Search:



The Web

Rediff








Home > Business > Special


India Inc gung-ho about 'middle India'

T R Vivek in New Delhi | August 16, 2004

It was a surprise counter-attack from Ford India. On Wednesday, Ford came roaring down the highway with the announcement that it was slashing prices on its mid-sized Ikon sedans by between Rs 20,000 and Rs 60,000.

Ford India boss David Friedman is hoping that the sharp price cuts will send Ikon sales soaring from 18,500 last year to 27,000 in 2004.

Ford India isn't the only vehicle manufacturer that's cutting costs and putting cheaper autos on the road. Take a peep behind the scenes at Maruti Udyog's sprawling complex in Gurgaon. Everywhere there are posters for something called 'Challenge 50'. What's Challenge 50? It's a corporate goal of a 50 per cent boost in productivity by 2005.

Move away from autos to the LG Electronics complex in Greater Noida. Here there are no posters about productivity and cost cutting. But the same message is driven home during the constant training sessions for workers at all levels.

It has been the great dilemma of the Indian corporate world: how do you tap the huge Indian mass market that's hungry for consumer durables but short on cash?

Now a host of companies from FMCG and auto giants to hoteliers are revamping their act in a bid to reach middle class buyers. They are cutting costs at every level starting from the factory floor and then making hefty cuts on their price tabs. What's more, they are redoubling their efforts at selling low-end product ranges where costs have been slashed to the bone.

Leading the way is the auto industry. Three years ago the cheapest Ikon used to hit the road for around Rs 500,000 plus taxes. From this week the cheapest Ikon will come out of the showroom for Rs 449,000 plus taxes. What's more, this model comes with a new 1.3 Rocam engine and leather upholstery.

A few months ago Ford started a second shift to keep up with demand and it has benefited from the increased production. Says Friedman: "We are benefiting from better capacity utilisation and we'll pass on the benefits to the customers."

Ford's move came in response to Maruti, which recently slashed prices of its mid-size sedan Esteem by Rs 42,000. Earlier this year Maruti also brought out a stripped-down version of the compact car Alto and utility vehicle Versa with sharply reduced price tags.

Switch to the small screen and LG's Sampoorna range of colour televisions targeted at the rural and semi-urban areas is packed with features like Golden Eye, which used to be reserved for its high end televisions.

The Sampoorna models retail for around Rs 8,200. For LG the low-priced segment is extremely important because nearly 60 per cent of its sales come from semi-urban and rural areas.

It's true that at the top of the pyramid the Indian middle class is richer than it ever was before. But the vast majority of Indians -- even those who can afford televisions and two-wheelers -- are counting the rupees and the paisas with the utmost care.

If anything, would-be buyers are more careful now than they ever were before. That's because scores of new products are competing for attention.

Says KSA Technopak's chairman Arvind Singhal: "In 1991 when we started the consumer outlook study there were only seven product categories that accounted for 80 per cent to 90 per cent of consumer spending. Today the basket has nearly 20 categories competing."

Jagdeep Kapoor, managing director of the Mumbai-based Samsika Consultants, puts it slightly differently. In his recently published book Nine Brand Shastras, Kapoor argues that the Indian market will be dominated for the next five years by a category he calls the "never use" consumers.

As a result, according to Kapoor, companies will be forced to come up with cheaper products or come up with new tricks like selling products in sachets for which the unit cost is lower.

Says Kapoor: "The never use consumer initially is an occasional consumer who wants to be associated with a premium brand but is looking for a low-cost option."

Even a fast-growing world leader like Nokia is bowing to the new realities of the Indian market. The era when mobile phones were a status symbol of the ultra-rich have long gone.

Today, millions of phones are sold each month and the newest subscribers who are dialling in want cheap handsets. Also, new challengers from the east like LG, Samsung and Ben-q have emerged with smart-looking but low-cost handsets.

That's why Nokia launched the 1100 six months ago at around Rs 4,000. The 1100 isn't the cheapest Nokia phone on the market but it does have plenty of features which handsets in that price range never had before. "The phone is a combination of product benefits and pricing," says Sanjay Behl, head (marketing), Nokia India.

Nokia launched the 1100 after months of market research and studying the emerging new market carefully. Although Nokia won't reveal how many handsets it has sold, industry experts say that the 1100 has definitely helped the company defend its turf in the face of aggressive challenges. Says Behl: "It certainly is the cheapest in its competitive reference given the features it is packed with."

Head back to the road and the fast-moving motorbike industry. More than four million bikes are sold annually and the biggest action is, of course, at the lowest end of the market. Here the big winner in 2003-04 was Hero Honda, which sold nearly 500,000 CD Dawns, currently priced at Rs 30,900.

That's a whopping Rs 10,000 cheaper than executive segment bikes like the Splendor, Caliber and Victor. "This is the toughest segment to operate in. Market shares fluctuate wildly with every new launch or a new price point," says Atul Sobti, executive director, Hero Honda.

In mid-2003, Hero Honda looked over its shoulder and noticed that sales of Bajaj's lower-end bikes were revving up swiftly. That was when it turned its attention to the Dawn.

"In 2003 we decided to get aggressive with CD Dawn. But it is a tricky business because you cannot de-feature a bike beyond a point to reduce costs. We undertook several value engineering measures to beat down the price," says Sobti.

Hero Honda's cost-cutting moves included using special aluminium paints on the bikes instead of plating the metal. That saved around 10 per cent to 15 per cent. But Sobti warns that the company can't cut prices any more.

"We are scraping the bottom of the price pit. We can't bring down the price tag any lower. Already our entry level bikes are perhaps the cheapest such product anywhere in the world."

Careful cost-cutting is the name of the game. Take a look at how Maruti has been taking the axe to costs. It now employs only two quality inspectors per shift instead of the eight who were on duty before.

That's roughly about Rs 120,000 saved per day. Maruti says it has taken additional steps to ensure quality, which makes it possible to cut down the number of inspectors on the factory floor.

At a different level, the company has also cut back from 350 suppliers two years ago to 220 at end 2003-04. That makes for operational efficiencies and also gives the vendors better economies of scale.

"By lowering the time and cost involved in dealing with more vendors, we have increased our supply chain efficiencies. Going forward, we plan to have technically and financially capable set of vendors who can match up to MUL's standards," says a Maruti executive.

Maruti executives say they've streamlined the system to an extraordinary extent through a combination of controlling workshop costs, lean management systems and improving delivery schedules. For instance, the man-hours spent per car have been reduced by nearly 54 per cent in the last three years.

In other ways too Maruti has smartened up its act. Back in 2002-03 it had stocks of 30 days and that has now fallen to around 19 days. And this year production has zoomed to 472,908 vehicles from 359,960 in the previous fiscal.

Other sectors are also trying to bring down prices and attract a new class of clients. Take Indian Hotels, which recently announced its IndiOne low-cost hotels.

The group's first property in Bangalore -- a 100-room hotel -- is just about 45 days old, but the average occupancy rates have been upwards of 80 per cent. With rack rates of Rs 900 a day for delux rooms, and discounts thrown in for Internet bookings, the rush is understandable.

"Taj is an upscale hotel brand with low presence in the secondary and tertiary markets. Looking at the way information technology parks and business clusters are mushrooming outside the traditional central business districts, we felt there was a huge vacuum to be filled," says Sheela Nair, COO, IndiOne.

According to Nair, keeping manpower cost at a minimum has helped IndiOne to rein in the rates in a big way. "For a 100 room hotel we have just 25 employees," she says.

Buoyed by its initial success, IndiOne has ambitious plans of setting up 150 such properties across the country in the next five years. An average investment of Rs 10 crore (Rs 100 million) per hotel means the group will have to pump in a massive Rs 1,500 crore (Rs 15 billion).

"We are looking at pilgrimage places, state capitals, district headquarters and even the major railway junctions," adds Nair.

It's a slightly different story in the aviation industry. Around the world low-cost airlines like RyanAir, EasyJet, Air Asia and Virgin Blue have brought ticket prices down to unimaginable levels in recent years.

In India too a similar airborne revolution could be on the horizon -- though there could be technical hitches and opposition from established players.

On the domestic sector around five or six new airlines are hoping to start services in the not too distant future. And foreign airlines like Malaysia's Air Asia and Qatar's Air Arabia are also looking at the Indian market.

"India has a great potential for low-cost airlines. We will see more activity in this area with a large number of companies starting their services," says Peter Harbison, managing director, Centre for Asia Pacific Aviation, an aviation consultancy.

The buzz about low-cost airlines has even forced national carrier Air-India to make new plans for the future. It's now actively considering launching a low-cost subsidiary, which will be called Air-India Express. The new airline will cut costs by doing most of its bookings online and keeping operating costs at rockbottom levels.

This will help the carrier cut costs by about 50 per cent, which is the norm for low-cost carriers globally. Typically, in a low-cost airline model, the ticketing and related costs -- about 10 per cent of total costs -- are completely eliminated by using Internet-based and call centre based ticketing.

"We will have to look at a completely new business model which will be centered around reducing cost to become a successful business. It is very different from operating a full service operation," says a senior Air India executive.

Samsika's Kapoor has bright hopes for the future. He expects lots of innovations as companies strive for new ways to control costs and attract price conscious customers.

"With more than half our population below the age of 25, there will be an enormous number of people who would be first time users of several products and services. Companies can succeed only if they understand the aspirational heterogeneity of the market and cater to it."


Powered by

More Specials

Share your comments




Article Tools
Email this article
Top emailed links
Print this article
Write us a letter
Discuss this article




People Who Read This Also Read


Cyber city or Silicon slum?

A pipeline through Pakistan

How the pre-paids ring







Copyright © 2005 rediff.com India Limited. All Rights Reserved.