Swamped by CBUs

Raghuvir Srinivasan

THE CONTRAST could not be more glaring. Even as one section of the auto industry boasting big names staggers from the impact of the demand recession, yet another one is busy introducing newer products into the market.

In the last couple of weeks, Ashok Leyland, Mahindra and Mahindra and Motor Industries Co (MICO) have all announced truncated operations following a sharp drop in offtake of their products. Maruti Udyog has resorted to a strategic ``maintenance shutdown'' to balance its production plan even as Tata Engineering is fighting with its back to the wall.

Bad scene? Well, not really if you look at the other side of the picture. Ford India has just announced plans to bring in the Mondeo, a model in the high-end luxury segment. Toyota Kirloskar Motor is giving final touches to its plans of bringing in the Camry and the Corolla. The Mahindras are toying with the idea of introducing the exclusive Lotus Elise, a car that is made to order, in the country. Honda has already initiated steps to bring in the Accord which is in the same class as the Mondeo and General Motors has signalled its intention to introduce the Opel Vectra in India. Hyundai Motors is well into its plan of importing the Sonata, another high-end model. Whew!

Anybody seeing only this side of the picture would be justified in assuming that everything is hunky-dory with the Indian automobile industry and market. Make no mistake. The picture is anything but pink for the auto industry. In fact, there are more shades of red. Witness Tata Engineering's historic Rs 500.34 crore loss in fiscal 2000-01 and a string of losses posted by some well-known component companies. Vehicle offtake shows no signs of improvement and the overall economic indicators are anything but encouraging. So what then is the big deal about all these car manufacturers introducing high-flying models into the Indian market?

It is much ado about nothing. Especially when you consider that all those models listed above and more, are competing for a piffling overall volume of 4,000-4,500 cars per annum. Again, it is not as if these high-end cars are going to be manufactured or even assembled in India. They are going to be imported as completely-built units (CBU) and there will be no value-addition within the country. Their introduction is certainly not going to pep up the market nor will it add to the business of component manufacturers. Individually, for every one of those companies entering this segment, the volumes are likely to be nothing more than a few hundred cars. This is one reason why these models are being imported as CBUs even though the import duty is over 100 per cent. In short, there may not be much money to be made from the CBU import business.

So why are the car companies then taking the trouble at all? They are essentially sowing their brand names in the segment which they think is going to be the one to watch out for in future. The appetite for luxury cars in India may be limited now but is expected to grow into ravenous proportions in the near future, according to some observers. This is a debatable proposition. The Indian passenger car market is maturing and volumes are now shifting gradually from the entry level Maruti 800 segment (`A' segment) into the next one which has models such as the Zen, Santro, Indica and Matiz (`B' segment). But this by no means suggests that the volumes will soon catch up with the luxury segment.

It is inconceivable that a country and market such as India's will shift to the luxury segment in the near future. Affluence levels are nowhere near where an average salaried person can think of investing in a car costing around Rs 15 lakhs. And there is nothing now to show that this is going to change in the near future. It is important that the average buyer is able to afford such a car if volumes are to come by. Thus, volumes may, at best, grow to around 25,000 cars in the next couple of years. Even that would be way below the level required to justify the manufacture of these luxury sedans in the country. But then, that seems to be the least of the worries for the big names as they vie with each other to sell the first CBU in the country.