catered to a small section of the market and were pretty much useless to the needs of the narrow and crowded Indian roads. The result? The sales of these cars grew manifolds over the years but the market share always remained negligible. After 2015, both market share and sales volume stepped on a banana peel and went down a slippery path which was further worsened by the global pandemic.
Thirdly, the investment decision of Ford to establish a new manufacturing unit of $1 billion in Sanand, Gujrat proved to be disastrous and dumbfounding. Instead of improving the existing Chennai plant capacity, setting up a new greenfield facility was a financially and fundamentally wrong decision because the existing facility had potential to be utilized further. It was like buying another plate of Biryani when your first plate of Biryani was half left. This decision coupled with the falling sales and market share pushed Ford down a deep well from which recovery was as impossible as getting sympathy from Indian parents.
Throwback to the Golden Period
The period of liberalization presented itself to be a gold mine for a highly restricted country like India which finally began to reap the benefits of global companies and their advanced technology. The carmakers were lured to invest in the Indian market heavily right after 1991 which was marked by the first foreign joint venture in India between Maruti Udyog and Suzuki, a Japanese multinational automobile corporation.
Maruti Suzuki gave fierce competition to existing market leaders like Hindustan Motors and Premier backed by its affordable small vehicle, Maruti 800 catering to the growing middle class and shoved the existing market leaders out of the picture.
Captivated by the lucrative prospects in the Indian automobile industry and unable to hold their horses, automobile giants such as Hyundai and Honda started setting up manufacturing units in the country. Automobile behemoths, Toyota, General Motors, and Ford entered the Indian automobile industry during the 2000s and by 2008 there were 35 players in the market including the marquee brands like BMW, Mercedes-Benz, and Volkswagen. This was also the period which gave birth to cinematically elegant movies like Tarzan: The Wonder Car.
Catastrophe, Covid, and Comeback
2018 saw the start of a dooming period for the automobile industry as the sales of commercial vehicles underwent a sharp dip after a regulatory change in axle-load norms which led to a demand crisis coupled with fundamental economic challenges posed by the falling credit availability and poor performance by infrastructure and the mining sector. The industry exhibited signs of reversal after a glorious run from 2012 to 2018. In a way 2012 did act like a cataclysmic event, albeit only for the automobile industry.
Just as this industry was showing signs of recovery, the covid-19 pandemic swept across the world resulting in national lockdowns leading to complete demolition of supply chains and a 50-day halt of the manufacturing sector making our lives come to a standstill. Production dropped, sales shrunk, demand fell and profits turned into losses as the world started to feel bereft of any enjoyment. Initial months of the covid crisis proved to be a disaster for the entire economy especially the industry of consumer durables because of a reduction in disposable income of citizens.
Fortunately, the effects of lockdown started back-pedalling with a good harvest season and a release of pent-up demand. Combined with a global supply chain rebalancing, government incentives to increase exports, and rapid digitization, obstacles posed by these crises were overturned by the automobile industry swiftly.
Meeting the Demand with Digitization
Owing to the lockdown, the automobile industry had to digitize its processes efficiently which finally ushered in the Terminator era. All the processes were automated and physical interactions with customers were minimized. The websites were refined, PDF files started replacing glossy brochures, employees were asked to work from home, showroom sizes were reduced and all the inquiries of the customers were handled through video calls. The only thing left was watching mammoth robots getting converted into cars by themselves.
As digital channels started gaining traction among the citizens, luxury companies like Mercedes-Benz implemented a direct-to-customers channel which aided in minimizing inventory and other showroom costs (because what other choice did they have?
Growth Potential in Domestic Market
There is enormous growth potential in the domestic market for resale and new customers. Firstly, the automobile industry has been dominated by one-time buyers but with an introduction of revamped scrappage policy by the government, repeat buyers are gaining more importance in the market. Many startups have successfully solved the problem of dealing used cars aided by mobile apps. The big companies can venture into this field to revive the urban demand and push another startup environment into oblivious existentialism.
Secondly, the new generation is always on the move and is drifting away from direct ownership of assets. The demand of such a customer base can be met by introducing leasing facilities for vehicles, which can be a game-changer for the automobile industry, especially the passenger vehicle section as it not only satisfies the need of the millennials but also creates newer avenues of ownership leading to the creation of a new customer base.
The Future: Electric Vehicles
Tesla, the electric car company owned by the savvy billionaire Elon Musk has set up office units in Bengaluru and is asking for a cut in import duties because Musk loves profits more than his life. Only 2% of the vehicles around the globe are electrified and there is a huge untapped potential for EVs as people look for sustainable modes of power generation and move away from the rising global fuel prices.
The Indian players have a big opportunity to take the first-mover advantage and innovate in the field of EV and take control of the global supply chains. Soon, we will finally witness the flying cars predicted in Back to the Future. While India is still in a nascent stage of EV adoption due to the high prices of battery-powered cars, battery production capabilities, electricity consumption, and the infrastructure of charging ports, it is expected that India will grow by more than 3 times by 2026.
Thus, the EV segment along with the expansion capabilities in the domestic market, and the thriving international markets, paves a clear way for the Indian automobile companies to plan their future endeavours and pull off the ambition of becoming a $250 billion industry by 2026.