Financial Daily from THE HINDU group of publications
Saturday, Dec 21, 2002
Financial Daily from THE HINDU group of publications Saturday, Dec 21, 2002 |
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Cars Industry & Economy - Cars A long, long way from the Contessa S. Muralidhar
Year 1970: Rajasthani industrialist, flustered and embarrassed after his Chevrolet Impala convertible stalled in the middle of his factory driveway, is goading his assistant to quickly crank up the car. Even as the engine is sputtering and coughing helplessly, other assistants are trying to throw over the tarpaulin cover, in a futile attempt at cooling down the tempers of the visiting officials of a potential foreign collaborator. The car itself, looking like a massive rectangular metal box scooped out in the middle, rivals in length the two caparisoned elephants that have been lined up along the driveway to welcome the Videsis.
The SLK's automatic transmission with Touchshift-electronically controlled 5-speed automatic transmission not only changes the gear for the driver, but also adapts itself to his temperament and driving style. The car also comes with `on-dash' and side impact airbags for added protection. The engine and exhaust systems of the car are continuously monitored by an onboard diagnostic system. Unruffled by the nearly Rs 50 lakh price tag, the dazzled young tycoon reaches into a Gucci briefcase and pulls out his cheque book... In many respects the Indian market for luxury passenger cars today represents the kind of transition that the examples above depict. From a market of scant choice and out-dated technology, the luxury car market now is a medley of some of the world's best in terms of design, technology and brand names. Companies such as Daimler Chrysler, Hyundai Motor, Toyota and General Motors have launched the very latest generation luxury models from their international portfolio of cars. With fully loaded trim levels at that. Clearly, this reflects the growing importance of the Indian market.
Historically speaking
Luxury cars were anathema for the Government till the turn of the millennium. An insulated passenger car industry and a pro-poor policy ensured that the country's elite had to be satisfied with Hindustan Motors' Contessa as their status symbol! Imports were regulated under the Quantitative Restrictions (QRs) regime and it was an impossibility to import cars for individuals. As the economy became more export driven and the Government's sops to the increasingly popular export oriented units (EOUs) started increasing, the centre decided to loosen the rules for import of cars by these organisations. After all, the EOUs were bringing in foreign exchange, a much sought after resource. The new rules for import of cars allowed super star trading houses and star trading houses (large EOUs based on turnover) to bring in cars, under the condition that the imported vehicles could not be sold or transferred for a fixed period of time. This was in addition to embassies and diplomatic corps, which could import cars for official use. These imports were channelled through official importing agents and companies, such as the erstwhile DCM Toyota (later Daewoo Motors India), which was the official importer of Toyota cars in the early 1990s. Many of these cars were in the top-end luxury segment and were sold at huge premiums upon the expiry of the stipulated period during which transfers were banned.
Opening up of QRs
The integration of the Indian economy on the lines of the Government's commitment to the WTO spelt the end of many non-compete, import unfriendly regulations. As part of the Government's liberalisation policy, the first to go was control over the domestic car industry. The deregulation of the industry led to a number of new players entering the country. Later, the centre's schedule of commitment to the WTO meant that the QRs on most items of import (except a few sensitive items in defence production and the life) had to be removed. Imported, fully built cars and passenger vehicles were part of the second tranche of QR removal. The removal of QRs also allowed companies to import the knocked down kits of luxury cars, to be later assembled in the country. Luxury cars by nature offer the manufacturer more margins per car, and this despite the higher costs involved in import duties etc. Under the circumstance, the attraction to import was understandable. The Government's WTO commitment to progressively reduce the rate of import duties applicable for cars, both in the completely built form and in the knocked down form, is likely to lead to an increase in imports. Currently, the total levies — import and countervailing duties and local taxes — applicable work out to an addition of about 130 per cent to the landed cost of a new imported vehicle. This is, of course, extremely high and such prohibitive taxation levels cannot be sustained beyond the next few years.
The import conundrum
Despite the severe imposition of duties and taxes, the import of luxury cars and multi-utility vehicles (MUVs) has gone up in the last one year and is set to increase further. Companies such as Daimler Chrysler, Hyundai and Honda are importing partially knocked down kits and assembling them locally to save on import duties. However, others such as Toyota and Mitsubishi are importing their top-end luxury vehicles like the Camry and Pajero for the Indian market. However, it is a fact that the small but niche top-end of the luxury car segment is indifferent to the cost of importing the vehicles. The lower entry-level luxury car segment populated by the Hyundai Sonata, the Honda Accord and the Ford Mondeo are more sensitive to pricing and consequently the higher duties from import of fully built cars are best avoided. Options in the luxury segment
The options available for the luxury car buyer today range from the stylish and yet affordable Hyundai Sonata at about Rs 14 lakh, to the extremely luxurious, top-of-the-line Mercedes Benz S-Class, which could set you back by a cool Rs 60 lakh. Recently, this segment has witnessed additions in the Toyota Camry and the Opel Vectra. While these are all cars that are retailed in India by companies that have their own subsidiaries or joint ventures, there are others such as Volkwagen, BMW and Volvo that are imported into the country by official agents appointed by the companies. The Volkswagen Golf, the BMW X5 and the Volvo S60 are popular imports. As in the US, where despite the `Ford Explorer - Firestone' episode, (when a massive number of vehicles had to be recalled because of defective tyres) the popularity of MUVs is increasing, even in the Indian luxury car segment, MUVs and sports utility vehicles are getting more popular. The BMW X5 launched last year was a top-end vehicle in this segment. There is a flood of more such vehicles expected to hit Indian roads next year.
Ownership experience
Ownership experience is everything in this segment and manufacturers are extremely aware of this aspect. Naturally, most luxury car makers have loyalty programmes and post-sales service features that are far superior to those offered to owners of lower priced cars. Manufacturers such as Mercedes Benz and General Motors also offer customers a whole line of branded accessories for embellishing their marques. In India, historically luxury cars are considered family heirloom. Mercedes Benz owners, most of them die-hard fans of the Merc brand, are particularly attached to their cars. They have formed an exclusive club to exchange notes and ownership experiences amongst the members.
Going forward
The country's luxury car market constitutes one per cent of the total passenger car and MUV market. The section of the population it targets is hence extremely limited. But that is hardly deterring more luxury car manufacturers from eyeing this market keenly. In the next two years, there are expected to be more luxury car brand launches than in any other sub-segment. The size of the market, as one of the manufacturers puts it, is deceptive, with the parallel black economy estimated to be a massive 50 per cent of the real economy. No wonder then that manufacturers are convinced that in the land of the Kohinoor, where even ascetic godmen and pro-poor politicians give in to the temptation of a Rolls Royce or a Mercedes, the allure of luxury cars will never wane.
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