The Hindu Business Line : `Heart of the market will be in C cars' — Mr David E. Friedman, Managing Director and President, Ford India

There is a greater buzz at Ford India's assembly line now. It is not just the Ikon that is rolling off. Fighting for space are the recently launched Fusion, a crossover vehicle, and Endeavour, a sports utility vehicle. In the corporate office, away from the hustle and bustle of the assembly line, Ford India's Managing Director and President, Mr David E. Friedman, believes that there is increasing segmentation in the Indian passenger car market. As the market matures, the C segment will become the heart of the market, as has happened in similar developing economies, he says. In this interview to Business Line, Mr Friedman, an MBA in Finance and Economics, who has been at the helm of affairs at Ford India since 2001, discusses the challenges ahead for automobile manufacturers.

Excerpts from the interview:

How is the market shaping up since the launch of Fusion?

We are continuing to see the market grow. We are coming off a higher base than last calendar year, when we saw a healthy 15 per cent growth. I would anticipate seeing growth maybe with the same absolute figures, but that would give you a lower percentage because we are coming off a higher base. The seeds for growth remain in place. You have good affordability, economy seems to be growing as planned, interest rates continue to be attractive.

Is the segment shift that you have talked of happening?

You (newspapers) have been writing stories on how the best selling car is no longer the 800 (Maruti 800), which is quite a demonstrable change. It shows that there is a segment shift. People are continuing to demand more from their cars in terms of features, performance and usage. We are seeing cars become a part of everyone's daily lifestyle. The C segment grew faster than the market average over the last two years.

If you look at other emerging markets that are further along on the development curve than India, cars started as basic transportation and people have moved up. The heart of those markets is clearly in the C cars. All those markets started with small cars.

Which means that both the Ikon and Fusion are in the growing segment...

Both cars are well placed. We do see the heart of the market shifting more to the type of vehicles we have brought to the market. The market is becoming more segmented as people buy cars based on their personal needs. A person buying a sedan has a different customer profile and a needs profile than someone buying a Fusion. Fusion is a lifestyle type of vehicle. Before you had a segment where the only need that it delivered was on price. Now we are seeing the segmentation based on usage requirements and functionality. Not just on price and size. You see in a mature market, you can have low-cost big cars, and quite expensive small cars. You can get a little BMW for $30,000. You can get a great big car in the US for $15,000-20,000.

How are companies meeting this challenge of catering to diverse requirements?

I think you are seeing the advent of multi-purpose and hybrid vehicles. On multi-purpose vehicles you have a lot of utility type use. When you talk of hybrid vehicles, you are talking of some of the utilities and also some of the ride and driving characteristics of a traditional saloon car. Hybrids are attempting to match the two because the need on Monday morning may be different from your need on Saturday afternoon.

What does the launch of the Fusion mean for the company? In terms of volumes, financial turnaround...

From financial performance, the key for us is filling this factory. Additional volumes go a long way toward that. In terms of numbers, we are ramping up the production and distribution of the Fusion. We are targeting about 500 units a month and over time that will go to a 1,000 plus a month.

Isn't that a modest target? Is it because the car has been a little highly priced?

No. As you see segmentation come into the market, and far more models, we are going to see the volumes of most manufacturers spread over products. You also see that more segments means that some of them are going to mean incremental customers, but that doesn't mean that they are all going to be the size of traditional B car segment. They will grow over time. I think that is reasonable if you are talking about a new segment. It will be interesting to see as new segments develop over time, how quickly they grow. Some of the more popular segments in the traditional markets 10 years ago did not exist. You have to be realistic in how segments get established and built and also as volumes spread over more segments.

You recently mentioned that when the Ikon was introduced, there were just 19 models in the market and now that number is over 50. How does a customer choose a car when he or she has seven or eight models to choose from?

Choice doesn't have to be confusing. Customers today are quite well informed even before they start shopping. You don't have a confused customer. They pretty much target the type of engine, the size of the car and probably have narrowed it down to two or three. Then they start shopping. The in-dealership experience and test-drive experience become important. They need to be able to experience the car, to take it for a drive, to see what it means for them. Frequently the family will come. Does the experience match with their expectations and how are they treated in the dealership.

How important is a platform concept to a company in terms of components and costs?

The key to developing any vehicle is that you get certain economies of scale. We typically think of economies of scale as related to production volume, but economies of scale also relate to... you want to be able to share your engineering as much as possible across models. Why engineer something multiple times if you can engineer something once and apply it across a large volume. When you hear that something is based on something else, what you are really talking about is shared engineering.

The look of the vehicles might be entirely different, but what you are saying is the underpinnings are common engineering that you are able to share. Sharing engineering allows you to bring new vehicles or new variants of vehicles to market more cheaply and cost effectively.

You mentioned the Ikon had its original engineering from the Fiesta. That allowed us to develop the Ikon, which is unique to the Indian market, while avoiding replicating the engineering already done. That is a much more cost- and investment-effective solution. When you look at markets like India, most vehicles that have come to the market will be shared engineering vehicles of one type or another. Or that vehicles developed in India, people want to find ways of sharing the engineering.

We have seen unique vehicles developed in India by some of our competitors, who are now developing variants of those to share that engineering and achieve economies of scale across engineering and speed of introduction. It is sound business and it allows you to offer more products, differentiated products to the consumer at a better cost and more quickly.

In terms of sourcing components, does it have any advantage?

Yes. While we might have unique components especially for the visual items, you might have functional components that you don't see. An example is the windshield wiper motor. You can spread that across many vehicle models. You only have to design it once. You save on engineering and you get economies of scale on the manufacture of the component itself.

What kind of cost advantage do you get by shared engineering?

You mean in terms of percentages? You mean compared to being inefficient?

No, I mean if the Ikon was not based on the Fiesta platform and you had designed it completely new... Typically, what would be the engineering cost of a car?

That is hard to... I don't even know... We have never really looked at it in terms of saying compared to a new car. Because if we have a new car, then we would find ways of spreading that engineering over. That is why I am saying that you are asking me to compare an inefficient... If you are efficient, then you have to compare with inefficient to know what is the benefit.

World over, automobile manufacturers talk of relentless cost cutting. Where will this lead to? More pressure on the component suppliers? Where exactly do you think costs can be cut further?

A lot of it is in just getting smarter. It is almost like the question that after Roger Bannister ran the four minute mile, wondering whether that is the fastest that you will ever go. Every couple of years somebody gets just a few seconds faster. I think it is almost the same thing because we continue to get a bit smarter. You get smarter in how you market cars and you will see a lot of cost effective marketing, smarter in how you design and make components. In the old days, you used to design a component, handed it to a manufacturer and told him make it. Now you and the manufacturer sit together and design the component so that you get what you want and he can manufacture it as efficiently and as easily as possible. You wind up sharing and coming up with new ideas to always improve the business.

Raw material costs are going up. What does it mean as component suppliers are going to ask for price increase and you will find it difficult to pass on this increase entirely to the customers?

Prices will have to go up. We have had input cost rise non-stop for the last 18 months, on steel, rubber, plastic, diesel and transportation.

This is global economy driving raw material inputs up and at the end of the day, the inherent costs go up and it must be reflected in the price. The level of increase we have seen on things like steel is significant. The gradual improvements in optimisation that I was talking about are not sufficient to fully offset some of these huge increases. It must come through an increase in price.

What would you like the government to do to improve the economy? VAT is to be implemented...

The auto industry is an important part of the economy. Growing the auto industry is going to be a key strategy for continuing industrial growth. We need to continue then to see the liberalisation policies. We need to see prudent fiscal policies — taxation, the deficit and managing the deficit, interest rates, managing the exchange rates — as they create a stable economic environment.

A stable economic environment creates a predictable business environment, which is then good for growth, which is then good for future investment. The last thing to mention is the realisation that we can do more to promote exports.

VAT should help. The complexity of state taxes is an inefficiency. Ours is an inter-state industry. Components move all over India into assembly plants and finished vehicles move to dealerships and customers. The ultimate benefit will come only when he have a fully integrated VAT.

We ought to look for a tax system that is transparent and seamless, because tax disputes by themselves are inefficient. A simple VAT system that is well understood, straightforward to administer and effectively implemented is good for everybody.

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