Distribution channel of maruti suzuki

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MARUTI SUZUKI INDIA: DEFENDING MARKET LEADERSHIP IN THE A-SEGMENT Jaydeep Mukherjee, Gaurav Mathur and Nikhil Dhar wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-12-17

Maruti Suzuki India Ltd. (MSIL), a subsidiary of Suzuki Motor Corporation Japan, had dominated the Indian automotive industry with an unchallenged leadership position in the “A-segment” since its inception in 1983. The Indian car market was normally divided into four product categories: hatch, sedan, sport utility vehicle (SUV)/multi- utility vehicle (MUV) and van. The hatch segment could be further divided into entry-hatch, mid-size-hatch and premium-hatch segments. The overall hatch segment was known as the A-segment (see Exhibit 1). Growth of the Indian car market was driven primarily by growth in this segment. From 2008 to 2013, MSIL’s competition had made inroads in the A-segment with cars like the Hyundai Eon, the Hyundai i10, the Tata Nano, the General Motors Beat and the Honda Brio. During this period, MSIL’s A-segment market share declined from 61 per cent to 49 per cent. Industry sources estimated that the Indian car market would grow to annual sales of 4.7 million units — and the A-segment to 2.4 million units — by 2017/18. A continued drop in market share in the A-segment could jeopardize MSIL’s competitive advantage in the Indian car market. The company needed to reassess its strategy to sustain its market position (see Exhibit 2). Among other initiatives planned in March 2013, the MSIL board had sought a product roadmap to sustain its dominance in the A-segment. Typically, new product development and introduction required four to five years to design, develop, test and produce with a budgeted spend of approximately ₹6 billion,1 apart from associated opportunity costs; hence, it was an important activity for MSIL. The general manager of the product planning department was entrusted with the assignment. THE INDIAN CAR MARKET India’s total passenger vehicle industry (including passenger cars and commercial vehicles) was the sixth largest in the world, with annual production of more than 3.9 million units in 2011, while the country’s passenger car market was the seventh largest in the world, with sales of almost 2.7 million units in 2011. As a car manufacturer, India was growing at an exceptional speed; in 2003, for the first time, national production exceeded the 1 million mark, going on to exceed the 2 million mark in 2006.2

1 All figures are in ₹ (INR or Indian rupee) unless stated otherwise; ₹1 = US$0.02 on May 5, 2015. 2 Society of Indian Automotive Manufacturers, “Industry Performance in 2014-15,” www.siamindia.com/statistics.aspx? mpgid=8&pgidtrail=9, accessed July 30, 2015.

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Page 2 9B15A016 MSIL utilized the findings of several macroeconomic studies to draw up its future plans. It also had a research wing that provided information to its planning, marketing and legal departments. Apart from that, it initiated its own research related to competition, dealership health, sales figures and market potential as well as consumer insights. Reports indicated a significant opportunity in the Indian passenger car market, in the form of growing gross domestic product (GDP), increasing income (i.e., more disposable income among consumers), increasing bank networks and credit facilities, and low car penetration (18 car owners per 1,000 people, whereas Brazil and China had figures of around 200 per 1,000). Major global players like General Motors, Ford and Toyota had initially offered only sedan cars and SUVs, but had eventually introduced products in the A-segment — typically, the most compact cars from their international portfolios. Most of these compact cars were in the premium-hatch category of the Indian market. Thus, the sedan, SUV and premium-hatch segments witnessed higher competition. These segments were also supported with some high-profile advertisements and consumer promotions from the car manufacturers, which fuelled growth. As a consequence, the entire A-segment also became very competitive for well entrenched players like MSIL, Hyundai and Tata Motors. Stakes for the entry- and mid-hatch segments also increased among these competitors. Competition was expected to intensify with more multinational companies entering the Indian market, in addition to existing players introducing India-specific products (targeting the entry- and mid-hatch segment) (see Exhibit 3). The Indian market saw increased proliferation of features from the luxury segment becoming available in the lower- end car segments. Features such as air conditioning, power steering and power windows were aspirational for the hatch segment in 2009, but became standard features in the hatch models by 2012/13. Similarly, features available in the luxury sedan segment during 2008, such as touch-screen audio, electric- and auto-foldable mirrors, and automatic air conditioning, were standard across the sedan segment in 2012/13. The used car market in India grew at a compound annual growth rate (CAGR) of 22 per cent from a volume of 1 million units to 2.6 million units from 2007 to 2012. The market was projected to grow at a rate of 22 to 24 per cent from 2012 to 2017. Within the used car market, small cars accounted for 67 per cent of the total sales in 2011/12. The ratio of new car sales to used car sales in India was expected to reach 1:1.8 by 2016/17 (from 1:1.3 in 2011/12). However, even with this increase, India’s ratio would be low compared to developed markets, where the ratio was 1:3. COMPANY BACKGROUND MSIL, formerly known as Maruti Udyog Limited, started operations in 1983, when the Government of India and Suzuki Motor Corporation established a joint venture company to sell small cars in India. Suzuki increased its equity from 26 per cent to 40 per cent in 1987, and further, to 50 per cent in 1992, and 56.21 per cent in 2012 (the remainder was owned by public and financial institutions). The company was listed on the Bombay Stock Exchange and the National Stock Exchange of India. MSIL’s vision statement was: “The leader in the Indian automobile industry. Creating customer delight and shareholders’ wealth: A pride of India.” Its core values were “customer obsession, fast, flexible and first mover, innovation and creativity, networking and partnership, and openness and learning.” By 2013, the company had established a strong brand image by offering solid, reliable products. MSIL’s corporate communications emphasized emotional connection, using the message, “India comes home in a Maruti Suzuki.” MSIL products enjoyed a sturdy, reliable and economical image in the minds of consumers, and A-segment consumers were proud to own a Maruti Suzuki car. The company’s market share reached 85 per cent in 1997, before gradually reducing due to intense competition. By February 2012, the company had sold 10 million vehicles in India. In addition, it was ranked number one in consumer satisfaction for an unprecedented 13th time in a row in the J.D. Power India customer satisfaction index in 2012.3 3 J. D. Power, 2012, “Customer Expectations of Convenience during Vehicle Service Rises Significantly in India,” http://india.jdpower.com/press-releases/2012-india-customer-service-index-csi-study, accessed November 17, 2015.

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Page 3 9B15A016 Indian consumers generally spent two times the cost of acquisition on repairs and maintenance over the lifecycle of a car, as per the research conducted by MSIL. MSIL products had lower overall costs of ownership. This was achieved by reducing product cost through localization, value analysis and value engineering (VAVE), and improved quality. The company had developed ancillary industries in and around its factory, indigenized the necessary components and increased the local content in its products. In 2012/13, MSIL achieved revenue of ₹426 billion and a profit of ₹23.9 billion. The company had two state-of-the- art factories. In 2010, it rolled out 1 million vehicles in a year, which was a remarkable landmark for an automobile company in India. The depth of MSIL’s distribution channels played a key role in helping the company to maintain its leadership position in the Indian passenger car industry. By the end of 2012, it had a sales network spread across 878 cities nationwide and a service network spanning 1,422 cities and towns. However, establishing and maintaining distribution outlets in rural markets remained a key challenge for MSIL. Initiatives to maintain constant dealership motivation — through hefty trade promotions, attractive foreign trips and corporate recognition for smaller dealerships — were crucial to success. MSIL dealerships were confident of brand pull, good sales and service support, and fair dealings. Dealerships located in cities that were not in the top 50 cities of India (in terms of car sales) took great pride in being part of the Maruti Suzuki family and this association gave them greater recognition in their own business and social circles. COMPETITION With its aggressive tactics, broad product range, appropriate price points, attractive promotions and wide distribution, Hyundai was MSIL’s greatest competitor in the A-segment. Its product range comprised the Eon, the i10 and the i20, which were designed to cater to the changing requirements of Indian consumers. Hyundai had the added advantage over MSIL of having successful products like the Verna in the premium car segment, which helped in building brand image and improving profit potential. Tata Motors posed a different type of competition to MSIL. The brand was trusted across different consumer products and had good presence in the transport vehicle segment. Most A-segment consumers had travelled in Tata buses and experienced the sturdiness and ubiquity of the company’s vehicles. Tata entered the hatch market with the Indica, which was an indigenously developed car and hence, had an emotional connection with many consumers. The product was a success in the hatch segment and it catered to personal and commercial segments. With its spacious interiors, sturdy structure and relatively cheap operating costs, the Indica was a preferred product for both short- and long-distance travel. The vehicle was very popular in the taxi segment, as well as with consumers who used it for their own businesses. The Nano was Tata’s most innovative product and had enjoyed a high-profile launch. It was conceptualized as a product that bridged the gap between two-wheeled vehicles and the entry-level A-segment car. It was expected to be a game changer in that it was completely designed in India using the frugal engineering4 methodology to provide an affordable alternative to two-wheeled vehicles, which constituted a huge market in India. Despite these selling points, the product was not as well accepted in the Indian market as was expected, which was reflected in the sales figures (see Exhibit 4). Hyundai and Tata Motors had plant capacities of 600,000 and 1.1 million vehicles, respectively. Hyundai designed its vehicles in Korea and established a global image for its products. Tata motors had its design centres in India and Europe. MSIL had its research and development centre in India, which was Suzuki Motor Corporation’s main research and development centre in Asia (apart from Japan). This gave MSIL an edge over its competitors, as it had

4 “The central tenet behind every frugal engineering decision is maximizing value to the customer while minimizing nonessential costs. The term frugal engineering was coined in 2006 by Renault chief executive Carlos Ghosn to describe the competency of Indian engineers in developing products like Tata Motors’ Nano, the pint-sized, low-cost automobile.” PwC, “The Importance of Frugal Engineering,” May 25, 2010, www.strategy-business.com/article/10201?gko=24674, accessed July 8, 2015.

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Page 4 9B15A016 access to Japanese technical support but the autonomy to design and develop new products in line with local requirements. DEALER NETWORK Buying a car was a high-involvement purchase that required quality selling. MSIL operated through an exclusive network of dealerships, which provided sales, service and spares. Every sale had the potential to start a regular stream of revenue for the subsequent decade for the dealership and the car manufacturer. Sales and service support was critical for managing customer expectations, experiences and relations, apart from the initial sale. Car dealerships relied intensely on infrastructure and working capital. Each required an investment of around ₹85 million (in rural areas) to ₹175 million (in major cities, excluding the cost of land). With such large capital investments and low margins in the small car segment, dealers were finding it increasingly difficult to break even, even after two to three years of operations. For these reasons, dealerships were appointed only after assessing long- term commercial viability (see Exhibit 5). Since the cars could be located in any part of the country and reliable service was a basic necessity (human life could be at risk in case of product malfunction), all car manufacturers had a large network of authorized service stations to provide quality service. Sales and service channel development and maintenance were therefore major costs; hence, companies aligned their distribution strategies with their market realities and business strategies. MSIL enjoyed high network penetration with 1,009 dealerships and 2,946 authorized service centres. Market intelligence data for MSIL showed that Hyundai had 340 dealerships and 935 authorized service centres, while comparable figures for Tata passenger cars were 217 and 874, respectively (though it enjoyed considerably greater reach and presence in the commercial vehicle segment). The dealer margin on A-segment cars was shrinking in 2013. The Maruti sales team had been tracking the data from the dealerships across the country and found that this drop was more pronounced for the entry-level than the premium-hatch category. Based on market intelligence by the MSIL sales team, while gross margins varied from 3.5 to 5 per cent, depending on the manufacturer and the product, net margins remained around 2 to 3 per cent across the industry. MSIL management expected the net margins to remain low across the segment because dealerships had to share part of the ever increasing consumer promotion expenses with the manufacturers. These expenses were typically much higher for the premium hatches as compared to the rest of the A-segment. Considering the low sales margin in A-segment cars, dealership viability in new car sales remained problematic. With high sales requirements for channel viability, penetration in rural markets was a challenge for most manufacturers, since reaching break-even volumes on a regular basis was very difficult in these markets. Even companies like Maruti Suzuki and Hyundai had struggled to penetrate beyond the district level. The largest 20 cities in India in terms of car sales had dealerships of 21 car manufacturers, while the figure for the next 30 cities was 17. MSIL internal reports indicated that only nine manufacturers had dealerships beyond the top 100 cities (with respect to industry sales), and just two had dealerships outside the top 200 cities. Dealerships had to develop their used car businesses, as many consumers were now buying a replacement car. These consumers typically wanted the dealership to also buy back the old car, which could act as a consumer retention strategy for the dealerships. Dealerships had to set up additional infrastructure for this business; however they also enjoyed double gross margins in the used car business as compared to new car sales. For instance, a four-year-old compact car could fetch a gross margin of 6 to 8 per cent, as compared to a similar new car that would fetch only 2 to 4 per cent. There was intense competition in the used car business, as it included independent used car dealerships as well as the dealerships of other car manufacturers. MSIL had done its own internal research, which showed that independent used car dealerships were selling around 75 per cent of the total market. Their main value proposition was that they offered consumers the choice of switching their original brands as well as a 2 to 5 per cent price advantage as

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Page 5 9B15A016 compared to dealerships of car manufacturers. Conversely, dealerships enjoyed superior brand image, reduced hassle and no gap between the receipt of the new car and the sale of the old car. CONSUMER BEHAVIOUR The consumer base for the A-segment was evolving. In the past, only high-income consumers could afford a car but from 2000 to 2010, the threshold annual salary for consumers seeking an entry-level car reduced from ₹600,000 to ₹300,000. These new consumers tended to be younger. The change could be attributed to increased ease of accessing credit and finance options. Almost 85 per cent of the entry and mid-hatch segment was financed, while the figure declined to 70 per cent for the premium-hatch segment. Average financing in the industry was 75 per cent, while rural financing was 60 per cent (largely due to cultural aversion to credit and lack of credit infrastructure) (see Exhibit 6). Historically, the Indian car consumer had been a price seeker; however, younger consumers were more trend conscious, and responded to lifestyle aspects of product and marketing stimuli. These consumers required products with value proposition and desired the perfect combination of styling, features and performance at an affordable price. However, although consumer requirements were changing with changing lifestyles, the desire for owning a “value-for-money” product was still prevalent. Thus, requirements like good fuel efficiency and affordable price were important to consumers. Consumer buying behaviour was complex. First-time buyers went through a process of problem recognition, identification of alternatives, evaluation of alternatives, purchase and finally, post-purchase evaluation. Important considerations included customer experiences at the dealership, test drives, word-of-mouth recommendations by friends and relatives, and re-sale value. In the top 100 cities and towns (with respect to industry sales), consumers’ professional circles (including colleagues) influenced their choices regarding brand and product. Alternatively, in other markets, immediate family, friends, acquaintances and village elders influenced the decision-maker. Influencers normally recommended based on their own prior brand experience. Since not all brands were available in smaller towns and rural areas, existing brands with much longer presence and greater distribution reach enjoyed better acceptance. In the top 50 cities in India (in terms of car sales), brand name and brand-related associations played an important role in the purchase decision, as each product had lifestyle and status connotations apart from its functional and utility value. Consumers purchased different brands for meeting different psychological needs (see Exhibit 7). Raising brand equity was a key challenge for automakers and they invested heavily in advertising. As per market research conducted by MSIL, consumers based their buying decision on the utility of the product and its features for meeting their needs. In general, new products with additional features at reasonable incremental prices were preferred across the country. Geographical location had a distinct effect on consumers’ product evaluations (see Exhibits 8 and 9). There were other geography-based variations as well — e.g., the percentage of women among car buyers was increasing in the top 20 cities (in terms of car sales). This trend increased the acceptance of automatic transmission in India. Similarly, increased traffic congestion in major cities had also been contributing to the shift towards automatic transmission models amid increased convenience. Interestingly, at the same time, the Indian market had witnessed successful launches of compact SUVs/MUVs, such as the Renault Duster and the Maruti Suzuki Ertiga. This trend could be explained by the changing lifestyles of urban consumers, who needed flexible vehicles and increased utility to manage everyday needs. Consumers could be classified based on their purchase situations. First-time buyers were those who had no prior experience of buying or using a personal car. They mostly opted for entry-level hatch vehicles, while a few bought mid-level hatch vehicles. The second group comprised customers who already owned a car and were now buying an additional car. This group was equally divided between mid- and entry-level hatch vehicles. Yet another set of customers — those who had a car and were now seeking to replace that car — typically upgraded to premium-hatch cars, followed by sedans and, for a select few, SUVs (see Exhibit 10).

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Page 6 9B15A016 CONSIDERATIONS IN PRODUCT DEVELOPMENT Emissions and safety regulations played an important role in product-development decisions. For safety, all new vehicles were required to comply with offset-and-crash regulations starting in 2017.5 Therefore, any new product (conceived in 2013, for example) had to be compliant with these mandates, which added to the vehicle cost. Automakers could either reduce cost in some other areas or pass the cost on to the customer. However, increased competition in the industry was putting a counter pressure on automakers to lower the price of cars. This difficult situation made the choice of product features and other issues of the product design even more critical. Fuel prices had increased (and continued to increase) across the globe. India was dependent on oil imports and it faced additional pressure because of regular devaluation of its currency. Consequently, the price of petrol had increased from ₹40 per litre in January 2009, to ₹66 per litre in March 2013. In the same period, the price of diesel had risen from ₹30.8 per litre to ₹48 per litre.6 As a result, for economic reasons, customer preference shifted towards diesel vehicles. The Government of India had been experiencing a fiscal deficit and a considerable part of it was because of the oil subsidy. The government had tried to reduce the subsidy but faced political hurdles. It had deregulated petrol prices in 2012, and had shown increasing intent on reducing the subsidy on diesel. MSIL management expected the gap between petrol and diesel prices to remain in the future (considering the government’s political compulsions); however, the extent of such subsidy and the consequent gap in prices was hard to predict. Diesel engines were associated with higher levels of noise, vibration and harshness, high maintenance costs and higher emission levels. However, diesel technology had improved significantly since 1980. As a result, diesel engines in cars were much more refined, with lower noise, vibration and harshness, higher fuel efficiency and lower emissions, thereby improving acceptance and sales of diesel models versus petrol cars. In the MSIL product lineup, the share of diesel vehicles was around 80 per cent of MSIL product sales (including models like the Swift and the DZire). The MSIL team estimated that the number of diesel models in the industry had increased from around 30 in 2009, to more than 50 in 2013. Global auto majors such as Honda and Hyundai, which were primarily focused on petrol models, had started to shift their focus to diesel — especially for the Indian market. The MSIL team had information that Hyundai and Honda planned to launch diesel products in India in 2014. Diesel cars cost slightly more than petrol models to produce and greater taxes were levied on them, making them around 20 to 25 per cent more expensive than comparable petrol versions; however, they were approximately 15 to 20 per cent more fuel efficient than petrol versions. Thus, only heavy users (i.e., customers who drove more than 30,000 kilometres per year) found it economical to use diesel vehicles, as the savings in fuel cost offset the other costs. PRODUCT CHOICE DILEMMA The entry-level hatch segment was a “consumer pull driven product,” in 2003, but by 2013, it had evolved into a “channel push driven product.” Consumers did not have a thorough understanding of the segment’s technological complexity. With greater choices available in terms of models, features and brands, sales representatives had a significant role in influencing these choices. For this reason, manufacturers were wooing customers with promotional schemes (sometimes as high as 20 per cent of the car price) and compensating their trade channels with hefty sales-linked incentive schemes. This phenomenon was more prevalent in urban markets than in rural markets, which could be attributed to the higher intensity of competition in these regions. MSIL’s team felt that targeting the right consumer segment and designing appropriate features and benefits were critical components for the success of any product.

5 A crash test was a form of destructive testing, usually performed to ensure safe design standards in crashworthiness and crash compatibility. Frontal impact tests were conducted on a solid concrete wall at a specified speed, but could also be vehicle-vehicle tests. 6 SoftUsvista, “New Delhi Petrol Price,” www.mypetrolprice.com/2/Petrol-price-in-Delhi?FuelType=0&LocationId=2, accessed September 8, 2015.

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Page 7 9B15A016 MSIL’s product development team had developed the following qualitative descriptions of the A-segment target consumers: Entry-level hatch consumers:  Mostly first-time buyers.  Very price sensitive; concerned with fuel efficiency.  Annual household income of ₹300,000 to ₹500,000; aged 30 to 34 years with a family of one or two children.  Used car perceived as a convenience; satisfying basic travel needs for family.  Usually satisfied with basic car features and already owned a motorcycle, which would continue to be used in

addition to the car.  Had been initiated to the MSIL vehicle since childhood and aspired to own one when they grew up.

Mid-level hatch consumers:  First-time as well as additional car buyers looking to upgrade to a more expensive product out of necessity.  Annual income of ₹400,000 to ₹800,000; aged 25 to 30 years; typically unmarried or, if married, no children.  Used vehicle for recreation and to project identity and communicate social status (hence, brand conscious,

though not necessarily looking for a contemporary brand).  Accepted MSIL as a very good brand and acceptable from the perspective of image association.

Premium-hatch consumers:  Had already owned a car for at least three years; hence, additional car or replacement car buyer.  Annual income of ₹400,000 to ₹1 million; aged between 30 to 45 years, had a nuclear family with husband,

wife and one or two children.  Very brand conscious; considered vehicle as a product to build social status.  Mostly employed as managerial staff in urban areas or self-employed in rural/semi-urban areas.  Looked for international brands to project a contemporary image. Generally, the product lifecycle of a successful automobile model was approximately six years, with at least two changes in its external design and internal features during these years. Based on past trends, any new MSIL product needed to sell 100,000 to 250,000 units (depending on its price and associated margins) to recover the required investments and to be considered successful. By estimating market price and production costs, the product-planning team determined that the entry-hatch would require minimum sales of 300,000 vehicles per year to break even in two years, while the corresponding sales figures for the mid-level hatch and premium-hatch were 200,000 and 150,000, respectively. Design-direction, platform-selection and product-making philosophies were dependent on the selection of features and benefits to be incorporated into the new product. It was not possible to design one product that could cater to the needs of customers belonging to different segments. Hence, trade-offs had to be made; for example, if more power was required, fuel efficiency had to be reduced. In this way, the product had to be designed and optimized for a particular sub-segment of the A-segment to ensure that it met the design specifications. Therefore, the target segment and product design brief needed to be absolutely clear before the design conceptualization stage. MSIL enjoyed economies of scale across the value chain. Higher sales volumes reduced per-unit overheads, reduced raw material, procurement and logistics costs, and improved efficiency in production, distribution and marketing. For example, because of MSIL’s high sales (the brand was very popular, and was considered to be sturdy and reliable), the company’s per unit advertising costs were the lowest in the industry. Though it had Suzuki as a major stakeholder, it was perceived to be an Indian brand; however, it lacked the status and technology image enjoyed by many multinational brands. Similarly, the impact of word of mouth was also expected to be favourable for MSIL compared to its competitors — particularly in cities beyond the top 50 (in terms of total car sales). The technology platforms for the petrol and diesel vehicles were entirely different. The product planning team had to decide whether the chosen design was for a diesel engine, a petrol engine or both. The team had access to some trends in the industry about the fuel preference of the market (see Exhibit 11). It also had to consider the specific

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Page 8 9B15A016 positioning of the proposed product, and its impact on the other MSIL products. The team decided that the best way to visualize the product positioning would be to use the Boston Consulting Group (BCG) matrix of MSIL’s existing product portfolio (see Exhibit 12). A summary of the product alternatives was developed (see Exhibit 13). The choice before the team was basically in terms of product and market. Was MSIL better off battling the competition in the top 20 cities (where the maximum action was) or should it fortify its position in smaller markets? Or should the company try to develop entirely new markets? From a strategic point of view, would a premium-hatch add significantly to the brand image and channel motivation as compared to an entry-level hatch? Was there merit in projecting a mid-level hatch product, which could redefine consumer expectations and be positioned on higher space and fuel economy? Would the entry-level hatch segment have to be merged with the mid-level hatch segment because of the cost pressures of regulatory compliances? What was the probable profit potential of each category? The product planning team needed to work out the figures and make a recommendation.

Jaydeep Mukherjee is a faculty member at MDI Gurgaon. Gaurav Mathur and Nikhil Dhar are employees of MSIL.

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Page 9 9B15A016

EXHIBIT 1: DETAILS OF THE SEGMENTS IN INDIAN CAR MARKET

Segment Products Price range in ₹ Consumer Requirement

Specific Attributes

Entry- hatch

MSIL Alto 800, MSIL Alto K10, Tata Nano, Hyundai Eon, Chevrolet Spark

200,000 – 300,000 Functional and basic

Price point driven and yet value for money; good fuel efficiency and affordable price

Mid- hatch

MSIL Wagon-R, MSIL Zen-Estilo, MSIL A-Star, Hyundai i10, Chevrolet Beat, Ford Figo, Tata Indica, Honda Brio

300,000 – 400,000 Value for money for more evolved consumers

Value for money over the entire lifecycle

Premium- hatch

MSIL Swift, MSIL Ritz, Hyundai i20, VW Polo, Nissan Micra, Toyota Liva, Tata Indica Vista

400,000 – 550,000 Stylish, convenient and efficient

Style, interior space and convenience

Sedan Honda City, Hyundai Verna, MSIL Swift Dzire, MSIL SX4

Basic: 550,000 – 1.1 million Luxury: 2.5 million and upwards

Status and comfort

Brand image, technology and sophistication

SUV/MUV SUV — Mahindra XUV500,Honda CRV, GM Captiva, Toyota Fortuner, MUV — GM Enjoy, Nissan Evalia, Toyota Innova, MSIL Ertiga

900,000 – over 2 million

Adventure, extended family and people carrier

Power, utility and versatility

Van MSIL Ecco, Tata Ace Magic 250,000 – 400,000 People carrier People carrier

Source: Company materials.

EXHIBIT 2: SALES OF PASSENGER CARS (IN ‘000 CARS)

Segment

2008/09 2009/10 2010/11 2011/12 2012/13

INDIA MSIL INDIA MSIL INDIA MSIL INDIA MSIL INDIA MSIL

Entry-hatch 294.5 262.0 340.9 268.2 478.4 373.3 486.7 331.5 435.1 284.6

Mid-hatch 497.6 188.8 581.2 218.7 628.8 252.1 527.4 177.3 415.1 156.2 Premium- hatch 128.2 110.1 262.7 179.3 438.9 209.6 499.8 218.3 531.8 244.0 A-Segment (total) 920.2 560.8 1184.8 666.2 1546.0 835.0 1513.9 727.1 1382.0 684.9

Sedan 247.0 75.9 302.5 99.3 415.3 131.4 492.7 128.6 491.8 176.5

SUV/MUV 202.5 7.5 240.9 3.9 297.8 5.7 347.3 6.5 538.5 79.2

Van 106.6 77.9 150.3 101.3 213.5 160.6 227.8 144.1 230.8 110.5 Total Car Industry 1,551.2 722.1 1,949.2 870.8 2,520.4 1,132.7 2,629.8 1,006.3 2,686.4 1,051.0

Source: Company materials.

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Page 10 9B15A016

EXHIBIT 3: YEAR-WISE MARKET SHARE PROJECTIONS OF MAJOR CAR MANUFACTURERS IN INDIA*

Year

Manufacturer’s name 2008/09 2009/10 2010/11 2011/12 2012/13 MSIL 46.51 44.63 45.28 38.27 39.12 Hyundai Motor India Limited 15.72 16.14 14.37 14.78 14.28 Tata Motors Limited 14.86 14.65 13.96 14.12 11.71 Mahindra and Mahindra Ltd. 6.85 7.72 7.2 9.34 11.57 Toyota Kirloskar Motors Pvt. Ltd. 3.02 3.27 3.36 6.09 6.16 General Motors India Pvt. Ltd. 3.96 4.46 4.28 4.08 3.28 Ford India Pvt. Ltd. 1.8 1.89 3.94 3.52 2.87 Honda Cars India Ltd. 3.38 3.17 2.38 2.07 2.74 Volkswagen India Pvt. Ltd. 0 0.21 2.06 2.98 2.44 Renault India Pvt. Ltd. 0 0 0 0.14 1.95 Nissan Motor India Pvt. Ltd. 0.01 0.02 0.52 1.26 1.38 Skoda Auto India Pvt. Ltd. 0.89 0.9 0.92 1.3 1.08 Others 3 2.94 1.73 2.05 1.42

*All figures are in percentages. Source: Company materials.

EXHIBIT 4: TATA NANO SALES FIGURES AND SOME EXPLANATIONS

0

2,000

4,000

6,000

8,000

10,000

12,000

Reasons for drop in sales: 1. Safety reasons 2. 'Pay-First, Drive-Later' booking model did not reach the intended target customers.

Reasons for gain in sales: 1. Zero down payment option 2. Free 4-yr/60,000 km extended warranty

Reasons for gain in sales: Nano Facelift Version launch

Source: Industry estimates compiled by case authors based on the research inputs made available by MSIL’s research wing.

For the exclusive use of I. Lansberry, 2017.

This document is authorized for use only by Ian Lansberry in QSO-500 Business Research 17TW1 taught by Lindsay Conole, Southern New Hampshire University from August 2017 to November 2017.

Page 11 9B15A016

EXHIBIT 5: OPERATING COSTS OF DEALERSHIPS ACROSS LOCATIONS

Location of Dealership

Top 20 Cities

Top 21– 50 Cities

Top 51–200 Towns Rural

Infrastructure

Land* 150 100 75 50 Building 25 20 15 10 Equipment 15 15 15 15 Permissions 2 2 2 2 Miscellaneous 10 8 6 5

Working Capital

Vehicle 80 60 40 30 Spare parts 2.5 2 1.5 1 Consumables 1 1 1 1 Manpower 2 2 1.5 1 Utility 0.5 0.5 0.5 0.5 Miscellaneous 5 5 4 3 Rent (Annual)* 30 22 15 8

Note: All figures in ₹ million. *Either the land was purchased or rented. Source: Company materials.

EXHIBIT 6: PROFILE OF EXISTING A-SEGMENT CONSUMERS IN INDIA

Monthly average household income Occupation in percentage

Segment

Avg. age in

years

Less than

₹50,000

₹50,000 –

₹75,000

Avg. family size

First- time

buyer Self-

employed Middle

Management Professional Govt.

employee Entry- hatch 37 21% 63.40% 4.68 61% 51 11 14 5 Mid- hatch 36 17% 71.60% 5 59% 45 12 15 9 Premium- hatch 34 11% 77.80% 4.57 50% 55 12 14 5

Source: Company materials.

For the exclusive use of I. Lansberry, 2017.

This document is authorized for use only by Ian Lansberry in QSO-500 Business Research 17TW1 taught by Lindsay Conole, Southern New Hampshire University from August 2017 to November 2017.

Page 12 9B15A016

EXHIBIT 7: REASONS TO PURCHASE DIFFERENT CAR BRANDS

Good reputation/reliability

of the brand Recommended by

friends/relatives Previous experience

with the brand Maruti Suzuki 65.6 54.6 19.2 Hyundai 54.3 46.7 12.9 Tata 48.5 39.1 13.9 Chevrolet 53.8 48.4 8.9 Fiat 57.5 52.1 12.2 Ford 63.9 53.6 5.8 Honda 61.1 54.5 14.8 Mahindra 53.5 51.7 14.5 Nissan 50.3 50.7 8.9 Skoda 60.8 49.4 7.1 Toyota 67.6 51.2 11.0 Volkswagen 64.7 49.5 8.3 Total Industry 57.1 47.8 14.9

Note: The table denotes the importance of different attributes by percentage of consumers. Source: Company materials.

EXHIBIT 8: IMPORTANCE OF DIFFERENT PRODUCT ATTRIBUTES

Variable Top 20 cities

Top 21-50 cities

Top 51-200 cities

Beyond 201 cities

Price 9 10 10 10 Brand 8 7 7 6 Reliability 7 8 9 10 Word of mouth 6 7 8 9 Styling 7 7 6 6 Resale 5 6 7 8 Overall cost of ownership 10 9 8 8 Fuel efficiency 7 7 8 8 Convenience 8 7 7 7 Dealer persuasion 7 8 9 10 Promotional offers 8 8 7 7 Interior space 7 8 9 10

Note: Importance scores were given in a 10-point scale where 10 was the highest score obtainable. Source: Industry estimates compiled by case authors based on the MSIL’s internal reports.

EXHIBIT 9: SALES DATA OF KEY COMPETITORS ACROSS GEOGRAPHIES (%)

2008/09 2012/13 Company Top 20

cities Top 21– 50 cities

Top 51– 200 cities

Beyond 201 cities

Top 20 cities

Top 21– 50 cities

Top 51– 200 cities

Beyond 201 cities

MSIL 48 19 28 5 42 18 28 12 Hyundai 56 20 23 1 50 19 27 4 Tata 47 21 31 1 42 20 35 3 Industry 52 20 26 2 46 19 27 8

Source: Industry estimates compiled by case authors based on the MSIL’s internal reports.

For the exclusive use of I. Lansberry, 2017.

This document is authorized for use only by Ian Lansberry in QSO-500 Business Research 17TW1 taught by Lindsay Conole, Southern New Hampshire University from August 2017 to November 2017.

Page 13 9B15A016

EXHIBIT 10: MOTIVATION FOR A-SEGMENT CARS PURCHASED FROM MARUTI SUZUKI (%)

First vehicle Additional vehicle Replacement

Entry-hatch 60.7 24.5 14.7 Mid-hatch 59.1 17.4 23.4 Premium-hatch 50.3 24.5 25.2 Total Industry 47.8 27.3 24.9

Source: Company materials.

EXHIBIT 11: SALES TRENDS FOR DIESEL AND PETROL VEHICLES

Segments Fuel CAGR 2007/08 to

2011/12 (%)

PROJECTED CAGR 2012/13 to 2017/18 (%)

Entry- and mid- hatch

Petrol 5 2 Diesel 5 25 Total 5 11

Premium-hatch Petrol 10 -1 Diesel 30 18 Total 40 14

Sedan Petrol 0 2 Diesel 30 7 Total 15 6

SUV/MUV Petrol 14 6 Diesel 13 10 Total 13 10

Van Petrol 13 -24 Diesel 20 Total 13 8

Total Cars Petrol 6 1 Diesel 29 15 Total 14 10

Source: Company materials.

For the exclusive use of I. Lansberry, 2017.

This document is authorized for use only by Ian Lansberry in QSO-500 Business Research 17TW1 taught by Lindsay Conole, Southern New Hampshire University from August 2017 to November 2017.

Page 14 9B15A016

EXHIBIT 12: BCG MATRIX FOR MSIL

Source: Company materials.

EXHIBIT 13: THE PRODUCT DEVELOPMENT CHOICES

Segment Value proposition

Price, target market and competitive retaliation

Strategic role of the product

Limitations of this choice

Entry-hatch

10% more fuel efficient than comparable products and value for money.

~250,000 Markets beyond top 50 cities Nissan Datsun, Tata Dolphin

MSIL’s core competency; can dominate the market as the competition is less, and difficult for competition to achieve this price level.

Lower profit margins; if not successful then product would not meet its break-even objectives.

Mid-hatch

Interior space (10% more with respect to current comparable vehicles), convenience (utility features) and total cost of ownership.

~375,000 Top 100 cities Ford Small Car, Nissan Small Car

Large customer base upgrading from entry- hatch to mid-hatch; product for family still a large market.

The positioning was middle of the segment (hence not precisely defined); target market was only in limited geographies. It was not expected to have a high contribution margin.

Premium- hatch

Stylish (unique styling with respect to current vehicles available). Technologically advanced (new features). High performance (higher power).

~500,000 Top 50 cities Ford Fiesta Hatch, full model changes of current products

Can act as a differentiator; can create brand image for the company; can create new demand, potential for making another vehicle (sedan) out of this new vehicle.

High investment in providing technologically advanced features. Intense competition — many global competitors already having stylish and technologically advanced products.

Source: Compiled by case authors based on company material.

For the exclusive use of I. Lansberry, 2017.

This document is authorized for use only by Ian Lansberry in QSO-500 Business Research 17TW1 taught by Lindsay Conole, Southern New Hampshire University from August 2017 to November 2017.