Insight

India and China: Divergent paths for smallest cars

By Marvin Zhu and Ammar Master (China Daily)
Updated: 2010-09-20 07:46

Global behemoths have different demands for 'ultra low cost' vehicles

India's Tata Motors created history when it launched the Nano - the world's cheapest car - in March 2009.

Global vehicle manufacturers have since been scrambling to develop their own low-cost cars in an attempt to tap the strong growth potential in emerging markets including India and China.

The question is how will these efforts pay off, and how can they be applied to India and China?

The case to develop low-cost cars in India is definitely a very strong one. Indians are highly cost conscious, giving importance not only to the retail price of a car, but also to factors like fuel efficiency and running costs while making their purchase decisions.

The emergence of a large middle class, estimated at about 300 million, together with a young population with big aspirations, present an almost ideal customer base.

India's relatively low labor costs coupled with an improving supplier base allows manufacturers to reduce production costs for their models.

In addition, the government imposes lower excise duties on small cars in India. Vehicles with a length less than 4 meters and powered by 1.2-liter petrol or 1.5-liter diesel engines are subject to 10 percent excise duty, compared to 22 percent on other vehicles, which helps lower prices and promotes the sale of small cars.

India has been and will remain a small car market, given the increasing number of entry-level car buyers. This trend is being driven by higher incomes particularly in smaller cities.

The mini and subcompact vehicle segments today comprises about 65 percent of the total light vehicle market in India, and we believe this will continue to be the case in coming years. We project that combined sales of these two categories will be 997,000 units in 2010, increasing to 3.14 million units by 2017.

The top three models in minicar and subcompact segments in 2010 are expected to be the Maruti Suzuki Alto, Hyundai i10 and Tata Indica. The Nano is projected to hold the No 2 spot in 2011 after Tata ramps up production. By 2017, we think the top three models will be the Alto, Nano and Maruti Suzuki Wagon R.

The challenge for producers of low-priced cars in India will be to keep production costs low while meeting rising consumer requirements in safety, fuel efficiency, low operating costs and durability.

Rising incomes have improved affordability. However, consumers have also become more demanding. Vehicle buyers today want added safety and luxury features, but they want it at practically the same cost. Therefore, global automakers operating in India need to learn to meet these demands very quickly.

Case in China

The case in China appears to be radically different though.

Trying to replicate Tata's success with the Nano, the small Chinese carmaker Zotye launched the Jiangnan Alto model in August 2010. The minicar has become the cheapest model in China, priced from 18,800 yuan. Zotye expects to sell the Alto to rural customers since the model does not meet Euro IV emission standards mandatory in big cities.

Despite the Alto achieving the tag of "lowest priced car in China" it is just another ultra-low cost car. Models in this category have some common characteristics: ultra-low price under 40,000 yuan, availability with only very basic configuration, compact size and small engines up to 1 liter. Typical models include the Chery QQ, BYD F0, Chang'an Benben and Chevrolet Spark.

Small cars were particularly successful in the first two to three years of this decade when a car was a luxury for most people.

While most cars were priced at 150,000 yuan, the entry-level autos like the Suzuki Alto, Xiali and BYD Flyer did help a lot of families realize their dreams of owning a car.

In some large cities such as Chongqing, Tianjin and Xi'an, the market share of these small cars were even higher than the popular Volkswagen Santana, Jetta and Citroen Fukang.

But China's entry into the WTO in 2001 became the starting point for manufacturers to re-evaluate their China strategy. Market dynamics and structure soon began to change.

After 2001, competition intensified with the establishment of over 30 new carmakers and an influx of almost all major global component suppliers, which greatly lowered the production costs. Today there are over 400 passenger vehicle models on the Chinese market produced by more than 50 manufacturers. Vehicle prices have also been on the decline over the past five years.

As prices of other vehicles have dropped, ultra low cost cars are now struggling with their sales declining for three consecutive years from 2006 until 2009, when the overall market saw a revival in demand.

Among the dozens of new models being launched in China every year, there are only one or two vehicles that fit the ultra low cost category. Local carmakers that built their early success with cheap cars are now putting more resources into developing and producing larger vehicles.

Poor profit margins and sluggish demand for small cars are of course the main factors driving this shift. Another major reason is their intention to change the brand perception among Chinese customers.

Cheap cars had a reputation for poor build quality and low safety. To reduce costs, manufacturers chose to adopt outdated techniques from abroad, use the cheapest materials and components and remove as many features as possible. Now they are trying to shake free from that image.

Considering most Chinese consumers are still first-time buyers, demand for such cheap cars - particularly in rural areas - can still be expected.

But compared with cities, the road conditions in rural areas are usually poor and people's awareness of safety and compliance with traffic rules are weaker. So such cars still need to improve their quality and safety standards which are inadequate at present.

According to the National Bureau of Statistics, the annual income per capita of rural residents in China grew by 8 percent in 2008 and 8.5 percent in 2009.

More and more rural buyers are looking for cars in upper segments due to their larger space and better safety. We believe the market share of these cheap cars will continue to shrink in the future, unless a proper balance between cost, quality, performance and safety can be achieved.

The fate of low-priced cars in India and China are headed in different directions. While the cost-conscious Indian consumers will continue to drive up demand for low-priced models, the rising affluence of Chinese buyers will fuel the growth of bigger vehicles.

Manufacturers will have to adopt two very different strategies in these Asian behemoths.

The authors are senior market analysts at JD Power Asia Pacific Forecasting

India's Tata Nano (left) and the Chang'an Benben made in China are likely have very different stories in the years ahead. Provided to China Daily

(China Daily 09/20/2010 page19)