Every car company worth its wheels is ready to enter the newest segment in the car market, the D class, but Mercedes' aggressive pricing of its C class sedan and changes in import regulations may mean they have to rethink their marketing mix.

By Suveen K. Sinha

Let us, for a moment, forget the alphabets and look at the simple facts. The most expensive Mercedes Benz available in India is the S320l, priced at Rs 62 lakh (ex-showroom, Delhi); the least expensive (until recently) was the E220CDI priced at Rs 30,46,509. The next most expensive car in the market is a Mitsubishi Lancer variant priced at Rs 9,94,719. Gaps like this-at Rs 20,00,000, this is the mother of them all-are a marketer's delight. If Indian car-makers have shown restraint in addressing this opportunity, blame it on the market not being ready for it. Circa 2001, despite a recession looming large, things look good on this front: discretionary incomes are up and customers, especially those who spend a substantial portion of their lives commuting in Opel Astras and Honda Citys, seem willing to graduate to more expensive cars.

The two companies that will probably enter the segment first are Hyundai with the Sonata, and Honda with the Accord. Then there is wolf-crier Skoda which is threatening (once again) to make an entry into India, with the Octavia, and Daewoo Motors India-CEO Y.C. Kim is strangely convinced that the fate of the company in India will not be affected by whatever happens to it globally-which boasts its own d class contender, the Magnus.

Market leader Maruti wants a piece of the action too. It is considering entering the segment with a Sports Utility Vehicle (SUV), the Grand Vitara. Tata Engineering's Ratan Tata was the first to signal his intent to launch a d class offering, the Magna, in January 2000, but little has been heard of the car since. And, as everyone who is someone in India's auto industry swears, Ford India has been putting the Mondeo through its gears in the country. The company insists that India may be the testing ground for products to be launched elsewhere, but the Mondeo, first launched in 1995 by the company in the US, to compete with Japanese and European models, would be the ideal d class offering.

The Pricing Conundrum

Pricing is easy when all marketers have to do is pick an exact price point from a gap as huge as the one that existed in the car market. With the launch of the Mercedes C class on April 19, this year, though, things have changed. The least expensive variant of the car is priced at Rs 19,90,000 (ex-showroom, Mumbai). And that's laid the pricing strategies of other car makers waste. Given the brand-equity of the three-pointed star and the likely flexibility in the paying power of the potential customer, the other wannabes will have to price their offerings considerably below the C class.

''Even Accord will have to be priced at least Rs 5 lakh below the C class,'' says an auto-analyst. That, when 400,000 Accords are sold every year in that most competitive of car markets, the US. That, when over 1,00,00,000 Accords have been sold since its launch in 1976. That, when the Accord is already a recognised brand in India, thanks to the 3,000-4,000 that have reached Indian roads, over the years through imports.

Honda had firmed up its pricing strategy for the Accord (around Rs 15,00,000) by the time Mercedes went public with the price tags on its c class. Now, the company appears a trifle unsure. ''The C class pricing will pose a threat to Accord. Thankfully, we have the benefit of watching the market performance of the C class for three months,'' says a Honda executive.

Also watching will be Hyundai. The two HS are hoping that the pricing of C class will turn out to be unsustainable by the time they launch their cars in July. Mercedes Benz India CEO Jurgen Zeigler doesn't think so. ''The pricing is a conscious decision and can be sustained in the long term. At worst, we will have price movements owing to inflationary pressures that will be in line with other manufacturers.''

The Sonata will be more insulated from the threat the C class poses than the Accord or the Mondeo. While unveiling the car in February, Hyundai pegged its price at Rs 14-16 lakh. The reduction in the excise duty on cars from 40 to 32 per cent in March, translates into a new price band of Rs 12.5-14.5 lakh for the car. The Mondeo, on the other hand, falls in the same category as the Accord in the European market, and its pricing will be similar to the latter's.

The removal of Quantitative Restrictions (QRs) on the import of cars on April 1 held a sliver of hope for car-makers who believed they could bring in Completely Built Units (CBUs). But with the government raising the effective duty on CBUs from 86 per cent to 125 per cent on April 25, that hope was squashed. At the time of going to press, Ford India was busy working out the impact on its future plans. Says its spokesperson: ''CBUs were an option for Ford.'' Honda and Hyundai claim the hike will have no impact on their D class foray. ''We are going to manufacture the Sonata in India with a definite productionising strategy,'' says Hyundai's marketing chief, B.V.R. Subbu. The Accord and the Sonata will, thus, start off with a local content of 30 per cent.

Wishes and volumes

Even discounting the 800 c class sedans Mercedes India plans to sell this year, the newest segment of the car market is cramped. Hyundai estimates the size of the segment at 14,000 in the first year. Honda's estimate is significantly lower, between 6,000 and 7,000. An elementary number crunching exercise indicates that volumes fall as one moves up the price gradient. In 2000-01, the size of the mid-sized cars segment was 79,000. Of this, 24,000 were in the upper price band (Baleno, Opel Astra, Honda City, Lancer).

The size of the segment, then, will increase if prices come down. But car- makers have waged an eternal battle with the other side of that argument. ''Price,'' says Subbu, ''is a function of volumes.'' Volumes will also decide the extent to which the production can be localised. Typically, at volumes of over 3,000 a year, weld, paint, seats, battery, tyres, wind shields, carpets, wheels, and perhaps wiring harnesses can be done locally. At over 5,000, all these and CKD (completely knocked down) assembly of engine and transmission can be done locally. At over 10,000, all these and 'ancillarisation' of transmission components can be done in India. At over 15,000, all this and engine component machining can be done here. No one is speaking of those kind of numbers: Hyundai expects to sell 2000 Sonatas in the nine months to March 2002, and Honda, between 2,500-3,000 Accords.

This isn't so bad for Hyundai, which sold 86,719 cars-Santro and Accent combined-in 2000-01. But Honda, which sold 10,011 units of its only offering in India, City, and Mercedes, which sold 716 units of its E class and S class, could come under some pressure. ''To be profitable, a manufacturer needs to sell at least 200,000 units a year. And at least one model must notch up 100,000 or more, in order to give economies of scale to vendors and get a low price from them for components,'' says Jagdish Khattar, the CEO, Maruti. Then there are advertising costs which are certain to be significant in a niche market crowded with several brands.

Still, the lure of higher profitability that the segment holds, makes it attractive to car makers. The low level of local content, and the consequent lower investments required, render both entry-and exit-barriers irrelevant. ''Low investments will make it easy for manufacturers to phase out a model if it doesn't do well,'' says an analyst. If the segment doesn't grow, manufacturers will have to live with shorter lifecycles and regular launches to keep customer-interest high.

Customers, then, can expect to see aggressive pricing stands, high-decibel advertising campaigns, and, maybe, quick entries and even quicker exits. And all the while, the original question before that select few, 14,000 or 7,000, or even less remains: To D or not to D.
  

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