Cracking the Indian auto market: Why Ford lost and Hyundai won

Madhuri Saripalle/ Vijaya C. Subramanian | Updated on September 22, 2021

Though Ford’s exit from the Indian market has not come as a surprise, it has certainly thrown into spotlight the ongoing issues of sustainability and strategy in the Indian auto industry.

While poor product line up, failure of strategic partnerships and overcapacity are being cited as some reasons for Ford’s declining profitability, a comparison with Hyundai Motor, which entered India at around the same time (1998) as Ford, reveals some interesting insights on the entry and investment strategy of the American versus the Korean giant.

Hyundai created a niche and was able to compete with Maruti in the small car segment initially using a combination of aggressive marketing and flexibility. Termed as Judo entry strategy in game theory, entrants can capture a significant market share from the incumbent players by being flexible, fast and converting the strength of the opponent into its weakness.

Maruti’s dependence on its entry level car and a smaller product line up did impact its market share. Hyundai gained by leveraging on technology, customer service, price sensitivity and aggressive marketing. By committing to volumes of 50,000 cars per annum, it secured appropriate prices and quality from reliable and dedicated vendors. Unlike Ford, Hyundai invested right at the beginning, in a completely integrated facility which included engine machining, automated weld shop, captive foundry and heat treatment facility.

Ford entered the Indian market in 1995 as a joint venture with Mahindra, eventually rebranding as Ford India Limited in 1999. While making safety as its prerogative, Ford did not commit to high volumes from the beginning and could not compete on the pricing game or scale up its export volumes. This also shows that the Indian market is still in a nascent stage with the consumer leaning more towards feature-laden vehicles which may lead manufacturers to cut costs at the expense of safety and quality. So stringent safety norms are much needed to achieve parity across manufacturers.

The auto industry was already reeling with car sales dipping to a 20-year low between 2015-2020, further compounded by the pandemic. Slow economic growth, rising fuel costs, growing cost of ownership and regulatory norms are reasons impacting sales. High royalty payments by car manufacturers to their parent companies is a further drain. Despite this, the Indian market remains one of the few big auto markets and has seen many new players in the recent times including Kia Motors and MG Motors, each eyeing for a share in an already saturated, yet unsatisfied market. Demand projections have not been realised whereas competition has intensified, resulting in falling profitability.

If one looks at the past data, it is obvious that Ford was in the red for the past five years. Ford is not the first to exit Indian market because of falling profitability. General Motors, Fiat India Limited and Eicher Polaris, also could not survive the competitive landscape of the Indian market. Big players such as Daimler India Commercial Vehicles, backed by its parent company have survived despite persistent losses by aggressive sales and increase in market share.

Wanted: Policy support

The industry has been long demanding concrete policy measures from the government. This demand on the other hand also demonstrates the need for continued economic growth, job creation and a raise in income levels to sustain various sectors.

Industry veteran RC Bhargava, speaking at the SIAM’s 61st annual convention, said that the auto industry growth in India was driven by customer aspirations to own a car rather than policy planning. Recent developments and demand trends show that customer behaviour still continues to be a major influencer.

The auto industry wants to be in the driving seat of the economic engine leading India’s manufacturing aspirations contributing to employment, revenue and foreign exchange. In turn, it expects major policy measures to increase vehicle penetration.

However, with the threat of climate change, increasing urban congestion, sustainability and the push towards electric vehicles, the traditional auto industry is in a state of flux. Electric vehicles too face their share of issues including cost and supply chain hurdles.

In this fast-changing scenario, what is needed is a holistic vision and some far-reaching decisions from the policy makers chalking the road map for the overall auto industry and clarity on its role in the economy.

This must be framed within the context of the future of transportation, mobility and changing population needs in India. In the absence of this, the auto industry will continue to face the consequences of policy decisions and be driven by customer trends.

The writers are faculty members in the economics and operations management areas respectively at IFMR Graduate School of Business, Krea University, Sri City, AP

Published on September 19, 2021

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