All About Cars

The Budget 2008 has reduced the excise duty for small cars and two-wheelers from 16 to 12 per cent, so a Maruti-800 customer should benefit by around Rs 10,000, reasons Sanjay Nigam, Director-Automotive Business, Trilogy India, a US based company providing business solutions to auto OEMs.

“From the manufacturer’s point of view, it’s good news for Maruti, Tata and Hyundai and all those planning to launch small cars in the near future,” he adds in a recent e-mail interaction with Business Line.

“But the excise duty on bigger cars continues to be at 24 per cent, which will cause more disparity between the prices of small and big cars. The demand for big cars may get impacted in the short-term,” rues Sanjay.

“In the infrastructure sector, the Government has increased allocation for the National Highway Development Project (NHDP) to Rs 12,966 crores which will increase demand in the auto sector in medium to long term.”

Excerpts from the interview, in which Sanjay answers a few pointed questions about the forthcoming Nano, the one-lakh car from Tata.

What impact do you foresee of Nano on the two-wheeler and the passenger car segments, and as challenges to motorcycles and entry-level passenger cars in retaining their market share?

Entry of Nano has set a new benchmark in both price and size in the passenger car segment. It has opened up a huge market that was hitherto untapped. Its potential impact on the market can be judged by the recent proposals of competitors to come out with similar cars in the same segment.

While the price and fuel efficiency of Nano can have a competitive edge over the two-wheeler segment and entry-level passenger cars, its actual impact on their market share would have to be gauged taking into consideration the interplay of various macro factors.

Such as?

To begin with, while it will have an impact on the two-wheeler segment, to state that this will be significant enough to alter market share may be incorrect.

For instance, a sizeable number of two-wheeler users are youngsters whose purchase is guided by fuel efficiency, price, style, parking considerations, besides a host of other factors.

Replacing the two-wheeler with a Nano may not always be an attractive or a feasible option for this segment as they face a budget constraint, parking issues, the absence of style as in a fancy motorbike, the absence of power as in a motorbike of this price. Even the middle-aged group using a two-wheeler will factor in similar considerations, though to them, the style factor may not play a significant role.

As for entry-level passenger cars, or ‘A’ segment cars, they could be impacted to a certain extent, especially since Nano, besides its attractive features, is also positioned as an environment-friendly car at a more attractive price. But a larger impact is likely to be seen in the used car segment.

On the effect that the used car market has to get used to…

Nano’s impact on used cars is likely to be more pronounced in tier II and tier III cities. These cities are a potential market for used cars. Given that these cities are also a strong market for small cars, the availability of a brand new car at a price that could probably match a used car could prompt customers to pitch for a Nano in place of a second-hand car.

Besides, the client base here typically is price conscious, pays attention to factors such as fuel efficiency, which Nano can aptly satisfy. While these cities can form a potential market base for Nano, the sales could be at the cost of used cars. Given that the tier II and tier III cities are a major market for used cars, a fall in demand here could effect a fall in price of second-hand cars.

In the same vein, the availability of Nano could also prompt similar tilt in purchases in the tier I cities, in favour of Nano and against used cars. This in turn would again lead to a fall in the price of used cars in tier I cities. Such a fall in price of used cars, both in tier I cities as well as tier II and III could indirectly impact segment B and C cars.

Indirectly because, typically, the purchase of segment B and C cars is an upgrade, which means that the car currently in use would have to be disposed of, to make the new purchase. A fall in the price of used cars could act as a deterrent at least in the short run, for purchases in the B and C segments.

How will Nano impact after-sales services’ profitability of dealers and service centres?

Car sales yield very low margins, especially in the A segment. This is because of high showroom costs and high discounts offered. While Nano would face a similar challenge, yielding low margins, the sheer volume of sales may counter this, ensuring profitability. Besides, a major chunk of the profit for a dealer comes from after-sales service and body shop and hence it would pay a dealer to invest in the workshop.

However, given the expected volume of sales, innovation in dealing with sales and after-sales service is certainly called for. For instance, an option of having a central pool of inventory could be explored, from where the dealers can draw their stocks periodically. This would greatly reduce the burden of land cost to hold stocks for individual dealers. To handle the excessive rush and the resultant adverse impact on sales service on other car segments offered by the dealers, individual kiosks could be set up to exclusively cater to orders for Nano. The Internet too could be used to reduce the pressure on dealers.

As for customer satisfaction, different car segments call for different levels of customer satisfaction. Lower segment customers are typically less demanding in terms of customer-care expectation and thus, meeting this with a team of stretched customer-care officials may not be a major challenge.

As regards after-sales service, these centres need not necessarily be in the heart of the city but could be situated in the outskirts to cater exclusively for Nano. There could be an arrangement with a service centre within the city where the customer can leave his car for servicing. The actual servicing could happen in the centre that is outside the city. This would take care of the spiralling real estate prices within the CBD (central business district) and ensure profitability.

Do you see the absence of a backdoor, fuel-tank access inside the bonnet acting as deterrents?

The customer of an A segment car is essentially one who is guided by price, fuel efficiency and other related factors. He is not as discerning or as demanding as a customer in the higher segments. Hence, as long as the above criteria are met to his satisfaction, he is not unduly worried about factors such as the absence of a backdoor or fuel-tank access.

Will Nano’s slow speed be an edge over other cars?

This again will not be relevant, as the sale of a car is dependent on factors such as price, size, status factor, fuel efficiency, besides a number of other connected variants. Congestion on roads need not necessarily improve the sales of Nano.