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Strategic Focus
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Can one ‘small’ car alone make Honda SIEL’s ‘big’ wrongs right?
The carmaker has finally launched its small car in India. But for a company plagued by strategic myopia for years together, there is more to the revival act than just a trick we call the Brio.
Issue Date - 10/11/2011
It is tempting to argue that market watchers and speculators are allowing irrational fears about Honda SIEL’s depreciating health to get in the way of rational debate over the outcome of its latest bet on India’s small car market (the Brio). But even for believers, the company’s sales numbers do not provide any relief. Over the past couple of years, Honda’s grip on the Indian market has been loosening. It’s public. Blame Honda’s lack of strategic focus in the Indian market for resulting in a situation as such.

Ever since Honda Motor Company established an India subsidiary (December 1995), its cars have been regarded as powerful yet efficient engines, found in smart, beautiful packages. Led by the iconic City, Honda has for long even been able to command a premium on the pricing front (even in the used car market). Of late however, the script has changed. And dramatically so.

For Honda, in recent quarters, the good news have stopped pouring in. It was meant to. Competitors – German, Korean, French, American & Indian – have struck clean, well-timed blows to chisel-off Honda’s dominance in the passenger vehicles (PVs) market in India. Its City is no longer the wonder brand in the A3 (mid-sized) segment. There are others like Ford’s new Fiesta, Hyundai’s Fluidic Verna, Volkswagen’s Vento, Maruti Suzuki’s SX4 et al, which have come across as stronger, appropriately priced alternatives to suit tastes on Indian roads. Count the numbers: during the April-September 2011 period, the City recorded a 15.49% y-o-y decline in the mid-size PV segment (having sold 19,803 units). Believers would argue that the City’s fall is only a reflection of the mid-sized PV segment’s pain. It is not. On the contrary, during the April-September 2011 period, domestic sales in the overall mid-size PV market saw a 14.91% increase y-o-y. You could write similar stories for the Civic (a y-o-y fall of 47.24% in sales vis-à-vis a fall of just 1.20% in the overall Executive segment), the Accord (fall of 44.20% vis-à-vis rise of 2.79% in sales of the Premium segment) and the CR-V (fall of 50.81% vis-à-vis rise of 20.98% in the SUV-UV4 market). Result: for the April-September 2011 period, Honda sold 24,191 units in India – a fall of 19.82% y-o-y, as compared to a rise of 1.84% for the overall PV market.

There are more problems than one – precisely why the small car alone cannot save Honda’s day. In fact, the very timing of the launch raises a question. Didn’t September 27, 2011, come a few years too late? Not to say there is anything wrong with the top-down market-entry approach that Honda adopted in India (mirroring the strategy adopted by Toyota, VW, Ford, GM, Nissan, Renault et al). But the fact that the company waited so long to launch its small car, is perplexing. Here is why. GM took 13 years to launch its hatchback. Toyota and Ford, 11 years each. Skoda, 7 years. Renault, 6 years (expected to launch the Modus in Q4, 2011). Nissan, 5 years, and VW, less than 3 years. Honda took 16 years – 3 years more than the slowest mover in this respect – GM! And how about the market share lost due to the delay? Had Honda launched the Brio even 3 years earlier, the car would have had to compete with only 15 other models in the hatchback segment. Now, the Brio has to fight it out in a much more crowded marketplace – against 35 other small cars! And to give you an idea of how fragmented this compact car space has become, 3 years back Maruti dominated the market with 63.25% share and 6 other players shared the rest 36.75%. Today (April-Sept 2011), Maruti only has 47.65%, while 10 other players command 52.35%. [Welcome Honda, you make the dozen.]

And it’s not Honda’s recent performance that influences our analysis. Even in FY2010-11, when the car market managed an incredible recovery of 9.73% y-o-y growth in sales units, that of the entity fell further by 3.79%.

Local production has been an issue with Honda over the years. Even in the past three quarters, an appreciating yen made the company’s import-led-low-localisation strategy look ugly. But hope there is, in the name of the Brio. Rather, it is a sign that this misery might be nearing an end. 80% of the parts used in the car is today, locally manufactured. The company even expects this level to reach 90% by Q2, FY2012-13. Such a process will help increase reduce costs and prices of Honda cars by anywhere between 8-100% (provided Honda passes on the entire benefit to the buyers). [The following are the indigenisation levels of Honda’s products: Jazz – 77%; City – 76%; Civic – 74%; Accord – 28%; & CR-V – 0%.] This could work magic in the Indian market, especially in the Mid-size & Executive segments. The sooner Honda realises this, the better are its chances of making its entire portfolio work in its favour. Not just one.


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