"Unless Loka can adapt and develop sub-assembled modules that can be standardized across models, its cost advantage may be under threat" Jagdish Khattar, Managing Director, Maruti Udyog

Much is going right for Loka Automobiles. It appears that customers recognise it as a company that offers products conceptualised and designed for the Indian customer, under an Indian brand name. It has a reasonable range of offerings in the segments where it is present. Also, it is apparent that the company enjoys a cost advantage.

Offerings in the A and D segment will, of course, have a positive rub-off for the company's image and its other products. There is a huge potential market that Loka Automobiles can tap with an entry-level car. The car ownership rate in India is currently an abysmal six per 1,000 population. The car owner base in the country's towns is widening. Rural incomes are growing. The national highway and rural road network is expanding. Car finance is cheaper and more accessible than ever before.

In fact, Loka's Prajapati recognises that the earlier assumption about A segment cars being phased out and replaced by B segment cars at the entry level is turning out to be wrong. An entry into the A segment will also reinforce Loka's 'Indian' brand image.

But Loka would need to consider a few issues while moving into new segments. The foremost is capacity. To be able to offer an entry level car at Rs 2.2 lakh, it needs huge volumes. Even for its existing models, it would need to ramp up the numbers to sustain its cost advantage. Its current overall capacity of 1.2 lakh units per annum would be a constraint. Capacity upgradation will impact the company's cost structure. It may even run the risk of losing its 'value-for-money' edge in the existing models in the process.

While a common platform between B and C segment models is a positive for Loka Automobiles, it should not be stretched. An A segment car on this platform may turn out to be too heavy, which will affect its fuel efficiency, a key attribute that an entry level buyer desires.

Global car manufacturing is moving up from common platforms to sub-assembled modules that can be standardised across models. This enables companies to compress lead time for introduction of new models as well as lower per unit costs. Unless Loka Automobiles can quickly adapt and develop common modules across models, its cost advantage may be under threat.

While Loka Carvaka comes in a range of variants, it appears to enjoy a certain advantage in diesel engine products. Loka Automobiles will have to factor in the possible impact of a genuine dismantling of the administered price mechanism for oil products in the future while working out its strategy for entry into new market segments.

Overall, I believe Loka should move aggressively to straddle all segments of the passenger car market in India. For that, it would be advisable to go in for suitable capacity expansion, work towards standardised modules and, together with its suppliers, use value analysis and value engineering to bring Anubhav down to an entry level car. That will be good for Loka. That will also be good for the Indian consumer.

"Loka should focus on consolidating its position in the current segments and ensure that changing customer needs are anticipated and respondent to, first" Vinay Dixit, Vice President (Marketing), General Motors India

First of all, it's important for any company to define its core field of play... and then stick to it. There are many examples of companies trying to expand their portfolio too wide without understanding its true implications.

Now, an expansion strategy can be quite successful, but only if the required capabilities-financial, product developmental and marketing-are available to the company. Success in one segment does not necessarily imply success in other segments. The motivations and key success drivers are quite different in different segments of the market.

A product that is successful needs continuous investment in upgradation. Product refreshment or the novelty factor plays an important role in keeping any brand top-of-mind in the prospect's mind. This requires significant investment in model-year changes, mid-cycle enhancements and full model changes.

As we go higher up in the segment ladder, image considerations overtake mere product considerations. It will be almost impossible to offer a D segment vehicle on the same platform as a B segment vehicle. The key product parameters are quite different in these cases.

Bearing these factors in mind, Loka should focus on the current segments and ensure that changing customer needs are anticipated and responded to, first.

If an expansion strategy is being contemplated, it should move to A segment first, and that too, only if the move is profitable or at least capable of quick breakeven. A money losing strategy is just not a sustainable one. However, significant value engineering may enable the company to take enough cost out of the existing B segment vehicle to launch it in the A segment.

Given the current cost structure in India, and assuming a 3 per cent net profit margin for the B segment product, the company would need to slash roughly Rs. 40,000-45,000 from its cost to price it at Rs 2.2 lakh.

However, there could be considerable diversions from the B segment vehicle to the A segment vehicle, unless the value offerings are significantly differentiated. The benefits, though, would be in the form of a much larger customer base from which to upgrade to the B & C segment offerings. The ownership experience (service experience & costs of ownership) will play an important role in this upgradation pattern.

A move to the D segment should be contemplated once the A segment strategy is found to be successful, and after evaluating the requirements of overseas markets. The company should be clear on whether the objective is to target exports or the domestic market.

"With 62 per cent manufacturing capacity utilization, Loka can easily produce a low spec version of the Anubhav by cutting variable costs" Murad Ali Beg, Management Consultant, Murad Baig Consulting

The discussion between Loka automobiles' chief Marketing Officer Rakesh Prajapati and Executive Director Prakash Raman, evidently, is far from concluded yet. In which direction might it continue? Here's a possibility.

Rakesh Prajapati: "From a marketing standpoint, I think we should see beyond the A,B,C,D segments as just size classifications. In India, everyone would like a bigger car, but the key question is price. We have now established a solid market position with our Anubhav hatchback in the B segment, and with a modest additional investment, have been able to stretch the wheelbase by 5 cm and add a boot to get us a very competitive car for the C segment with the Carvaka."

Prakash Raman: "That's putting it modestly. We've done some impressive technical work to get higher power for the Carvaka, and then there's a far more sophisticated suspension, don't forget. Yes, and you were saying..."

Rakesh Prajapati: "As we have crossed our breakeven volumes with 62 per cent capacity utilisation, and are now making profits, we could consider a low cost version of the Anubhav to compete in the A segment. As 70 per cent of our costs are variable costs of materials and labour, we could easily produce a low spec version with no initial overhead costs for a car in the A segment, which still commands 35 per cent of the domestic market. Though the finance boys will scream, we could easily increase our sales by about 25,000 units from 75,000 units to achieve 83 per cent capacity utilisation. These increased volumes would spread our overheads and those of our suppliers and these savings should satisfy the finance boffins."

Prakash Raman: "That is very good in theory, but a low cost variant of the Anubhav would also cannibalise our existing sales in the B segment."

Rakesh Prajapati: "Not necessarily. We would have to present it as a different product with completely different styling, and perhaps a slightly shorter platform and boot. It would need some investment in the body shop, new lights, grille and plastics, but these are costs that the volumes would quickly justify."

Prakash Raman: "I suppose you are now going to recommend a super stretched version to enable us to get into the D segment."

Rakesh Prajapati: "No way! A D segment saloon has to also be wider and stronger. This will require a completely new platform and more powerful new engines. The high costs of importing small volumes of D segment cars into India makes this market small, so I think we need to initially target our model at foreign markets, and with volumes, we will be able to underprice all our foreign competitors and really grow this segment in the domestic market. But we need to be different. Most competitive cars in this segment are not really luxury cars like the S Class Merc. In Europe and the US, there are executive saloons that are great in the front seats but cramped in the rear, not cars suitable for top executives with chauffeurs. We could design a smaller D segment saloon with very spacious and luxurious rear seats instead of focusing on the front ones. With our low cost production base, this car could do very well in Asian and European markets."