The Hindu Business Line : Price competitiveness, a critical success factor in auto sector

Valued-added features, more lucrative sales incentives to dealers and extended warranty coverage will emerge as some of the means to retain and increase market share in the extremely price-sensitive mass market segment.

MR KAPIL ARORA, PARTNER, AUTOMOTIVE SERVICES, ERNST & YOUNG.

India will necessarily remain an integral element in the long-term strategy of every significant global automotive player, declares Mr Kapil Arora, partner, automotive services, Ernst & Young.

“All players are sharpening their focus on developing and executing their business strategies to take advantage of this market which will be critical to achieving future growth and profitability. Let the race begin,” he flags off, during an e-mail discussion with Business Line, on the emerging trends and challenges in the Indian automotive sector, as a backdrop to the Auto Expo in New Delhi.

Excerpts from the interview:

How would you describe the global auto scene, in brief?

Globally, the automotive sector is in transition in many markets. While it is growing significantly, overall, major differences in market dynamics exist by geography.

The US market is experiencing poor profitability, industry consolidation, restructuring and spin-offs. Market-share dominance is shifting from the traditional Big 3 US OEMs (original equipment manufacturers) to other Asian-based manufacturers and suppliers.

The emerging markets — particularly India, China and Russia — have seen frenzied activity over the last few years.

A few snapshots of the Indian prospects?

India is the second largest two-wheeler market, fourth largest passenger vehicle market, and the largest three-wheeler market in the world. By industry estimates, it is expected to contribute approximately 10 per cent to India’s GDP (gross domestic product) by 2016.

In the immediate future, the market is likely to witness intense competition with leading global OEMs as well as Indian vehicle and component manufacturers aggressively showcasing their product portfolios and hoping to translate the much-hyped potential of the Indian marketplace into higher market share, revenues and profitability.

What do you see as the key drivers of the Indian market potential?

The continued growth of the Indian economy, reflected in increased consumer spending, and the growing disposable incomes of a vibrant and an aspirational middle-class.

Do you expect shifts in the industry trends, closer home?

Of all the segments in the Indian auto space, the passenger vehicle segment will probably witness the most intense market action with the introduction of nearly two-dozen new models and variants.

The entry-level segment will be redefined owing to the introduction of a car priced $2,500 on January 10. Several first-time buyers will graduate from the two-wheeler market to this base segment.

Any major worry…?

While the number of vehicles will grow rapidly, the related road infrastructure will face added pressure to sustain the increased vehicular movement, particularly in the major metros.

How should the competition react?

All market participants will have to quickly rethink and alter their own pricing strategies and product portfolios to combat the challenge. Notwithstanding the competition, several players have announced plans to enter this segment and are forging new joint ventures and alliances.

Can you offer some insight into the likely consumer reaction?

While it is difficult to track consumer habits in a rapidly evolving market, price competitiveness will certainly remain a critical success factor. The mass-market consumers are likely to make product selections based on the price competitiveness, fuel efficiency and liberal credit availability.

Valued-added features, more lucrative sales incentives to dealers, extended warranty coverage will emerge as some of the means to retain and increase market share in this extremely price sensitive market segment.

Your suggestions on what should be the strategies?

The automotive industry is a B2B (business-to-business), B2C (business-to-consumer) industry involving large investments and a long-term return on investment plans. New product launches — on time, on Budget, and focussed on the target segment — will be critical to the future success of OEMs and suppliers across all segments.

Volatile raw material and input costs, especially oil and steel, will continue to have a pervasive impact on the operating profitability of OEMs. Successfully managing supply chain complexity, implementing low-cost country sourcing strategies, and continuous technological innovation will be vital to achieving long-term cost mitigation goals.

Will we see an impact of the climate change concerns on the industry?

As the ongoing global debate on climate change gains momentum in India, consumer groups and government will introduce legislative changes with varying incentives and time-frames for compliance to reduce emissions, encouraging the use of blended fuels and alternative powertrain technologies.

For example, in the US, tax credits are available to consumers purchasing environmentally-friendly hybrid vehicles to offset the higher initial cost of purchase.

Is the future bright for alternative fuel?

While a commercially viable global mass-market for hybrid and alternative fuel vehicles will take another eight-10 years to evolve, leading OEMs will continue to make investments in this area over the next few years. There being no tax credits or other significant incentives to encourage use of alternative fuels or powertrain technologies in India, the Government could consider these in future.

Bio:

Mr Arora, partner in the risk advisory services (RAS) practice at Ernst & Young, leads the firm’s work with regard to the automotive sector, and contract risk services. He has over a dozen years of experience and expertise in financial and management assurance, business process reviews and regulatory compliance, and has led several large internal audits, risk and control reviews, and business process advisory engagements at global 100 companies in North America, Europe, Asia Pacific and India. Mr Arora - a chartered accountant, a certified internal auditor, and a certified fraud examiner by qualification – serves as a member on a several committees of the CII and FICCI.

D. MURALI

http://InterviewsInsights.blogspot.com

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