Facebook Pixel Code

Maruti rivals bet on capex plans to grow

Even as car sales remain sluggish this year, smaller players such as Ford, Renault-Nissan and Toyota Kirloskar are rapidly increasing production capacities in order to gain from larger economies of scale.

Even as car sales remain sluggish this year, smaller players such as Ford, Renault-Nissan and Toyota Kirloskar are rapidly increasing production capacities in order to gain from larger economies of scale. The aim is to lower prices and increase sales in a highly competitive market, helping them nibble away market share from strongly placed incumbents, such as Maruti Suzuki and Mahindra & Mahindra (M&M).

Most announcements of capacity expansion have come in the past year, which may seem surprising at a time when consumer demand is low ? car sales have just grown 1.28% between April and November this year. Ford is building its second plant in Gujarat, more than doubling output to 4.4 lakh units, while Renault-Nissan has also announced a similar strategy. Toyota Kirloskar?s expansion at its Bangalore facility will be effective from early next year itself and Honda Cars already has a second site at Rajasthan ready for when its first plant at Greater Noida completely utilises its capacity.

Joginder Singh, Ford India?s president and managing director, said, ?The strategy is to build on scales, then we can provide products at a great value proposition. We are in execution mode of our accelerated growth strategy that will see a big step up in presence. We are also creating an export hub in India.?

Building scales is important for profitable growth, especially when you consider that the top four companies, Maruti, Hyundai, Mahindra and Tata Motors, together command a 76% share of the passenger vehicle market (sales grew 9.62% to 1.75 million units in April-November, 2012). Competing with the mammoth sales networks is also tough, Maruti and M&M have touch points in almost all of the 629 districts of the country. Maruti?s huge network helps it find almost 1.2 million buyers a year, while the volumes keeps prices low.

To understand the challenge in front of the smaller players, here is some food for thought ? Maruti today has 4,500 touch points, which is equal to Hyundai, Tata Motors and Toyota Kirloskar?s networks (for cars) put together, an industry executive said.

Though analysts fear that carmakers run a risk of underutilisation of their installed production capacities, companies plan to use India as an export hub for Europe and emerging markets like Africa, South-east Asia and South America ? till the domestic demand is large enough to ensure full utilisation. For certain models, such as small cars/hatchbacks and SUVs, India is the perfect manufacturing destination, given the large supplier base and domestic market, that help keeps costs down.

A connected strategy that also helps lower prices (also requires a large production base), is monetising one platform for many models and using the same set of components as much as possible to again build economies of scale. Maruti has done this with the Swift (shares with Dzire, Ertiga and more upcoming models), while Hyundai does it with the i10 (shares with i20, Santro, Eon). The Volkswagen group bets on it as well ? Polo, Vento and Skoda?s Fabia and Rapid share the same platform and engines. Such a plan helps products break-even faster, even with lower volumes.

Get live Share Market updates, Stock Market Quotes, and the latest India News and business news on Financial Express. Download the Financial Express App for the latest finance news.

First published on: 27-12-2012 at 01:46 IST
Market Data
Market Data
Today’s Most Popular Stories ×