Little boxes on the hillside, Little boxes made of ticky tacky
Little boxes on the hillside, little boxes all the same
There's a green one and a pink one and a blue one and a yellow one
And they're all made out of ticky tacky and they all look just the same.
…a song by Malvina Reynolds – looks like I am a big fan of Malvina Reynolds, right?
Well, that is however far from the reality. I have known ‘Reynolds’ as a pen brand, I have vague memories of ‘Reynolds number’ from my CDC classes, but Malvina Reynolds... I had little clue about, till I ‘googled’ for ‘little boxes lyrics’.
Okay, with a rather complicated, convoluted and nonsensical introduction to this post, let me jump to the topic directly. This post is inspired by what I would call as the advertisement of the year (in my books, based on sample set of very few advertisements that I have seen in the recent past. I see very little of TV barring cricket matches!). As you would have guessed by now, we are talking about ‘Maruti Zen Estilo’ advertisement. Two parts to this post flowing out from the title – one being Maruti Sukuki and its latest offering Zen Estilo and the other being an outlook to the exciting times awaiting the Indian small car industry – little boxes on the hillside, little boxes made of ticky tacky…
Revival of Maruti’s fortunes
Zen was first launched in India in mid 1990s. I have personally never been a Zen fan – to me, it has always been an over-priced car. Yes, it had the engine power, sophistication and smoothness, yes, it had a bit more of space than a 800, it did look a bit better than a boxy 800, but all factors combined, in my books, Zen was nowhere close to being worth the price tag attached. However, the new Zen Estilo seems different – the styling and designing being the most significant changes.
Within 10 days of launch, the tall boy design had attracted 10,000 bookings and this figure must have gone up substantially since then. It is fairly well positioned with the VX version being close to 4.1 Lakhs on-road Chennai. I didn’t get a chance to take a test drive, so will reserve my comments till I get an opportunity to get behind the wheels, but it does look like a car that’s going to sell a lot.
Let’s zoom-out the camera and shift our focus to Maruti as a company now – with the controversy surrounding the ownership structure behind, Maruti has looked a totally different company, introducing new products and aggressively increasing its capacity in a bid to fight back its decreasing market share. 2006 was characterized by Alto becoming the largest selling car in India, very successful introduction of Swift, a new look lower priced Esteem and then the promising launch of Zen Estilo. Interestingly, Maruti Engineers were involved with Suzuki’s global team in designing Swift which has been a huge success globally. Furthermore, Estilo is almost a 100% Maruti product, with engineers in India renovating the model with very little support from the parent company. It does look like Maruti has started to stamp its authority with these significant developments and I will not be too surprised if Maruti would become Suzuki’s biggest plant, overtaking capacity in Japan, in the early part of next decade. Currently, Maruti has an installed capacity of close to 0.6 million, while Suzuki globally is close to 2.2 millon mark. Maruti accounts for ~25% of global Suzuki sales and this figure is bound to go up. In comparison, Hyundai India has a capacity 0.3 million, soon to be expanded to 0.6 million.
Small Car Industry
The story of Indian small car industry dates back to the time when Maruti 800 was first introduced. Since then, this segment (industry definition being category A and B cars) has grown to become the largest segment in India, while globally Category C cars lead the way (Accent, Esteem, Ikon, Indigo, etc). While all through, new models have been introduced, old ones upgraded, the industry in my view has been through two critical phases and the third one is just around the corner:
- Early 1980s: Introduction of Maruti 800: A fuel efficient, reliable new product with low cost of ownership and modern features – it was surely a big jump from Ambassadors and Fiats that Indian market had then
- 1998: For most part of 1990s, the small car industry developed and reached scale volumes, a few new products were introduced (including Zen), but it was all much the same till 1998 when Santro, Matiz and Indica hit the road (these cars really did hit the road running)! It created a totally different segment, providing customers with all the features of mid-size cars in a fuel efficient, compact car. In years to follow, Category B became the largest segment with Santro and Indica emerging as the winners.
- 2008 and beyond: In about a year and a half, the industry would once again go through a dramatic change. While the previous change was all about offering an enhanced product, this is going to be pure scale game. Yes, I am talking about the Tata 1 Lakh car!
As of now, Maruti 800 is probably the cheapest car in the world. Tata Motors, with reasonable auto design experience and know-how, is trying to beat that by driving the cost down further. I have followed the development of this car closely both from technical and business perspective over the last couple of years. When Tata Motors first came up with the idea of 1 lakh car, my reaction was “wow, wouldn’t that sell like crazy?” Since then, like everyone else, I have had doubts about the success of this ambitious project. It is difficult to get the pure manufacturing variable cost of a car to under a Lakh. Add to it, the amortization of fixed costs, the margin for economic rate of return, taxes at various stages, dealer margin and the puzzle does get challenging.
For all I have read about this project, Tata One-Lakh Car would in all probability have the following features:
- A bit smaller than Indica, though big enough to seat 4-5
- 30 bhp, 700cc engine – probably 5-10 bhp lesser than ideal
- Would meet safety and emission standards
- Design would in all probability be a bit sleek and not too boxy
- Automatic transmission with engine at the rear
- Basic model would roll-out without doors
On a standalone basis, looks reasonable, rather attractive for the magic price tag of Rs One Lakh. But let’s consider the choices that consumers would have to determine the success of this project:
- Maruti 800 sells at Rs. 2 Lakhs, but apparently, the cost of production is much lower than the final price (achieved due to scale and old fully depreciated dies). Maruti could easily slip the price tag down to ~1.5 Lakh. Given this likely scenario, Tata 1 Lakh car would need to match Maruti 800 as a product to have any chance of getting to the volumes that they desire.
- The biggest challenge would be the 2nd hand market - to beat a 3 year old Maruti 800, a 4 year old Alto (now that’s not easy) and a 8 year old Santro
- The car might sell, could do really well, but for Tata to make money on this project, the annual sales need to touch close to a million. That’s 3-4 times the market currently occupied by 800 and Alto.
So, where is this battle heading? Can Tata Motors repeat the success that they have had with Indica and other models or is this project a little too ambitious? Although I have little data and knowledge to back my claims, here is my best guess to the final outcome of this project:
- The basic version would cost ~1.2 lakhs. This version would be a complete car, however without proper doors. Tata motors needs to be creative with the door part. The minimum expectation would be to have very basic plastic doors instead of an open air compartment. I would hate to see a 4 wheel auto rickshaw as the basic version
- However, for most practical purposes, the much awaited car would cost ~1.4-1.5 lakhs with proper doors. I think it would look a lot better than a Maruti 800 and with a 660 cc engine, should have a fuel economy of ~25-30 km per litre
- Tata Motors needs to be clever with positioning of the car. The basic model is a must to get people interested. Perhaps, all advertising campaigns should revolve around the basic model – the true one Lakh car (in 2003 rupees, accounting for inflation) trying to fulfill the aspirations of millions!
- Once the customers walk in to the show room, show them the benefits of buying a complete car priced at 1.4 Lakhs. What otherwise looks like a difference of INR 30 K, becomes much less significant on a per month EMI basis. People wouldn’t mind paying extra Rs 500-800 a month for safety, comfort and the feel of owning a full-fledged car!
- Will Tata sell a million units a year? I can’t answer that. However, I wouldn’t bet my money on anything more than 5 Lakh units in the first few years. At some stage infrastructure constraints would come into play. Can our cities take the extra traffic?
Well, sounds like really exciting times at Tata Motors. Let’s wait and see where this phase of auto industry leads us to. In the meanwhile, I would go back to the song I started the post with…
“Little boxes on the hillside, Little boxes made of ticky tacky…”
… as it looks for now, little boxes could well be eventually made of ticky tacky to further drive down cost!
