Indian_Small_Car_Market

Assignment 4-4: Country Analysis 3 MBA 750 Sanjay Arya Prof. Douglas Ruml December 17th, 2009 Volkswagen - Entry into the Indian Small Car Market Car-ownership is an emblem of economic progress in India and is very high on a wish list of consumers. The face of the Indian automobile market has changed tremendously following economic liberalization in 1991 and will change further with the introduction of Tata Nano. Rising incomes, better financing and improved roads are the combined drivers for strong growth of automotive sector in India. In the fiscal year 2006-07, the Indian passenger car market grew by 20 percent, making India one of the fastest growing passenger car markets in the world in absolute terms. It is expected that the Automobile Industry in India would be the 7th largest automobile market by the year 2016. Current market leader in Indian automotive industry: [pic] Analysts say domestic growth rates for small cars have been boosted by the government’s effort to tackle the fallout of the financial meltdown in the second half of 2008. As a result, taxes on small cars were cut to 8 per cent. Car ownership in the developing world shows immense potential for growth. A report prepared by Deloitte says there are 511 cars on the road for every 1,000 citizens in the UK, compared to 22 per 1,000 in China and just 11 for India. Analysts predict that the largest purchasing segment by 2020 will be first-time buyers. Volkswagen brand is associated with certain standards of safety, they are not meant to be used only for intra-city travel. Volkswagen recently rolled its first Indian made car the ‘Volkswagen Polo’ from its Pune in Maharashtra. The price of Polo is about Rs 6 lakhs which is about 5-6 times that of Tata Nano, depending on options. In order to compete with the low-cost car, Volkswagen-Suzuki will have to cut on every step in production without sacrificing the safety that the company is known for. Volkswagen's possible entry would mark the first real competition to the Nano, which will be the world's cheapest car on the road today. The modes of entry can be classified as equity and non-equity modes of entry depending on the commitment needed to setup operations in the foreign market. The equity mode of entry, like Joint-ventures or Acquisitions, requires a huge amount of resource commitment from the firm. Non-equity modes of entry, like Exporting and Contractual Agreements, require considerably lesser resource commitment from the firm. The equity and the non-equity modes also differ considerably on the risk, return, and control characteristics. Volkswagen is planning to enter into a long-term strategic partnership with Japan’s Suzuki. As part of the plan, Volkswagen is proposing to buy 19.9% of Suzuki's issued shares, while Suzuki intends to invest up to one half of the amount received from Volkswagen into shares of the German car maker. This partnership is a win-win for both Volkswagen and Suzuki. Volkswagen would have a solid supporting leg in India and Southeast Asia and Suzuki would have access to a variety of Volkswagen technology. The five competitive forces - threat of potential entrants, threat of substitute products, bargaining power of customers, bargaining power of suppliers, and rivalry among current competitors – suggests that competition in an industry goes well beyond the established players. These forces together determine the strength of competition in the industry and profitability. The competition in India’s automobile industry is from both domestic and foreign firms. Volkswagen’s focus should be on the elimination of waste at every step of the manufacturing process resulting in a slew of high quality, low cost cars. The company’s focus is not only to capture Indian market but also to capture other regions like Europe. Trend in Europe is also shifting towards compact and small cars due to rising petrol costs as well as concerns of climate change. Suzuki has the expertise to make small cars and Volkswagen has the expertise in environment friendly technology which is being used to build hybrid cars. Combining the two can reduce cost of making new cars considerably. Volkswagen has an advantage over the competition because of its partnership with Suzuki which holds approximately 50% of India’s passenger car market share. Volkswagen must make cars in India, which allows them to avoid large import taxes and keeps production cost competitive. The company’s two facilities in Aurangabad and Pune (upcoming) will be utilized to manufacture the car. Localizing the car to a large extent will help achieve a competitive price. The Pune facility has the capacity to produce 110,000 cars annually, is a key plank in Volkswagen’s India strategy. The facility has the capacity to ramp up to 160,000-180,000 units. Volkswagen has invested $850 million in the plant, its biggest investment so far in India. Even though the manufacturing plant is already set, in order to develop this new competitive model, both partners need expertise from the respective departments. Suzuki has the technical expertise in making small cars and Volkswagen can contribute its technical know-how towards higher end diesel engine. In order to compete in the lower-end market, the company will need to increase its production capacity in the current facility. This will require hiring at all levels, mostly local. Some technical consultants may also be needed from third country in order to facilitate the know-how and integration of the technologies from two companies. Rising oil price is one of the major concerns for Indian automobile industry. The rise in oil prices will impact the growth of global automotive industry. Unless the use of alternative fuels increases, it is very unlikely that the situation will change for the better. This necessarily means that more and more investments should be directed towards R&D, establishing methods to transform these results into more efficient products. This will also require thorough redesign of engines. The second major challenge is the availability of highly skilled human resource required for the auto industry. Auto industry, like many other industries is facing severe shortage of skilled technical as well as managerial resources. In India, many of the institutions used to provide training in automotive engineering through Internal Combustion Engineering (ICE) and Mechanical Engineering departments. However, the new trend of Information technology, electronics and communication technology has forced these institutions to close down ICE departments and reduce the number of Mechanical Engineering departments. Volkswagen will have to increase its distribution network in India and boost brand spend. The company currently has 22 dealership outlets across the country. The new low-cost automobile is meant to be for the lower middle class in India. The marketing plan should concentrate on promoting the clean environment and stress on the importance of safety over luxury. As the tables have turned in the economic downturn, it is becoming more popular to brag about how little you just spent on a new car as opposed to how preposterously expensive your new car is. The new small car from Volkswagen will be in the same league as Tata Nano. Pricing for the new product should be very close to the competition as well. A little higher price will be beneficial as it shows the superiority in brand but keep it in the same market as Nano. The company will need to keep close eye on the new entrants in the same market segment. Companies like General motors, Toyota, and Honda are also planning the same route to enter the low-cost small car market in India. The automobile sector in India was transformed as a result of the liberalization policies by the government since 1991 which included relaxation of the foreign exchange and equity regulations, reduction of tariffs on imports, and refining the banking policies. In 1996, Global automobile industry majors moved into the country after the auto industry opened to direct investment from foreign countries. Automobile industry in India also received a boost from rigorous government auto emission regulations over the past few years. This ensured that vehicles produced in India are consistent with the standards of the developed world. Conclusion With the introduction of Nano, Tata has challenged the global auto industry and has created an absolutely new segment with this car. In today’s global market, companies need to be very agile. They can no longer afford to dump a product in a market. India’s auto industry was among the first sectors to recover from the slump. Auto sales have surged 18 percent to 7.8 million in eight months from April to November. Sales for passenger vehicles have gone up 21percent to 1.2 million. There are lots of companies planning to enter the small (compact) car market in India. It is a very good time for Volkswagen, with added advantage of brand reputation and Suzuki with its market share in India, to introduce a competitive car for Nano. The same car can also be sold in other markets like Europe where the trend is moving towards small cars as well. After analyzing the current trend of Indian Economy and Automobile Industry we can say that being a developing economy there is lot of scope for growth and this industry still have to cross many levels so there is huge opportunities to invest in. References Embassy of India: Foreign Exchange Regulations. (2009). Retrieved December 17, 2009, from Embassy of India, Foreign Exchange Regulations: http://www.indianembassy.org/newsite//Doing_business_In_India/Foreign_Exchange_Regulations.asp Embassy of India: Taxation System. (2009). Retrieved December 17, 2009, from Embassy of India, Taxation System: http://www.indianembassy.org/newsite//Doing_business_In_India/Fiscal_Taxation_system_in_India.asp Indian Economy 2009. (2009). Retrieved December 17, 2009, from Indian Economy 2009: http://www.economicshelp.org/blog/economics/indian-economy-2009/ India FDI Policy and Procedure. (2009). Retrieved December 17, 2009, from Indian Embassy: http://www.indianembassy.org/newsite//Doing_business_In_India/FDI_Policy_Procedures.asp Buckley, P.J. and Casson, M. (1998), “Analyzing foreign market entry strategies: extending the internalization approach”, Journal of International Business Studies, Vol. 29 pp. 539-562. Okoroafo, S. C., (1991). “Modes of Entering Foreign Markets” Industrial Marketing Management, 20, 341-346. Volkswagen India (2009). Retrieved December 17, 2009, from http://www.volkswagen.co.in/in/en/about_volkswagen0/volkswagen_india.html Appendix A | |Positive |Negative | |Internal |Strengths |Weaknesses | | |India’s skills have been on the “soft” side like service |Their attitude of not questioning a tradition is their biggest | | |and knowledge management. This is their natural strength. |weakness. There can be no innovation unless people question | | |Business processes outsourcing, once the processes are |traditions or refuse to believe blindly. A typical Indian | | |established, suits Indians a lot. This alignment of the |upbringing doesn’t encourage questioning authority and the | | |nature of work with their natural temperament is their |existing conditions. | | |primary strength. |High power costs and long export lead times are eroding India’s | | |Raw material - India has high self sufficiency for raw |export competitiveness. | | |material. India’s cotton crop is the third largest in the |Less attention on man power training. | | |world and they have the fourth-largest reserves in the |Poor quality standards. | | |world of coal. |Unfavorable labor Laws. | | |Cheap labor and strong entrepreneurial skills. | | |External |Opportunities |Threats | | |They are a young nation – more than 65% of Indian |Their biggest threat is that they may fail to move up the value | | |population is under thirty. This is a huge opportunity. |chain by the time the cost arbitrage disappears. Instead of just| | |More than 650 million people available as resource pool for|doing the assigned job, employees need a deeper understanding of| | |industries. No nation, other than China, has this |the nature of business and come up with path breaking | | |advantage. |innovations. Indian companies need to become more of a partner | | |India has the opportunity to increase its UVR’s (Unit Value|rather than just a replaceable service provider. | | |Realization) through moving up the value chain by producing|When India opens its protected domestic market for foreign | | |value added products and by producing more and more |players the domestic market may suffer. | | |technologically superior products. |Formation of trading blocks like NAFTA, SAPTA, etc; has resulted| | |Market access through bilateral negotiation – The trade is |in a change in the world trade scenario. Existence of bilateral | | |growing between regional trade blocs due to bilateral |agreements would result in significant disadvantage for Indian | | |agreements between participating countries. |exports. | Appendix B Legal Analysis: • Liberal and transparent foreign law as it relates to foreign direct investment. • 100% foreign direct investment is allowed. • Economy is progressively liberal and deregulated. • Few licenses required, even relative to pollution control. • Very positive and accommodating foreign law as it relates to foreign business investment. • Tax system recently reformed. • Labor unions are very hostile, but not protective of most of the Indian population as the vast majority work in the informal sector. • Intellectual property rights protections in place. • Product liability protection very limited for consumers, favors business. • Formal dispute resolution process through the court system. Appendix C Financial Forces Analysis: • Freely convertible rupee. • Easily exchanged profits, dividends, and investments. • Customs duty and tariff laws in place. • Inflation on the decline. • Trade deficit as it relates to balance of payments. Appendix D Labor Analysis: • Two distinct sectors of employment: formal and informal. • Vast majority of workers are in the informal sector and are not protected by labor laws. • Largest population of illiterate adults in the world. • Massive shortage of educational facilities. • Massive shortage of safe drinking water. • Massive shortage of health care facilities. • Large population of highly skilled work force in the areas of Information Technology and Engineering. Appendix E | |Positive |Negative | |Internal |Strengths |Weaknesses | | |India’s skills have been on the “soft” side like service |Their attitude of not questioning a tradition is their biggest | | |and knowledge management. This is their natural strength. |weakness. There can be no innovation unless people question | | |Business processes outsourcing, once the processes are |traditions or refuse to believe blindly. A typical Indian | | |established, suits Indians a lot. This alignment of the |upbringing doesn’t encourage questioning authority and the | | |nature of work with their natural temperament is their |existing conditions. | | |primary strength. |High power costs and long export lead times are eroding India’s | | |Raw material - India has high self sufficiency for raw |export competitiveness. | | |material. India’s cotton crop is the third largest in the |Less attention on man power training. | | |world and they have the fourth-largest reserves in the |Poor quality standards. | | |world of coal. |Unfavorable labor Laws. | | |Cheap labor and strong entrepreneurial skills. |Limited product liability. | | |Liberal foreign law. |Highly illiterate population. | | |Deregulated economy favoring business. |Vast majority of workers employed in the informal sector. | | |Recent tax reform increasing fairness and simplicity of |Massive shortage of educational facilities, safe drinking water,| | |enforcement. |and health care facilities. | | |Intellectual property rights protection laws. | | | |Well-established and independent judiciary system. | | | |Limited product liability favoring business. | | | |Strong economic indicators. | | |External |Opportunities |Threats | | |They are a young nation – more than 65% of Indian |Their biggest threat is that they may fail to move up the value | | |population is under thirty. This is a huge opportunity. |chain by the time the cost arbitrage disappears. Instead of just| | |More than 650 million people available as resource pool for|doing the assigned job, employees need a deeper understanding of| | |industries. No nation, other than China, has this |the nature of business and come up with path breaking | | |advantage. |innovations. Indian companies need to become more of a partner | | |India has the opportunity to increase its UVR’s (Unit Value|rather than just a replaceable service provider. | | |Realization) through moving up the value chain by producing|When India opens its protected domestic market for foreign | | |value added products and by producing more and more |players the domestic market may suffer. | | |technologically superior products. |Formation of trading blocks like NAFTA, SAPTA, etc; has resulted| | |Market access through bilateral negotiation – The trade is |in a change in the world trade scenario. Existence of bilateral | | |growing between regional trade blocs due to bilateral |agreements would result in significant disadvantage for Indian | | |agreements between participating countries. |exports. | | |Labor law reform opportunities to make the system less | | | |hostile and more favorable for business. | | | |Increase employment in the formal sector. | | | |Increase educational opportunities for all of the Indian | | | |population. | | Executive Summary, India India is a country rich with opportunity for foreign investment. India’s foreign direct investment law is favorable and transparent for business (India FDI Policy and Procedure, 2009). The Indian economy is unregulated, progressive, and favors business (India FDI Policy and Procedure, 2009). The tax system in India has recently undergone reforms which also favor business. These reforms have broadened the tax base, lowered marginal tax rates, reduced rate differentiation, and simplified the tax structure (Rao, 2005). Unfortunately, labor laws in India are very hostile and account for one of the main reasons that India does not have a stronger manufacturing base despite an abundance of unskilled labor (Ashan & Pages, 2009). Interestingly, because of the structure of formal versus informal labor sectors, most Indian’s are not protected by these labor laws because they are employed in the informal sector (Ashan & Pages, 2009). There is a limited amount of product liability in India largely because of a strong welfare state support for persons who are injured by defective products (Kellam & Nottage, 2008). In addition, there is little harmony between India and other Asia-Pacific product liability regimes (Kellam & Nottage, 2008). India’s judicial system is well-established and independent and follows the three tier system of District, State, and Supreme Courts (Embassy of India: Dispute Resolution, 2009). Many proceedings relative to business are resolved through civil suits (Embassy of India: Dispute Resolution, 2009). Exchange controls are in place in order to maintain exchange rate stability. It is very easy for businesses to exchange profits earned, dividends, and proceeds from the sale of investments in India (Embassy of India: Foreign Exchange Regulations, 2009). As a result, foreign firms in India have grown substantially in recent years from $155 million to over $3.7 billion (Majumdar, 2008). Customs duties and tariff laws are in place to prevent illegal imports and exports of goods typical of other emerging economies (India Finance and Investment Guide: Customs, 2009). Inflation peaked in August of 2008 because of rapid growth and rising oil prices, but is not expected to continue because of a recent fall in oil prices and higher interest rates (Indian Economy 2009, 2009). India is currently in a trade deficit on a balance of payments basis (Indian Economy 2009, 2009). Labor in India is broken into the formal and informal sectors with the vast majority of workers working in the informal sector (Bhowmik, 2009). Workers in this sector do not enjoy same the labor protections as those in the informal sector do (Bhowmik, 2009). Despite a large population of illiterate adults, India has a very strong technical base in its population specifically in the Information Technology and Engineering fields (Procter & Gamble, 2009).