HONDA ENTERING THE INDIAN DIESEL CAR MARKET

There is a Japanese proverb that literally goes 'Raise the sail with your stronger hand,' meaning you must go after the opportunities that arise in life that you are best equipped to do. - Soichiro Honda Founder, Honda Motor Company

Abstract
The Indian automotive industry embarked on a fresh journey in 1991 with de-licensing of the sector and consequent opening up for 100% foreign direct investment (FDI). Since then more or less all global automobile manufacturers have set up shop in India taking the level of production from 2 million units in 1991 to over 4 million units in recent years. Indias passenger and commercial vehicle market is the sixth largest in the world and is one of the fastest growing one as well. India is also the third largest exporter of passenger cars in the world behind Japan and South Korea. The export earnings from the sector are over USD 6 billion. In FY12, the sales of vehicles were reported to be about 3 million units. Currently Indian roads are home to about 42 million passenger cars and this number is expected to reach about 600 million by 2050. The Indian government's refusal to fully deregulate oil prices has thrown auto maker's production plans to the wind. Gasoline prices, which were deregulated in mid-2010, have risen sharply in the last 18 months to a level 64% higher than diesel prices, which are still heavily regulated and subsidized. The result is sales of gasoline-powered cars are plummeting and auto makers, from local giant Maruti Suzuki India Ltd. to foreign firms like Toyota Motor Corp. and General Motors Co., have been forced to cut gasoline-engine car production and increase diesel-vehicle output. The fickle gasoline prices have resulted in car buyers preferring diesel cars over petrol run cars even though auto experts proponent that in the long run cars operated on either of the fuel cost about the same and also that petrol cars are better in many aspects amongst the two. But this unyielding change in preference just goes to show that for most part consumers will always aim to maximize the more realizable short term goals. Currently the Indian automotive (4 wheelers) industry comprises of 22 companies out of which only 3 are purely Indian and the rest have entered India by partnering up with existing Indian companies after 1991. Among these, 21 companies have the provision for the customers to opt for diesel variants of almost all their cars. The only company yet to tap into the Indian diesel car market is Honda Cars India Limited.

Contents
Honda meets India .......................................................................................................................... 2 Company Timeline .......................................................................................................................2 Honda Finally Coming Around ....................................................................................................4 Expected hurdles ............................................................................................................................. 5 Road Ahead ..................................................................................................................................... 6 Exhibits ........................................................................................................................................... 6 Exhibit I: Sales figure of cars in the India (2008-2012)...............................................................6 Exhibit II: Market share* of all major automobile manufacturers in India .................................7 References ....................................................................................................................................... 7

Honda meets India

Company Timeline Honda Motor Company is a Japanese public multinational corporation primarily known as a manufacturer of automobiles & motorcycles. In 1963, Hondas automobile business begins with the release of its first sports car (S500) & light truck (T360). In 1982, with automobile manufacturing plants in Taiwan & Indonesia, Honda setup shop in USA. In 1986, Honda became the first Japanese automobile manufacturer to launch its luxury brand, Acura in USA. In 1992, Hondas worldwide production reached 20 million units. In 1995, Honda entered the Indian car market as Honda Siel Cars India in a JV with Usha International of Siddharth Shriram Group. In 1998, Automobile production starts in India. In 1999, Honda launched Insight its first Hybrid vehicle. In 2003, Honda crossed the production milestone of 50 million units. Also, Honda R&D (India) Pvt. Ltd. is established in India. In 2011, Honda introduced Brio compact car in Thailand & India. In 2012, Honda bought out Usha Internationals 3.16% stake for Rs. 180 Crores.

Hondas Automobile segment posted net sales of 5,822 trillion Yen for the year FY12. It employees about 180,000 people & has over 10 subsidiaries. In 2001, Honda became Japans se2

cond largest automobile manufacturer after only Toyota & in 2008 it crossed Chrysler to become the fourth largest manufacturer in USA. As of 2010 Honda is the worlds seventh largest aut omobile manufacturer.

In August 2012, Honda bought its JV partner Usha Internationals share in Honda Siel Cars India and renamed the company as Honda Cars India Limited. HCIL is a 100% subsidiary of Honda Motor Company and is responsible for production, marketing and export of passenger cars in India. The company started production in 1998 and currently has two production facilities in Uttar Pradesh and Rajasthan. The plants were setup with a combined initial investment of 1600 crore and both the plants have a cumulative production capacity of about 1.50 lakh units. HCIL currently has six cars on offer out of which it imports one from Japan as a CBU (Completely Built Unit) and produces as well as exports the other five locally. HCIL has 137 dealerships penetrating about 85 cities. All Honda dealerships work on the 3S Facility format viz. Sales, Se rvice and Spares are offered by all the dealerships to their customers. Despite manufacturing cars in India for the last 15 years Honda only has a 2% share in the Indian automobile (4 wheeler) market whereas new entrants such as Volkswagen India (2007) already have a market share of about 3%. One reason for this can be the imprudent pricing practices followed by Honda. In order to target a niche market Honda has alienated a big chunk of what could have been its key target market viz. middle income group. This was evident when Honda entered the hatch-back segment with Jazz but priced it around 6-7 Lakhs which is the price band in which other companies generally offer entry level sedans. Pricing a hatch-back, a segment meant for people with tight budget and usually buying their first car, this high resulted the car (Jazz) being an under performer to a great extent. However the chief reason of the snail paced rise observed by Honda in Indian car market where diesel operated cars account for 35% of the total vehicle sales. The lack of a portfolio of diesel vehicles has affected Honda Cars India Ltd adversely. The local unit of Japan's Honda Motor Company dominated the mid-size sedan segment for several years with its top-selling Honda City model, but sales of the model dwindled as customers preferred Hyundai's Verna or Volkswagen's Vento, both of which offer diesel variants. The Indian diesel car market is a success story in its own, government subsidized fuel has increased the appeal of diesel cars in India, although the subsidization is aimed at assisting the lower income groups who rely on public transport (majorly run on diesel) and farmers who use diesel fuel to operate most of the farm equipments, the auto manufacturers have capitalized on this greatly as high gasoline price have resulted in a positive shift in the customer buying behavior towards diesel cars. The shift in the sales of diesel cars in the Indian car market can be evidenced by the fact that, in FY08 14% of the total car sales was due to diesel cars which accounted for about 1.8 Lakhs and
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in just 3 years this figure rose exorbitantly by 280% to about 7 Lakhs diesel vehicles out of the total 20 Lakhs vehicles sold (FY11). This highly positive curve followed by sales number of diesel cars in India has led to many innovative strategies being adopted by many auto manufacturers such as launching passenger cars based solely on diesel model i.e. without any option to go for a petrol variant this was employed by M&M when it introduced XUV500 in 2011 this strategy aided in a 32% jump in sales during April & June in 2011. Other trends seen in the market are followed by new & global entrants who launch diesel variants alongside the gasoline powered cars which are widely recognized and lauded globally. Honda is the lone automobile manufacturer in the country to not offer a diesel variant for any of its cars and thus have paid dearly in terms of market share and sales volume. Although the company crossed the 5 lakh sales mark in 2012, it accounted for a mere 0.74% of total Indian car sales in January 2012 selling just 1800 cars.

Honda Finally Coming Around Despite clear indications and global trends Honda Cars India manufacturer shied away from diesel for years. As, Hondas culture is deeply rooted in the concept of petrol engines. Being fabricated on the foundation of motorsport and high-revving petrol engines, Honda has considered diesels to be sort of an anathema. But the skyrocketing price of fuel and a loss of market share in certain markets have forced Hondas hand. Thus in lieu of capitalizing on the lucrative Indian diesel car market and also to provide some respite from the ever-rising petrol prices, Honda India is launching its diesel car, the Amaze, which is speculated to be unveiled in mid-2013. Although Honda has not confirmed the expected pricing for Amaze, industry experts are speculating it to be just shy of Rs. 7 lakhs Even a diesel version of Hondas popular car City is expected to debut by the end of next year. Also Honda is expected launching a diesel powered 7-seater multi-utility vehicle (MUV) against the Maruti Suzuki Ertiga as well as an all-new compact SUV. The Amazes diesel engine will be powered by an all-aluminum 1,500 cc engine. The Amaze will be developed on the same platform as the Honda Brio and will be manufactured at the companys Tapukara (Rajasthan) plant. The same plant will also start building cars eventually. To curb its cost and augment profit margins Honda has devised various strategies such as: It has decided to manufacture diesel engines for the Indian markets locally to cut its dependence on imports which have been proven to be costly due to frequent fluctuations in foreign exchange rates. Also, with a length of less than 4 meters, the Honda Amaze will benefit from having lower excise duty of 12% as it will belong to the category of small cars as opposed to 24% applicable to bigger cars.
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Expected hurdles
Honda is optimistically projecting a sale of about 1 Lakh units of Diesel cars per year and is also eyeing exports which will help Honda increase its reach in Indian as well as neighboring markets. However, there are little apprehensions that Honda Cars India is sure to make a comeback in the Indian auto industry and reclaim the market share that was lost due to the unavailability of a diesel car in the current era of elevated petrol prices. However there are certain elements pertinent to the car market and even consumer buying behavior that might hamper this positive augmentation for Honda. One such adversely affecting ground maybe the indecisiveness of the Indian government of the issue of whether taxes should be levied on diesel cars bought for personal use. Another key mentionable point here which is not just Honda specific but rather industry wide is sluggish new car sales. The number of cars sold in 2011-12 is a mere 2.14% higher than the number of cars sold in the previous year. Even though Honda enjoys a sense of reliability in the consumer minds, the delay of Honda to launch a diesel variant has conjured up questions such as whether Honda can even built a competent diesel car.

Although presently the Indian Union Budget 2012-13 has suspended the imposition of taxes which if applied would have increased the cost of diesel cars by about Rs. 80,000 to Rs. 1.6 Lakhs. But the government might on a later occasion decide to enforce and that will increase the one shot cost of diesel cars and bring their appeal down to the level currently enjoyed by petrol cars. This can affect Hondas sales directly as car buyers will either drop the idea of buying a car or maybe delay it hoping for a price reduction in the future. Now Honda being an established brand might counter this hike in price by competitively pricing its cars so that the consumer who is going still going to buy a car despite of the high prices keeps Honda as one of his options as well. Lethargic new car sales has influenced every automobile manufacturers projections, production volume has been curtailed as demand side feedback is not as undeviating as the manufacturer would like it to be. This can also put a damper on the buoyant expansion plans Honda has in mind for its new diesel cars as car sales are declining due to high inflation rates, high fuel prices, new taxes and a deteriorating currency. Honda can only save itself by prudently pricing its products and create points of parity, and avoid another Jazz fiasco. Another bad element that might hinder Hondas growth map is the perception of the brand in the minds of car buyers. Hondas decision to put off launching a diesel car in the Indian market has instilled in the consumers mind that it is petrol-only company. Thus the capability of Honda to
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roll out a competent diesel vehicle is uncertain. These doubts can be cleared up after the car(s) has/have been launched as the performance of the cars will make the news and a well executed car will garner positive reviews. But the propensity of this notion might result a slow initial growth for Honda.

Road Ahead

The success expected by Honda in its new endeavor might be hindered by the presence of several well established names which make diesel cars and have been for some time now. To go up against manufacturers which offer diesel variants of almost all their cars will require a very carefully selected or created point(s) of difference(s). Hondas move to enter a new segment is debatable as at present none of the automobile manufacturers big or small are immune to the descending trend in new car sales due to inconsistent and seemingly unfair fuel prices, no decisiveness of the government on the fate of taxing diesel cars more than petrol and also the after effects of a recession. It remains to be seen whether or not Honda is able to create a potent incentive for prospective customers to opt for a diesel vehicle from a brand that has not made a diesel car in over 15 years of its existence in the industry. This incentive can be anything from Hondas well established brand name for making quality automobiles to low price resulting from the cost containing measures put in place by Honda although an anticipation of low initial sales can also lead to Honda pricing the car high to recover cost.

Exhibits
Exhibit I: Sales figure of cars in the India (2008-2012)
Year Total car sales Diesel cars Share of diesel cars (approx.)

2008-09 2009-10 2010-11 2011-12

12,20,475 15,28,337 19,72,845 20,16,115

1,83,071 3,05,667 4,93,211 7,05,640

15% 20% 25% 35%

Source: Business Today

Exhibit II: Market share* of all major automobile manufacturers in India

Maruti Mahindra & Mahindra Chevrolet Rest

Hyundai Toyota Ford

Tata Motors Honda VW

4% 8% 6% 13%

4% 3% 3% 5%

14%

40%

*As of May 2012

References