Toyota wakes up to India's promise

This Japanese auto giant was napping in India while rivals took big bites out of the car market. That will change quickly now that it's woken up.

Toyota’s India wing increasingly looks like the Kumbhakarna of the auto world. As its Korean counterpart Hyundai Motor Corporation (HMC) grew volumes from a mere 8,447 units in 1998 to become the second largest car maker, accounting for nearly a fifth of the sales in the domestic market in the course of the last 13 years, Toyota was nodding off, content to ply its trade with the iconic Qualis, and later the Innova rather than focus on the small car segment which constitutes over 60 per cent of passenger vehicle sales in the country. This meant that its market share remained restricted to a puny three per cent.

Now, however, the auto giant has finally woken up and has exhibited a voracious appetite for Indian car customers. The awakening was enshrined by the launch of the Etios — a car which the world’s largest car manufacturer designed and launched exclusively for the market in India in December last year.

Its performance has been impressive so far. While passenger vehicle sales in the industry has skidded by two per cent, Toyota (which operates through a 89:11 joint venture with the Kirloskar group) has managed to grow volumes by a robust 75 per cent between April and October this financial year. Eager to keep pace with its nimble-footed rivals, the company’s second act post the Etios launch was the introduction of the hatchback Liva earlier in June this year to the Indian market. It wasn’t happy just stopping there. It responded with alacrity to the demand for diesel cars in the market by offering diesel variants of both the products in September. It also announced plans to inject close to Rs 2,000 crore in capacity expansion programmes and localisation efforts. “The India project is top priority in Toyota Motor Corporation’s (TMC) growth plans globally”, says Sandeep Singh, deputy managing director, Toyota Kirloskar Motor (TKM).

So what made a car maker, which had till recently been content with selling multi-purpose/sports utility vehicles (Qualis, Innova, Fortuner) and high-end sedans (Corolla Altis, Camry), suddenly wake up and recognise the rest of the Indian market? While detractors contend that Toyota had probably misread the latent potential in the Indian market in its early days in the country, Singh says that the company wanted to build a strong foundation before entering a segment which is volume intensive. “Our business model was to come in with products in a niche segment, develop a good manufacturing base and the requisite manpower before embarking on expanding our operations. Introducing small cars entails delivering big numbers. We made sure we had the facility and the distribution strength to meet customer requirements before starting work on the Etios platform.” Sister concern Daihatsu’s initial interest in the Indian market additionally held up Toyota’s plans in the country. The Japanese small car manufacturer had commenced a study to gauge the demand in the domestic market in 2005 but later decided against an entry. Toyota then chalked up plans to independently introduce products in the mass segment and started work on the Etios range in 2008.

However, to ascribe Toyota’s rapid scaling up in India only to carefully measured strategy would be to naively ignore the reality of cutthroat global competition, where peers Volkswagen and General Motors are running neck-and-neck with the Japanese auto giant. European vehicle manufacturer Volkswagen is working especially hard to topple Toyota as the world’s largest car maker by 2018. The gap between the two is not too wide even now. In 2010, Volkswagen AG grew by 14 per cent to sell 7.14 million vehicles worldwide compared to Toyota whose sales increased eight per cent to 8.42 million units. India and developing markets such as Brazil, Indonesia, Russia and China could well decide who hits the chequered flag first. Among its recent initiatives in India, Volkswagen has launched the Polo hatchback and the sedan Vento, and invested Rs 3,200 crore in a new factory at Chakan near Pune that can roll out 110,000 cars in a year. The Etios and the Liva has become Toyota’s counter to Volkswagen’s recent moves.

It’s been a tough year for Toyota. With the United States battling high unemployment rates and Japan struggling in the aftermath of a devastating tsunami which hit the country earlier in March this year, sales for Toyota in these key developed markets have taken a 17 per cent hit in the third quarter of this calendar year. Sales in the Asian region have, in the meantime, improved by a robust 22 per cent. Despite inflationary pressure affecting economic growth in important markets such as India and China, the company’s sales from the Asia are a good omen for the future.

“In saturated markets of the United States and Japan we have less room to grow,” Hiroshi Nakagawa, managing director, Toyota Kirloskar Motor (TKM) had earlier told Business Standard. “We are, therefore, focusing on countries like Brazil, Russia, India and China. The Etios was designed keeping the Indian customer in mind and will help boost volumes in the country.” At present, emerging markets account for 40 per cent of global sales for TMC. Over the next ten years, the company wants to add on to the product portfolio in India, China, Russia, Brazil, Vietnam and Indonesia and increase sales contribution by an additional 10 per cent from these countries.

Since 2005, Toyota strengthened its position in Africa, Asia and South Africa with the launch of its multi-purpose vehicle Innova, sports utility vehicle Fortuner and pick-up truck Hilux on the IMV (innovative international multipurpose vehicle) platform. However, in India its presence was largely limited to high-end vehicles — the Corolla Altis and Camry (sedans), the MPV Innova and SUVs Fortuner, Prado and Land Cruiser — which gave it 15 per cent share in the overall automobile market in India. The entry-level sedan Etios and premium hatchback Liva has now expanded the company’s market coverage to half the categories of vehicles offered in the country.

The Etios and Liva, lynchpins of the car maker’s India has been posting blockbuster sales, doubling volumes to 140,000 units in 2011. “The duo would help us gain critical mass in India. This year we are expecting to sell 140,000 units; in 2012, this would go up to 210,000 units. We expect both the sedan and the hatchback to follow the same growth trajectory,” says Singh. The company has already sold over 40,000 units of the two models and has bookings for another 12,000 units.

What has probably boosted the acceptability of the Etios and Liva is the strategic pricing of the products. Apart from Ford Figo which starts at Rs 3.69 lakh, Liva is the cheapest car in its category. The Etios is tagged upwards of Rs 4.96 lakh (ex-showroom, Delhi).To keep costs low, 70 per cent of the Etios and Liva have locally made parts in them. TKM is setting up an engine plant with a capacity of 100,000 per annum by 2012 for the Etios, and a transmission plant (capacity of 240,000 per annum) by 2013. Post the commissioning of the two units, localisation levels would be as high as 90 per cent for the two cars.

The secret weapon of the Etios game plan, however, is the Toyota dealer. The company has increased the number of dealers from 40 to 60 and the number of sales and service points from 82 to 150 in the last two years. By mid-2013, TKM would have 175 outlets across the country. The numbers might look small but Singh says they cover almost 85 per cent of the market. To keep its dealers happy, Toyota gives them a profit margins of 4 per cent on cars (industry norm is 3 to 3.5 per cent) and 18 to 20 per cent on spares (industry: 15 per cent). Eighty per cent of the owners bring their cars to a Toyota authorised station for service during the warranty period (industry: 50 to 60 per cent), which falls to 70 per cent after the warranty (industry: 30 to 40 per cent).

Its India thrust is not without concerns—the rapid diesel-isation in the domestic automobile industry has taken it by surprised. TKM did introduce diesel variants of the Etios priced between Rs 6.44 lakh and Rs 7.87 lakh and the Liva tagged between Rs 5.54 lakh and Rs 5.89 lakh (ex-showroom Delhi), but the sudden spurt in demand for diesel models has also entailed constraints in production capacity. According to industry estimates, diesel vehicle sales are currently 46 per cent of overall passenger vehicles sales as compared to the earlier 30-32 per cent. The company is now adjusting its production processes to roll out more diesel cars to meet the demand in the domestic market. The price differential between petrol and diesel stand at around Rs 25 at present. This has made an increasing number of consumers to opt for diesel vehicles in the last few month despite an initial premium of Rs 1-1.25 lakh on these variants.

These seem like niggles in the car maker’s progress. Overall, Toyota hopes to enhance capacity to sell at least 350,000 units in India by 2015 – which is what the country’s second largest car maker Hyundai Motor India sold in the domestic market in 2010-11. The company had announced an investment of Rs 300 crore in March and of another Rs 898 crore in July 2011 to increase capacity to 310,000 units in 2013.

Not bad for a slumbering giant that has only recently woken up.

Picture source - team bhp