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Final Lnoppen Auto Summit White Paper PDF
Final Lnoppen Auto Summit White Paper PDF
Summit 2015
Indian economy, buoyed by the promise of good governance and a stable government, is poised to to
have a healthy growth in the next 3-5 years. Automotive industry, being one of the main pillars in the
growth of global economy, also is a growth driver in the emerging markets and the developed
economies alike.
For large part of post-independence era the agriculture sector was considered to be the major growth
driver in the Indian economy and the automotive industry restricted to produce and sell only limited
number of vehicles in a year. However, the situation changed post 1991, when the doors of the Indian
economy where opened for the world to look into India, set-up their shops and manufacturing units.
This white paper provides a perspective about the current trends in the passenger vehicle industry
and focuses on aspects of right pricing of the product. It also provides initial ideas for right pricing that
does not require the profitability to be sacrificed.
If there had been only bullock carts and only boats in 21st century for transporting goods and
commuting people. Would it be possible for us to get one-day delivery of our purchases with those
means of transportation? The e-commerce industry is flourishing because of immediate availability of
material as and where required by the consumers- thanks to developments in automobile industry.
Agriculture and horticulture industry is also flourishing because of timely availability of raw material
and finished goods being transported by vehicles. Hence, in order to develop the economy, it is
necessity to keep the wheel moving in forward direction.
The Indian automotive industry accounts for 7 percent of total GDP in India, along with 4% of export
and roughly 4% of FDI. Indian automotive industry employs 2.2 million direct and another 18 million
2
indirect labors. The Automobile Mission Plan (AMP 2006-2016), states its vision for India as “To
emerge as the destination of choice in the world for design and manufacture of automobile and auto
components with output reaching a level of $145 billion accounting for more than 10% of GDP and
providing additional employment for 25 million people by 2016”. Though there has been a satisfactory
growth in the past decade, but the overall Automobile Mission plan target is unlikely to be achieved.
The Indian Automotive industry is classified into segments as:
Passenger Vehicle comprises 14% of the overall automobile market domestically that has been
dominated by the two wheeler segment. There are more than 35 automobile manufacturers in India,
providing more than 100+ models to the society. Below illustration indicates the share of each in the
Indian Automotive market.
14
3 Passener vehicle
3
Commercial Vehicle
Three Wheeler
Two Wheeler
80
(*Source:SIAM)
The passenger vehicle segment was slow moving and has actually registered de-growth in last
financial year3. However, the industry is still hopeful of clocking highest ever growth in current year.
SIAM estimates the sales of passenger Vehicle to be “3X” by end of current decade.
The double digit growth from late last decade has drastically reduced to single digit growth, while in
passenger vehicle and commercial vehicle segment there has been de-growth in last fiscal. Below
illustration indicates movement of Passenger Vehicle segment compared to the automobile Industry in
past few years.
According to the latest figures from SIAM, passenger car sales fell 8.16% from a year earlier to
142,849 units in November 2014, The decline was third time in last four months, and was mainly
attributed to high prices of fuels, higher interest rate of borrowing and slow economy growth.
Changing trends
Over the years, there has been change in trends of the vehicles in passenger vehicle segments.
Years ago, Van was considered to be utility vehicle, with Matador as the common passenger vehicle
carrier within the city limit. The trends is changing, and now, utility vehicles are considered to be as
effective passenger carrier as well as good carrier for inter and intra city. Apart from this, there has
been change in version of the vehicle based on fuel requirement as well. The petrol version was
considered to be most selling versions, due to high price difference between petrol and diesel, though
this changed in recent past with diesel vehicles leading the demand in India. The situation again
changed due to diesel de-regulation coming into picture and gap between price of petrol and diesel
reducing.
Indian automotive industry did enter the micro passenger vehicle segment with Tata Nano, the sole
contender in the category but the segment has not registered promising growth. The production plant
of the same is also widely reported to be under-utilized.
The Indian passenger vehicle industry currently faces many challenges, such as, underutilization of
the assets, stringent safety norms, high piling of inventory at warehouses and depots etc. In India, the
installed production capacity of passenger vehicle segment is close to 5 million units a year, while the
production for the last year 2013-14 was 3.1 million units, indicating only 60 % utilization of the
capacity [3]. The year 2013-14 thus ended with the minimum utilization in the recent history of India’s
passenger vehicle segment. Industry analyst reports this to be worse than the 2008-09 utilization.
In the recent past, there has been slow action on the green-field projects also, with only one
Japanese automobile manufacturer came up with new plant. Few other OEM’s focused on expansion
drive through brownfield projects at existing facility. This has been mainly to keep themselves future
ready for the new models launch in coming years and accommodating any surge in demand for new
models and running models.
The revenue generation and profitability are the key metrics to measure the growth of the industry and
the segment in particular. This is in direct relation to the sales volume of the company. However, with
the huge investment being made in new product developments, growing sales and service networks
etc, there will be pressure on the industry’s profitability, and is unlikely to see any improvement in near
term. Other prominent aspects which will mount pressure on industry’s profitability will be:
In recent past, Indian automobile industry has seen discount led sales with almost all the major OEM’s
offering products at cash discounts and/or additional benefits. Take as an example, many OEM
offered discount of10-12% of the Vehicle ex-showroom prices. Gone are the days, when block-buster
models were having long waiting, almost close to 2~3 months. Most are now readily available at the
sales outlet, with discounts. Many others are offering benefits, including free insurance. These
definitely add to sales volume, indicating that there has to be certain barrier for pricing of the models
in Indian Automotive market. The discount led sales gives rises to cascading effect in price reduction
through discounts, which is very detrimental to the organization in long run.
Below Illustration indicates on discount led pricing by any company impacting pricing decision of
competitors and entering a vicious circle of price war.
Other
Company A
companies
reduces price
reduces their
(Discounts)
prices
Strategize
other Increases
companies Sales of
also to reduce Company A
price
Company B
Increases
also reduces
sales of
their prices
Company B
(discount)
But are we concerned only with the utilization or the pricing of the products in the segment? There is a
major cause of concern and that is the “Safety”, when it comes to the consumers perspectives. Do
vehicle in India comply with the safety norms globally and to the Indian standards? When it comes to
the luxury segment, there are safety features added to the vehicles like ABS, Airbags etc., while they
are still optional for the lower versions of the vehicle.
Last year Global NCAP (Global New Car assessment program- an umbrella organization for
promotion of public safety), had carried out the first round of India tests, where many of the cars
manufactured and available for sale in India had been crashed, and hence failed in the necessary
safety norms. None of the cars had passed the test due to a lack of airbags as standard, with the
smaller cars faring poorly on build quality too. Recent news released by Global NCAP again
highlighted this same point with In one of the case, car's body shell disintegrated severely during test.
Additionally, lack of airbags further compounded the potential injuries. The driver and passenger
dummies sustained fatal injuries to the head, torso and legs.
The discount led sales do increases sales in the short term, but is neither sustainable nor scalable.
This has also increasing risk on future profitability of the organization. The government intention of
reducing the excise duty pushed the problem ahead, but did not solve the problem.
A majority in the Indian industry consider price as a Given high pricing is inevitable the other barrier for
major factor impacting growth in the market. Many consumption needs to be addressed, which are:
industries managed to have successful or near
a) Skill required for using product or service.
successful cost reduction campaign of running
products, thus achieving price target through b) Access to service or product
common technique. This strategy works well in Red
Ocean, which are mainly on exploring competitive c) Time taken from story board to product realization
advantages with price reduction.
This is in general for all the products or service where
However, there is and there will be vast opportunity there is healthy competition. Airline industry, which
in Blue Ocean, which are still to be explored. The has been flourishing in European and American sub-
basic principle of Blue Ocean is all about exploring continent, has been stagnant in Indian sub-continent,
unknown territory and identifying the needs at lowest primarily due to price sensitivity of the consumers in
possible cost. Pricing is determined based on lowest this area. Similarly, due to lack of skill of the
cost which can be derived. This changes the overall demography, there is limited access to Information
equation in providing service and products from, Technology revolution, which revolutionized entire
world. Recent Online sales and discounts has
Profit = Price - Cost pushed sales of consumer durables and FMCG
products, but has been restricted to only Tier-1 and
to
Tier -2 cities, due to accessibility of the demography
Price = Cost + Profit. in rural India to online retailing revolution, indicating
price barrier for the consumptions, but also indicating,
In the Automobile sector also, there is enormous that there are still other barrier prevailing like
opportunity for improvement. Again with the new accessibility.
stringent safety norms coming into force from
October 2017, just 2 and half years remaining, there is urgent need to start working on this front, from
the product design and manufacturing perspectives. The product life cycle has to be reduced
drastically to make vehicle compatible for the standards and that too at the existing price, which are
still considered to be on higher side in the price sensitive market. Here is an urgent need to stand in
the market by balancing the safety norms with the pricing.
In the foreseeable future, only those organizations that successfully compete in a dynamic eco-
system will be in existence. Right Pricing is the key to beat the competition and the 3 prominent
features, which constitute the pricing strategy of the product and service, are as follows:
Compettior
price tear
down
The Right
The Right
Business
solution
Model
Right
Price
This is the most general approach in pricing the product. It is required to identify customer’s
requirement and Job need to be done. This helps in identifying under-served and un-met
opportunities. The approach requires further screening of ideas generated and one of the relevant
approaches would be through R-W-W analysis, as illustrated below.
Is it really
Can we
Is it Real? worth
Win?
doing?
The R-W-W screen is a simple but powerful tool built on a series of questions about
The R-W-W tool can be used to identify and help fix problems that are miring an opportunity, to
contain risk, and to expose problems that can’t be fixed.
At the product development stage, comparison is generally drawn between different products under
same category from different manufacturers and based on the comparison and requirement from the
customer, the specification of the product is defined. The costing of the product will typically be based
on the specifications of the products.
Above illustration (only for indication) highlights tear down approach where model “Alpha” from
“Company A” is compared with similar models from 3 different competitors, across certain required
features as 1 to 7. Features 5 and Feature 6 are identified as opportunity area where “Alpha” can do
further analysis to price it less against their competitors. Based on the initial findings, Company A can
look into the Job-to-be-done objective and further look into re-defining the scope for customer
expectations, to reduce the cost of manufacturing and /or overheads.
The next strategic step is to identify opportunity for growth in a related market. There are many
alternate ways to identify the Blue Ocean- which has limitless opportunity. The relationship for the
price changes here with new business ideas, where Price becoming the function of cost and profit
required. Hence, this new unexplored ideas open the windows for product or services which should
have less cost. The added profit margin will decide over the price of the product or services.
Following illustration depicts the alternate paths which can be thought of and can be considered to re-
define business model.
Alternate
industries
Chain of
Time
buyers
New
Business
ideas
Functional Strategic
and group
emotional within the
appeals industries
Compliem-
entary
product /
services
Execution
Business Model
•Implement Initiatives
•What we do for whom?
•Monitor and Drive How do we do it?
Achievements
•How we finance it?
Perfect Match
Big Questions
•Which Strategy is
guided by our vision? •Vision, Mission & Values
•What is our desire? •Opportunities
•Challenges
We have two-wheelers as the individually owned vehicle and most cost effective solution intra city
solution for commuting. Another thought of expanding this to other boundaries of renting the same to
the individuals or making business model which works on rent and use basis. This may be difficult for
individuals to start such operation, but may be easy for the organization which manufacturers this
because of the large inventory at warehouses and depots.
Below illustration indicates about various aspects, which are to be considered for Business Model
Innovation. It starts from understanding customer’s requirement and adding more value to customer’s
requirement, by adding complimentary offering. Its overall focus is on redesigning of revenue
generation streams for customer offering. Another focus area in the model are Brand strategy,
resource optimization and value creation partners which are critical for cost structuring- important for
business to deliver value and sustain business model.
The business innovation model is beyond product innovation and has focus on overall value stream,
including finance as well. Below illustration indicate features which are part of value chain in business
model and their importance to the business. Organizations that looks beyond product innovation and
continuously work on business model will be far ahead than the competitors in the future.
There are many examples from various industry sectors for Business model innovations and resulting
in excelling in the segment. Prominent among them are
The business innovation model can strengthen the organization by focusing on more streams for
revenue generation and cost structuring. This overall approach on Business innovation prepares the
organization ready for the future and leads the segment.
Conclusion
For the Passenger Vehicle industry, developing new ways to meet the consumer need is the way
forward, to cease dependency on volatility in the industry. The right solution and right business model
form the keys for right pricing of the product. Organizations need to start focusing beyond product
innovation, on business model innovation. This could be brought about even through a cross industry
synergy, where the challenges of one industry could be the core strength of the other. As organization
starts focusing towards the business innovation with recommended frameworks and approach, the
future will see more development in the entire value chain, bringing more value proposition to the end-
users, and growth of the organization.
Breakthrough Management Group International (BMGI), is a global consulting firm with a strong
focus on delivering results and partners with organizations in various stages of their business life
cycle to transform their business performance. BMGI enables businesses drive growth and improve
profitability. Headquartered in the US, BMGI has developed a loyal clientele that today exceeds 200
active clients. BMGI has delivered cumulative benefits to its clients worth several billion dollars with an
ROI of 5:1 to 20:1.
BMGIs services to enable business success includes strategy planning and deployment, Innovation,
Problem Solving (Lean Six Sigma) and Business Transformation.
In India, BMGI is located in Mumbai. BMGI clients are leading Fortune 1000 Global companies and
leading Indian companies from diverse industries such as financial services, IT/ITES, airlines,
chemicals, FMCG, discrete manufacturing, telecommunications, petrochemical, textiles,
biotechnology, healthcare & energy. Few of the major BMGI global clients are Hitachi, Siemens,
Philips, Unilever, DeBeers, Avis Budget Group, Grameenphone, TNT Express, Brandix, Hulamin and
General Dynamics. Indian clients include ITC, Reliance Industries, Vodafone, HDFC Bank,
ThyssenKrupp Electrical Steel, Arvind, ICICI Bank, Yes Bank, Motilal Oswal, Asian Paints, Tata
Chemicals, Sudarshan Chemicals, Cognizant and Accenture.
BMGI is known to be one of the most effective thought leaders in the Innovation, Enterprise Process
Management, Lean and Six Sigma space and has gained world-wide attention through its
international bestselling books such as The Innovators Toolkit, Insourcing Innovation, Design for Lean
Six Sigma, A team leader guide to Lean Kaizen Events and many more.
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