India Passenger Vehicle Sector

Transcription

1 Breadth of product portfolio 12 June 2017 Asia Pacific/India Equity Research Automobiles & Components Research Analysts Jatin Chawla Vaibhav Jain India Passenger Vehicle Sector SECTOR REVIEW MNCs still struggling: What next? Figure 1: We expect Hyundai and Renault-Nissan to be the main challengers to Maruti; Tata Motors could be the dark horse Market acceptance/success Niche players Honda Toyota M&M Challengers Hyundai Renault - Nissan Tata Motors New Entrants Peugeot Kia Daihatsu Laggards Ford GM VW - Skoda Source: Company data, Credit Suisse estimates Industry growth to pick up with higher ASPs. Passenger vehicle (PV) industry growth is gradually picking up if it were not for demonetisation, the sector would have had double-digit growth in FY17. We expect growth to accelerate further in FY18/19 to ~15%. We believe the market will continue to gravitate towards these four segments: (1) compact SUVs, (2) premium hatchbacks; (3) proper SUVs (a shift away from sedans) in the >4m segment; and (4) entry-level hatchbacks (to drive penetration). MNCs in a phase of reassessment and realignment. After a number of launches until 2014, and having found limited success, multinational corporations (MNCs) in India currently are in a phase of reassessing their India plans. The goal that everyone is seeking is a cost structure to compete with Maruti. They have tried increasing localisation (a continuous process), and making India a hub for exports (to get scale). As a next step, original equipment manufacturers (OEMs) are now seeking alliances on (1) product development, to spread development costs and widen product portfolio; and (2) component sourcing, to further improve the scale of sourcing. Hyundai and Renault-Nissan main challengers; Tata Motors is the dark horse. We divide MNCs into four buckets: (1) the main challengers; (2) the niche players; (3) the help seekers; and (4) potential new entrants. In the near term, we believe the main challenges for Maruti will come from (i) Hyundai has the best product portfolio suited for the trends in the market; (ii) Renault-Nissan has a good platform to milk; and (iii) Tata Motors getting its act together both on product and alliance fronts. DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E 12 June 2017 Focus charts and table Figure 2: Evolution of the PV market in India (mn) Early entrants - Ford, GM, Toyota and Honda - along with JV partners; 100% FDI allowed in FY02 Excise duty reduction (40% to 24% ), higher financing helped strong growth; Mkt shares stable MNCs gained share with small cars at expense of Tata Re-assessment and re-alignment phase Source: Company data, Credit Suisse estimates Figure 3: Rs k is the key segment now; almost ~70% by value of the sub 4m market Figure 4: expect shift from entry sedans to compact SUVs here Price (Rs '000) FY07 Size of each segment in Rs bn FY FY17 Entry Sedan 38% Composition of Rs 750k segment Compact SUVs 23% Premium hatchback 39% Source: Company data, Credit Suisse estimates Note: FY17 data. Source: SIAM, Credit Suisse research Figure 5: New models largely focused on SUVs; this and GST taxation should further boost SUV rise Entry segment Super premium hatchback Compact UV SUV/MPV Maruti Cervo Vitara Hyundai Eon facelift i20 facelift Carlino Creta facelift Honda WR-V, Vezel HR-V Ford Ecosport facelift Kuga Toyota New Innova VW-Skoda Tiguan Ren-Niss HBC Kaptur M&M S201, U321 Tata Nexon Q501 Source: Company data Figure 6: Hyundai and Renault-Nissan likely to be the main challengers; Tata could be the dark horse Hyundai Ren.-Nissan Tata Motors Honda Toyota Ford VW-Skoda Source: Company data, Credit Suisse estimates Products Exports Hub Ownership Cost Overall India Passenger Vehicle Sector 2

3 Expect PV industry growth to improve further to ~15% in FY18 Market will move towards four segments: (i) compact SUVs; (ii) proper SUVs; (iii) premium hatchbacks; (iv) entry-level hatchbacks MNCs are seeking tieups on product development and component sourcing to get scale, to further improve cost structure Car OEMs in India can be divided into four buckets: (1) the main challengers, (2) the niche players, (3) the help seekers, (4) the potential new entrants MNCs still struggling: What next? Industry growth to pick up with higher ASPs Were it not for the two-month period of November-December, which was impacted by demonetisation, the passenger vehicle sector in India would have seen double-digit growth in FY17. We reckon this growth will likely pick up further, to around 15%, in FY18. The underlying macro economy, with low inflation, low rates, and stable car prices, is supportive of growth. This, combined with the low base of the past few years, Pay Commission (PC) benefits and a second consecutive good monsoon should drive industry growth. The one big headwind in the next few years could come from regulations, which will likely drive a ~5% cost increase in gasoline cars and a ~15% hike in diesel cars. The two clear trends in the Indian market currently are: (1) a steady upward movement in ASPs, as customers want more and more features in their cars, and (2) like other global markets, we see a shift in preference towards SUVs. We believe the market will continue to gravitate towards these four segments: (i) entry-level hatchbacks, which will drive an increased penetration; (ii) premium hatchbacks, as consumers continue to upgrade to cars with more features; (iii) compact SUVs (from compact sedans); (iv) proper SUVs (a shift away from upper-segment sedans) in the >4m segment SUVs already comprise ~60% of the market in the >4m segment and are set to become ~6-7% cheaper post GST. MNCs in a phase of reassessment and realignment The journey of MNC car makers in India has evolved over time with a few distinct phases: (1) early entrants jumped into the fray post Maruti's success, once the sector was opened up; Hyundai, which came in with a small car, was the key gainer. (2) broad stability in market shares but towards the end of this period, India started offering incentives for small cars. (3) MNCs started focusing on the market with India-specific small cars; new players such as VW and Renault-Nissan also joined. (4) in the current phase MNCs are reassessing their options and looking for alliances; and market leaders, Hyundai and Maruti, are consolidating their respective market shares. (5) 2020 onwards competitive intensity will likely rise again as OEMs come into the market with improved products and cost structures by forging alliances. After a number of launches until 2014, and having found limited success, MNCs currently are in a phase of reassessing their India plans. The goal that everyone is seeking is a cost structure to compete with Maruti. They have tried increasing localisation (a continuous process) and making India a hub for exports (to get scale). As a next step, OEMs are now seeking alliances on (i) product development to spread development costs and widen their product portfolios; and (ii) component sourcing to further improve the scale of sourcing. Four kinds of players: Few challengers for Maruti We have divided car OEMs in India into four buckets: (1) the main challengers, which are likely to pose a challenge for Maruti Hyundai, Renault-Nissan, and Tata Motors; (2) the niche players that largely focus on the >4m segment Toyota, and Honda; (3) the help seekers, which have tried everything and are now seeking help via alliances with other players GM (chose to exit recently), Ford, and VW; (4) the potential new entrants not many left, but PSA Group is the tenth largest globally; there could be Chinese players; also, Hyundai and Toyota might bring in their sister brands Kia and Daihatsu. Kia has already finalised location for its new plant in India. Among the main challengers, we believe Hyundai has the best product portfolio to address the four key trends we have highlighted above. Renault-Nissan has a good platform, i.e., CMF-A, which it uses for the Kwid; we reckon it will provide cost-effective solutions for the compact sedan and compact SUV segments as well. Tata Motors is getting its act together on both products and alliances, and we regard it as the dark horse. India Passenger Vehicle Sector 3

4 Valuation comparison Figure 7: Valuation comparison of global auto majors Company Currency CMP Market cap P/E (x) EV/EBITDA (x) P/B (x) RoE (%) (LC) (US$ bn) CY17/FY18 CY18/FY19 CY17/FY18 CY18/FY19 CY17/FY18 CY17/FY18 US Ford Motor Company USD General Motors Company USD Paccar Inc USD European BMW EUR Daimler EUR Volkswagen EUR Volvo SEK Peugeot EUR Renault EUR Fiat Chrysler EUR Korean/ Indonesia Hyundai Motor Company KRW 159, Kia Motors KRW 38, Astra International IDR 8, Japanese Toyota Motor JPY 5, Honda Motor JPY 3, Nissan Motor JPY 1, Suzuki Motor JPY 5, Subaru Corporation JPY 3, Mazda Motor JPY 1, Chinese SAIC Motor Corp Ltd CNY Brilliance China Automotive HKD Holdings Limited Dongfeng Motor Group Company HKD Weichai Power CNY Great Wall Motor HKD Guangzhou Automobile Group HKD BAIC Motor Corporation Limited HKD Geely Automobile Holdings Ltd HKD Indian Maruti Suzuki India Ltd INR 7, Tata Motors Ltd. INR Mahindra & Mahindra INR 1, Source: IBES estimates India Passenger Vehicle Sector 4

5 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 12 June 2017 Industry growth to pick up with higher ASPs Were it not for the two-month period of November-December, which was impacted by demonetisation, the passenger vehicle sector in India would have seen double-digit growth in FY17. We reckon this growth will likely pick up further, to around 15%, in FY18. The underlying macro economy, with low inflation, low rates, and stable car prices, is supportive of growth. This, combined with the low base of the past few years, Pay Commission (PC) benefits and a second consecutive good monsoon, should drive industry growth. The one big headwind in the next few years could come from regulations, which will likely drive a ~5% cost increase in gasoline cars and a ~15% hike in diesel cars. The two clear trends in the Indian market currently are: (1) a steady upward movement in ASPs, as customers want more and more features in their cars; and (2) like other global markets, a trend towards SUVs. We believe the market will continue to gravitate towards these four segments: (i) entry-level hatchbacks, which will drive an increased penetration; (ii) premium hatchbacks, as consumers continue to upgrade to cars with more features; (iii) compact SUVs (from compact sedans); (iv) proper SUVs (a shift away from uppersegment sedans) in the >4m segment (SUVs already comprise ~60% of the market in the >4m segment). Industry growth likely to accelerate further Demonetisation was a temporary blip Barring the months of November-December, when demonetisation impacted industry growth, growth has been in double digits since July. Given the festive season arrived almost a month earlier this year, the right metric to compare the pre-festive season period is the July-October period, during which the industry posted 14% YoY growth. Most auto OEMs have stated that October was the best month for retail volumes in a long time. This momentum was halted for a couple of months by demonetisation. However, the industry has staged a comeback to double-digit growth since January, and it will likely pick up further post GST implementation. In fact, the month of December itself was a good month for retail sales, and hence led to strong wholesale volumes from January as OEMs rebuilt inventories. Figure 8: FY17 volumes have been healthy, except during November/December (demonetisation) Figure 9: Despite demonetisation, FY17 growth was better than earlier years, indicating an upward trend , , ,400 1, , (5.0) - (10.0) PV sales ('000) Growth yoy (%, RHS) PV sales ('000) Growth yoy (%, RHS) Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research India Passenger Vehicle Sector 5

6 Multiple factors driving this growth We reckon industry growth is being driven by several factors. The biggest factor, in our view, is that the industry is emerging from a multi-year slowdown (see annual volume growth chart above), and there is a big catchup that needs to happen. The five-year CAGR for the industry was 2% over FY11-16, compared to the 17% CAGR in the five-year period prior to that. Having said that, the same argument could have been applied in FY16 as well and, hence, there has to be a trigger for this growth to come to the fore. Figure 10: Maruti has seen a rise in government sector employees share in volumes 25% 20% 15% 10% 5% 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 2H17 % share of Govt employees in Maruti volumes Source: Company data Historically, the implementation of Pay Commission has led to a significant increase in total outlay for salaries by the government. Not surprisingly, discretionary items' sales get a lift during these years. Both 2Ws and 4Ws posted an ~18% CAGR over FY08-11 post the 6th PC (also aided by other factors such as economic recovery). We expect similar support from the seventh Pay Commission. According to Maruti's management, post the implementation of the Pay Commission recommendations, the share of government employees in total volumes has risen from 16% to 20%. Note that state government employees are almost 3x central government employees. Even after adjusting for pay scales, prospective PV buyers among state government employees are around 2x central government employees. Hence, demand pick-up is more linked to the implementation of the Pay Commission recommendations by state governments. So far, only a few states (for example, Goa and Odisha) have announced pay revisions for employees, while most states are yet to implement them. India Passenger Vehicle Sector 6

7 Figure 11: State government employees likely to drive demand Particulars Central government employees (mn) 3.5 % employees with pay scale upwards of PB2 (relevant for cars) 25% Total central government employees who are prospective car buyers (mn) 0.9 State government employees (~3x central) (mn) 10 % employees in states falling in pay brackets who are relevant car buyers 20% Total state government employees who are prospective car buyers (mn) 2.0 Total government employees who are prospective car buyers (mn) 2.9 Annual passenger vehicle sales in India in FY17 (mn) 3.0 Source: Sixth Pay Commission report, Credit Suisse estimates Owning a car has become more affordable The overall macroeconomic environment is also supportive of an increase in car ownership now. CPI inflation has been trending down, which has led to interest rates also coming down. With a low commodity environment so far, car prices also have been quite stable. While fuel prices have inched up a bit in the recent past, over a 2-3 year period fuel prices have been quite stable (they have not declined in India as the government has increased taxes). Overall, the cost of owning a car, after declining in FY15 and FY16, has inched up a bit in FY17 but is still lower than FY14 levels. Thus, the cost of owning a car has not gone up in line with inflation, making cars relatively affordable. Figure 12: CPI inflation has moderated in the past three years Figure 13: and interest rates have also moderated FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 CPI average 5.00 May-05 May-07 May-09 May-11 May-13 May-15 May year G-sec yield (%) FY17 data until February. Source: CMIE Source: Bloomberg India Passenger Vehicle Sector 7

8 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun June 2017 Figure 14: Fuel prices have been stable now for a couple of years Figure 15: The cost of owning a car has remained quite stable in the last three years 80 Petrol price (Rs/ litre) Diesel 10,000 12% 70 9,500 8% ,000 4% 40 8,500 0% ,000 FY11 FY12 FY13 FY14 FY15 FY16 FY17-4% Monthly ownership costs % YoY increase (RHS) Source: Ministry of Petroleum and Natural Gas, Credit Suisse research Source: Credit Suisse estimates Good monsoon after a couple of years; outlook for FY18 also good Good monsoons have been one of the key reasons for the healthy improvement in total area sown to some extent this is reflected in the improved demand environment in rural areas. Demonetisation did affect rural demand during November-December as rural economies have a much larger share of cash transactions than urban areas. However, this did not impact the rabi (winter) sowing area, as farmers managed their purchases on credit. Given the outlook for a normal monsoon in FY18, rural demand could remain strong going forward. Early signs in FY18 (witnessed by demand of entry-segment cars) are very encouraging. New models creating new segments in the market The importance of new launches has increased significantly in the last few years with customers going for the latest products. On the large SUV front, for example, the consumer preference has been changing from Mahindra SUVs to Renault Duster, Nissan Terrano, and now to Hyundai Creta. OEMs have also tried catering to evolving consumer preferences; as a result, Maruti Baleno (premium hatchback) and Brezza (compact SUV) have done extremely well. Renault Kwid (SUVish entry-level hatchback) has been a novel product in the entry segment. India Passenger Vehicle Sector 8

9 Figure 16: Top five models contributed 130%+ to incremental industry volumes 120, ,000 80,000 60,000 40,000 20,000 - Brezza Baleno Kwid Tiago Creta Incremental volumes (yoy) in FY17 of recent launches Source: Company data, Credit Suisse estimates GST will lead to a reduction in prices of big cars and SUVs Under the GST regime, the government is doing away with the different slabs that existed on cars >4m (viz 24%, 27%, 30%) compared to a duty of 12% on small cars. There will now be a standard cess of 15% on all cars >4m in length compared to a 28% GST rate on other cars. Additionally, small petrol cars will have a 1% cess, while small diesel cars will have a 3% cess. Broadly, most car segments will see some sort of price reduction. The largest price reduction will be on those vehicles which were taxed at 30% excise duty earlier (viz cars with length >4m, engine capacity >1,500cc and ground clearance >170mm; largely SUVs, MUVs). Even before this change in GST, the market was moving towards SUVs despite the price premium that the consumer had to pay because of the extra taxation. Now with that taxation gap going away, prices of large SUVs could decline by 6-7%. Thus the shift towards SUVs could be even faster going forward. India Passenger Vehicle Sector 9

10 Figure 17: SUV share is on a rise likely to accelerate further with the new tax rates under GST 45% 42% 39% 36% 33% 30% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 SUVs as share of over 4m PVs Source: Company data, Credit Suisse estimates Regulations pose the biggest headwind for the industry The other big challenge for OEMs will continue to be regulations. The current government is clearly focused on improving both safety and emissions standards to developed market levels. This could mean that the cost of the vehicle would keep going up and hence affordability would not improve at the pace at which it would normally in an economy that is growing at 7%+. This would mean that car growth could be lower than what people expect. Compliance with safety regulations needs platform upgradation Safety regulations seem to be the key issue that the PV industry will face in coming years. Implementation of crash norms over the course of the next couple of years could lead to a rise in prices across the industry. Most companies would first focus on ensuring that their existing models comply with the regulations, rather than introducing new ones. Figure 18: Smaller (<4m) petrol vehicles likely to see ~6% rise in prices on regulations Figure 19: smaller diesel vehicles to see double digit increase (on a higher base than petrol) 110 Gasoline sub 4m vehicles 115 Diesel sub 4m vehicles Current 4W price BS-IV Crash Norms Price in 2019 BS-VI Price in Current 4W price BS-IV Crash Norms Price in 2019 BS-VI Price in 2020 Source: Credit Suisse estimates Source: Credit Suisse estimates India Passenger Vehicle Sector 10

11 Emissions norms could make small diesel vehicles unattractive While small petrol vehicles (sub-4m) are likely to witness a ~6% rise in prices on account of regulations, for diesel vehicles (sub-4m), the increase would be in double digits. The difference is on account of emission requirements, where diesel vehicles would see a much higher increase in costs. Diesel vehicles are anyways more expensive than petrol vehicles, and a further increase in prices would make them unattractive. This could lead to a scenario where manufacturers choose to focus on petrol versions for smaller cars, and look at diesel variants only for larger vehicles. This could prove to be a headwind for M&M, which is known for its diesel vehicles. Which segments would drive this growth? With rising income levels, cars are becoming feature-rich As seen in the chart below, the market has evolved quite a bit in the past 15 years. While regulations have ensured that 75% of the market has remained a sub-4m market, within that segment there has been a significant upward movement. While the early 2000s were about the smaller entry-level cars such as Maruti 800, and Alto (Rs300k price point), by the mid-2000s the market had started moving up to the Hyundai Santro and Maruti WagonR. By the end of the decade; consumers started demanding more stylish and powerful cars as the market moved up to the Maruti Swift and other premium hatchbacks, with the MNCs launching small cars for the Indian market. As of now, the market is gradually moving even further up with consumers demanding all the latest possible features (normally seen in much more expensive cars) in their hatchbacks, and hence cars such as Maruti Baleno and Hyundai i20 are doing well. Figure 20: Market size of the Rs700k car segment has risen to Rs795 bn from Rs127 bn ten years back Price (Rs '000) FY07 Size of each segment in Rs bn FY FY17 Note: Size of a market is shown in Rs bn. Source: Company data, Credit Suisse estimates The global trend towards SUVs is present in India too The share of SUVs is increasing in almost every global market; this trend holds true for India as well. The share of SUVs has increased from 14% in FY10 to 26% in FY17. OEMs have adjusted products for the uniqueness of Indian regulations and launched sub-4m compact SUVs as well. Ford was the first to launch such a product, the Ecosport. Maruti and Mahindra followed with the Brezza and the TUV. With other OEMs likely following suit in the next 2-3 years, there should be more such products. Honda has already introduced the Jazz-based crossover WRV; Tata is planning to launch the Nexon later in the year. India Passenger Vehicle Sector 11

12 Mahindra and Maruti have gone a step further and introduced their SUV look-alike products even at as low as the Rs500k price point the KUV and the Ignis, respectively. Figure 21: SUVs account for ~15% of volumes, lower than China and the US 60% 50% 40% 30% 20% 10% 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 SUVs as % of PV sales in India China US Source: SIAM, Credit Suisse research Diesel's share has started shrinking; will shrink even further post 2020 As global crude prices shot up from US$70/bbl to US$114/bbl over FY09-12, the gap between gasoline and diesel prices in India increased from Rs14/L to Rs32/L. This, combined with the fact that diesel fuel efficiency was also higher, meant that customers were ready to pay the extra Rs100k for diesel cars. As a result, the share of diesel cars increased from 34% in FY09 to 58% in FY13. However, since the government deregulated diesel prices and started the process of increasing diesel prices by Rs0.5/L on a monthly basis to reduce the under-recovery on diesel, the gap between gasoline and diesel prices now is only Rs12/L. Diesel is still cheaper because of lower taxes but not as cheap as it earlier used to be. As a result, the share of diesel vehicles has been shrinking. With emission regulations coming in FY20, the small diesel engine will become unviable and hence the share of diesel in the overall market should shrink considerably. The smaller car segment would still be ~70% of the market in FY20 and hence the share of diesel is likely to slip significantly from around ~40% currently to <25% post the BS-VI emission regulations. India Passenger Vehicle Sector 12

13 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun June 2017 Figure 22: Diesel share has come down to ~40%... Figure 23:...as the gap between diesel and petrol prices has reduced 100% 80 Petrol price (Rs/ litre) Diesel 80% 60% 66% 65% 64% 52% 42% 47% 52% 56% 60% % 20% 34% 35% 36% 48% 58% 53% 48% 44% 40% % FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E 20 PV Industry Diesel Mix Petrol Mix Source: SIAM, Credit Suisse estimates Source: Ministry of Petroleum and Natural gas, Credit Suisse research We expect four segments to do particularly well Given the ongoing SUV trend in the market, and the fact that India is still significantly underpenetrated vs other markets, we see more upside to the share of SUVs going forward. Given the large number of launches expected, compact SUVs will continue to take share away from compact sedans. On the >4m sub-segment, SUVs are already 60%+ of total volumes; their share will increase further post GST implementation. With the trend towards premiumisation, the premium hatchback segment, i.e., Baleno, price point (Rs700k) will continue to increase further at the expense of the Swift and WagonR price points (Rs k), in our view. We do not expect these segments to shrink but incremental growth will be much higher in the Baleno price segment. After years of very low growth, we reckon the entry segment is poised to grow again as overall industry volume growth picks up. In our view, the increase in penetration in the market will happen largely with the entry segment and post that people will quickly move up when they upgrade. India Passenger Vehicle Sector 13

14 The MNC evolution Figure 24: Evolution of PV market in India MNCs in a phase of reassessment and realignment The journey of MNC players in India has evolved over time with a few distinct phases: (1) a period of early entrants post Maruti once the sector was opened up; Hyundai with a small car was the key gainer; (2) broad stability in market shares but towards the end of this period, India started offering incentives for small cars; and (3) a phase where MNCs started focusing on the market with India-specific small cars; new players, such as VW, Renault-Nissan, also entered. Following a number of launches till 2014 and having found limited success, MNCs are in a phase of reassessing their India plans; General Motors even chose to exit the market. The goal that everyone is seeking is a cost structure to compete with Maruti. They have tried to increase localisation (a continuous process) and making India a hub for exports (to get scale). As a next step, OEMs are now seeking alliances for: (1) product development to spread development costs and widen the product portfolio; and (2) component sourcing to further improve the scale of sourcing. Post FY20, the competitive intensity in the industry may rise again, as OEMs come to market with products and cost structures both improved post the current phase of alliances. Maruti, by then, though, is expected to build differentiation on the distribution side. We re-analyse MNCs (Why is it a challenge for MNCs?) for the key parameters required to succeed in India: (1) suitable products; (2) sales & service networks; (3) India as an export base; (4) brand strength; and (5) ownership costs. In terms of product portfolio in the four growing segments of the market, Maruti is the only OEM with a presence in all of the segments. Hyundai, Renault and Tata Motors are the other players with plans to plug gaps in their product portfolio (mn) Early entrants - Ford, GM, Toyota and Honda - along with JV partners; 100% FDI allowed in FY02 Excise duty reduction (40% to 24% ), higher financing helped strong growth; Mkt shares stable MNCs gained share with small cars at expense of Tata Re-assessment and re-alignment phase FY95 FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Source: Company data, Credit Suisse estimates India Passenger Vehicle Sector 14

15 India s passenger vehicle industry is still pretty nascent compared with other developed countries, considering that local manufacturing kicked off only in the early 1980s with the creation of Maruti Udyog a joint venture between the Indian government and Suzuki Motors. Still, for about a decade after Maruti's inception, the passenger car market was kept closed for new entrants. It was only post liberalisation in 1991 that the government started opening up the auto sector which meant that for over a decade, Maruti had grown without any meaningful competition. This first-mover advantage created large entry barriers favouring Maruti. It was sitting on huge investments that were already amortised, had developed a reliable sourcing industry and was reaping the benefits of economies of scale especially in the small car segment. No doubt other players will find it difficult to emulate Maruti. However, given the attractive potential of India (extremely low car penetration even today resulting in potentially comfortable double-digit growth over a long period), most foreign majors did delve into India given their deep pockets and expectations that they would make money in the long haul. While all these companies have had local operations in India since the mid-1990s, even after almost 20 years they have not managed to gain any significant foothold in the country : The early entrants The Indian auto sector was opened for foreign investments in 1991 post liberalisation but foreign MNCs needed to have an Indian partner to start operations (similar to the regulation in China). OEMs, such as Ford (JV with Mahindra), GM (JV with Hindustan Motors), Toyota (JV with Kirloskar) and Honda (JV with Siel, Ushagroup) all entered in Hyundai was the first player to enter with a 100% stake in its India entity. It also came with a small car suitable for the Indian market and from the outset, made its India plant an export hub. The other early entrants Toyota, Honda and Ford all launched their global sedans in the market. Toyota brought its people carrier, Qualis, and had good success as its quality was a lot better than the people carriers available from Tata and Mahindra the other Indian players. Tata introduced its own small car, Indica, in 1999 which given the strong Tata brand name had a strong response. In 2002, the auto sector was completely opened up with 100% foreign direct investment (FDI) allowed under the automatic route : Largely stagnant shares Overall market growth accelerated during this period as the government progressively brought down excise duty on PVs from 40% to 24%. Despite the market growing from 0.7 mn units to 1.5 mn, market shares remained remarkably stable. This was the period during which the differential excise duty criteria was also implemented with excise duty on small cars (defined as <4m in length and <1,200cc for petrol engines and <1,500cc for diesel engines) reduced from 24% to 16% in March This was further reduced from 16% to 12% in March This large differential between small and normal cars led to the next phase of growth driven by small cars. Globally, this was a period marked by huge growth in China, as the Chinese market increased from 2 mn units in 2003 to 5.7 mn in India Passenger Vehicle Sector 15

16 Figure 25: Market shares were remarkably stable from FY FY03 FY04 FY05 FY06 FY07 FY08 Market share of Maruti (%) Hyundai Tata Motors M&M Others Source: SIAM, Credit Suisse estimates research 2008 to 2014: A period of MNCs focusing on India with small cars The emergence of China as a large market and the sharp reduction in duties on smaller cars in India meant that global players started focusing on India in a big way. Between 2008 and 2012, all MNCs which had earlier not focused on small cars were forced to launch small cars. This included players focusing on only the premium segments earlier. Toyota launched the Etios (a sub 4m sedan) and Liva (a sub-4m hatchback), Honda which launched the Amaze (a sub-4m sedan) and Brio (a sub-4m hatchback). Global players that were not present in India before 2008, such as Renault-Nissan and VW, also entered India during this phase. Ford and GM continued to launch cars suitable for the Indian market with limited success. With crude prices globally going up significantly and diesel a subsidised fuel in the market, the market started moving towards diesel vehicles in a big way. This meant that all global players also launched diesel vehicles resulting in Tata Motors losing its niche in diesel and the Nano failing, and no new launches as it focused on reviving JLR; its market share slipped from 15% to 6%. This meant that Maruti and Hyundai were broadly able to retain their share despite the entry of so many new players in the market. Figure 26: Tata Motors lost share in PVs... Figure 27: while Toyota, Honda and Renault- Nissan gained FY09 FY10 FY11 FY12 FY13 FY14 FY15 - FY09 FY10 FY11 FY12 FY13 FY14 FY15 Market share of Maruti (%) Hyundai Tata Motors M&M Others Market share of Tata Motors (%) Toyota Honda Ren-Nissan Source: SIAM, Credit Suisse research Source: SIAM, Credit Suisse research India Passenger Vehicle Sector 16

17 Figure 28: Hyundai and Japanese OEMs are profitable in India currently Profitability for most OEMs has improved from FY12 to FY16 largely as the fx became favorably for the Japanese players. The American and European players still continue to make losses, though. Figure 29: profitability for Japanese OEMs improved because of the depreciation of the Yen 15,000 10,000 5, % 10.0% 5.0% 0.0% -5.0% % -5, % -20.0% -10,000 Hyundai Toyota Honda VW-India Ford GM -25.0% Hyundai Toyota Honda VW-India Ford GM FY12 profit/loss (Rs mn) FY16 FY12 EBITDA margin FY16 Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research : A phase of reassessment and realignment What MNC players have realised is that they have not been able to find the right cost structure for the market, as they do not have the scale of Maruti or Hyundai thus forcing them to either price products higher than incumbents or offer fewer features than the incumbents. In a value-conscious market such as India, clearly this strategy has not worked. And hence all MNCs are in a period of reassessment and trying hard to get scale. One strategy which almost everyone barring Toyota is using is to make India an export hub to drive up utilisation as well as to increase scale on sourcing. Figure 30: Most MNCs trying to use India as exports to scale up 800, , , , , , , ,000 - Hyundai Ford Honda Toyota Renault-Nissan VW-Skoda GM Domestic volumes Exports Note: Based on FY17 data Source: Company data, Credit Suisse estimates India Passenger Vehicle Sector 17

18 We expect competitive intensity to rise again from FY20 We expect total market volumes to be ~5 mn units by 2020 so clearly, India should be a market that MNCs will not be able to ignore. This would also help in solving the scale issue to a certain extent as, even with stagnant shares, volumes will reach levels whereby localisation would become viable. We would expect this lull phase currently to be used by OEMs to devise business models through which they would like to challenge the market again. It seems the business model that OEMs seem to be veering towards now is alliances with local or other like-minded players. Those with global alliances such as Renault-Nissan-Mitsubishi, Toyota-Daihatsu and Hyundai-Kia will be looking to use those to gain platform and sourcing scale. Others, such as VW and Ford, are looking for alliances with Indian players. VW has already announced an MoU with Tata Motors for joint product development and sourcing. Media reports (Economic Times) indicate that Ford is also looking for some form of tie-up with Mahindra. Ford's first entry into India was via a JV with Mahindra. In its own presentations, Ford has talked about reviewing their India plans and thus it could also go the General Motors way, which chose to exit the market. Key success factors Products As the market has expanded in the past few years, along with the increase in GDP per capita, it has also continued to evolve. Over the decade of 2010 ( ), Indian consumers moved from segment A to B with the rise in affordability and aspiration levels. Over the past few years, consumers have now moved up further to compact SUVs and premium hatchbacks. While entry-segment cars will remain in demand on rising penetration (first-time buyers), the premiumisation trend has led to a rise in demand for premium hatchbacks and compact SUVs. In order to cater to this trend, companies are working towards introducing products in all segments with some of them looking to address product portfolio gaps over next couple of years. Figure 31: Product portfolio of OEMs in the Indian market Source: Company data, Credit Suisse research Price ('000 Rs) Maruti Hyundai Honda Ford Toyota VW-Skod Ren-Niss M&M Tata Entry Less than , Alto Eon Compact Hatchback Between 350 and 450 WagonR, Celerio Premium Hatchback Between 450 and 600 Swift Grand i10 Brio Figo Etios Liva Super-prem Hatch More than 600 Baleno i20 Jazz Kwid, Redi- Go Compact Sedan Less than 600 Dzire Xcent Amaze Figo Aspire Etios Ameo Verito Upper Sedan Between 600 and 1200 Ciaz Verna City Rural UV Less than 600 Bolero Sumo Compact UV Less than 700 Ignis, Vitara Brezza WR-V SUV Between 600 and 1200 S-cross Creta BR-V MPV Between 600 and 1200 Ertiga Luxury Above 1200 Elantra, Santa Fe Accord, CRV Ecosport Endeavour Innova, Fortuner Polo, Fabia Vento, Rapid Yeti, Jatta, Tiguan Go Pulse, Micra Scala, Sunny Duster, Terrano Evalia, Go+ Koleos, Fluence TUV, KUV, Quanto Scorpio, XUV500 Vans Omni, Eeco Gio ACE Xylo Rexton Nano Indica, Tiago Bolt Indigo, Zest, Tigor Safari, Hexa Aria India Passenger Vehicle Sector 18

19 Figure 32: Market share in different segments Segment size Maruti Hyundai Honda Ford Toyota GM* VW-Skoda Ren- Entry (A) 15% 54% 13% 31% 2% Compact hatchback (A) 12% 73% 4% 0% 3% 20% Premium hatchback (B) 14% 44% 35% 1% 3% 3% 2% 5% 2% 2% Super prem hatch (B) 9% 43% 45% 12% Compact sedan (B) 14% 50% 12% 8% 5% 8% 1% 4% 0% 1% 10% Upper sedan (C) 5% 41% 9% 36% 0% 0% 0% 12% 1% Rural UV (B) 1% 84% 10% Compact UV (B) 8% 49% 0% 22% 29% SUV (C) 8% 9% 40% 8% 0% 9% 31% 3% MPV (C) 6% 36% 0% 1% 0% 45% 7% 0% 7% 4% Vans (A) 6% 84% 6% 10% * Market share based on FY17 numbers. GM has discontinued sales in India Source: SIAM, Credit Suisse research Distribution reach and quality of service Nissan Most companies have invested in expanding their distribution network over the past three years. Maruti remains the undisputed leader with 2,200 touch points including Nexa showrooms, as it has chosen to expand its distribution reach much further in rural areas as well as installing more higher-end touchpoints with the Nexa concept in large cities. Hyundai is second with 470 touchpoints which is 8% higher compared to September Ford and Toyota have caught up well and now have 360-plus dealers compared to ~170 dealers a few years back. Renault has seen a good increase in the number of dealers from 108 in 2013 to 250 now. The company is targeting 270 outlets in the near term, as that will help in pushing sales of the Kwid model, which has emerged as a strong contender in entry-segment cars. VW-Skoda and GM have remained largely at similar levels, as domestic sales have failed to pick up. Figure 33: Dealer network M&M Tata Maruti Hyundai Ford Toyota Honda Tata Motors M&M GM Renault VW-Skoda No. of sales outlets Cities covered Source: Company data, Credit Suisse estimates Utilisation of India as an export hub We look at overall exports from India and how this has changed over the past few years. Among the leading ones, Ford and VW-Skoda have been able to scale up exports materially from India having witnessed a 37-48% CAGR for FY General Motors has India Passenger Vehicle Sector 19

20 also seen a rise in exports from India from negligible levels four years ago to over 65,000 units (~75% of total sales) and after announcing its exit from the domestic market will now operate the plant on an export-only basis. Hyundai has been using exports as a fall-back option and hence exports have actually declined at a 10% CAGR over these four years. Exports still account for ~25% of total sales. Hyundai India can thus continue to grow in the Indian market without investing in new capacity at the expense of exports (which can be served from other plants of the Hyundai parent company). Renault-Nissan already had sizeable exports from India even three years ago and that number has shrunk at a 4% CAGR, as end-markets in Africa and Latin America have been weak. However, exports still account for ~40% of total sales, thus providing much-needed scale to the alliance, which has helped them compete in the Indian market, especially in entry-segment vehicles. Honda and Toyota have not focused on using Indian plants as manufacturing bases for export markets and continue to have less than a 10% share of exports in sales. Figure 34: Ford, VW-Skoda and GM have focused on increasing exports; the export share for these players is also higher as their domestic sales struggled 80% 70% 60% 50% 40% 30% 20% 10% 0% GM Ford VW-Skoda Hyundai Toyota Renault-Nissan Honda Exports as % of total volumes in FY14 FY17 Source: Company data, Credit Suisse estimates Figure 35: Exports have fallen for Hyundai largely on account of higher domestic sales 800, , , , , , , ,000 Figure 36: For VW and Ford, exports have helped cross the 50% utilisation mark; GM is still struggling 120% 100% 80% 60% 40% 20% - Hyundai Ford Honda Toyota Renault- Nissan VW- Skoda GM 0% Hyundai Ford Honda Toyota Renault- Nissan VW-Skoda GM Domestic volumes Exports Cap. utilisation in domestic sales Exports Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates India Passenger Vehicle Sector 20

21 Brand strength We look at recent JD Power surveys to ascertain the brand perception of various OEMs. Maruti continues to score highest but had to share this position with Honda in 2016, which has done very well by reaching the top position from number three in This goes to show Honda's brand strength despite it struggling for market share because of a poor product portfolio. Hyundai slipped to third position. Tata Motors is another notable brand which has done extremely well by securing fourth position compared to sixth position previously. Another notable development is that the difference between number one and others has reduced, thereby indicating that other companies have improved their overall customer experience. Figure 37: Honda and Tata see most improvement; Maruti remains number one but the gap with others has narrowed Maruti Honda Hyundai Tata M&M Toyota Renault JD Power 2016 survey - Customer service index 2013 survey Source: Company data, Credit Suisse estimates Ownership costs In addition to cost of the vehicle, recurring maintenance costs are another important variable considered by customers. We highlight the change in maintenance costs of certain models over the course of the past three years. We notice that Ford has done a good job of reducing its maintenance costs (spare parts) even though the company has focused on premium products in all categories, and still does not have an entry-segment product. Maruti and Hyundai have been equally effective in keeping costs in check. We look at the various segments and OEM rankings for three segments of spare parts. The first segment is service parts, which have a high frequency of usage. The second segment is mechanical parts. These are replaced after the vehicle has completed 15-20,000 km of run usually. The third segment is accident repair parts, where requirements are event specific and thus one-off in nature. India Passenger Vehicle Sector 21

22 Figure 38: Maruti s parts most economical in entryvehicle segment... Figure 39:...as well as for budget hatchbacks 6 5 Rankings in entry segment 7 6 Rankings in budget hatchbacks Maruti Hyundai Tata Datsun Renault 0 Maruti GM Datsun Hyundai Nissan Tata Service Parts Mechanical Parts Accident Repair parts Service Parts Mechanical Parts Accident Repair parts Source: Autocar, Credit Suisse research Source: Autocar, Credit Suisse research Figure 40: In mid range, Maruti most economical for servicing, accident repair parts; third lowest for mechanical parts Figure 41: Ford has made its spare parts more economical for premium hatchbacks Rankings in mid range hatchbacks Maruti GM Fiat Honda Hyundai Nissan Renault Tata Toyota Rankings in premium hatchbacks Maruti Ford Honda Hyundai M&M Fiat VW Service Parts Mechanical Parts Accident Repair parts Service Parts Mechanical Parts Accident Repair parts Source: Autocar, Credit Suisse research Source: Autocar, Credit Suisse research India Passenger Vehicle Sector 22

23 Figure 42: Maruti best in entry-level sedans, Ford also well placed Figure 43: Hyundai second after Maruti in mid-size sedans 9 8 Rankings in Entry level sedans 9 8 Rankings in Mid size sedans Maruti Fiat Ford Hyundai GM Tata Toyota Honda 0 Maruti Fiat Honda Hyundai Nissan Renault Skoda VW Service Parts Mechanical Parts Accident Repair parts Service Parts Mechanical Parts Accident Repair parts Source: Autocar, Credit Suisse research Source: Autocar, Credit Suisse research Figure 44: M&M scores the best in compact UVs Figure 45: Honda most economical in mid-size SUVs Rankings in compact SUVs 8 7 Rankings in mid size SUVs Maruti Ford M&M 0 Maruti Honda Hyundai M&M Nissan Renault Tata Service Parts Mechanical Parts Accident Repair parts Service Parts Mechanical Parts Accident Repair parts Source: Autocar, Credit Suisse research Source: Autocar, Credit Suisse research Maruti remains most cost competitive in terms of its spare parts in most segments. If we focus on key segments premium hatchbacks, entry level sedans and compact SUVs in first two, Maruti s products are 16-40% cheaper than average across the three segments of spare parts (service, mechanical and accident repair parts). In the case of compact SUVs, M&M leads the pack with the cost of spare parts lower for lower priced vehicles, such as the KUV1OO and TUV 3OO. However, if we look at the ratio for parts to vehicle price, Maruti scores little better than others. India Passenger Vehicle Sector 23

24 Figure 46: Maruti spare parts 16-32% lower than the segment average among premium hatchbacks... Figure 47: and cost 24-40% lower than average in entry-level sedans 100% Premium hatchback 100% Entry level sedans 80% 80% 60% 60% 40% 40% 20% 20% 0% Service Parts Mechanical Parts Accident Repairs 0% Service Parts Mechanical Parts Accident Repairs Maruti's discount to average Maruti's discount to highest Maruti's discount to average Maruti's discount to highest Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Figure 48: Among compact UVs, Maruti s parts are expensive; M&M is more economical Figure 49: KUV1OO and Ecosport diesel s parts less expensive 40% 30% Compact SUVs 12.0% 20% 10.0% 10% 0% 8.0% -10% -20% Service Parts Mechanical Parts Accident Repairs 6.0% M&M TUV 3OO Ford Ecosport petrol M&M Nuvosport Maruti Vitara Brezza KUV 1OO petrol Ford KUV 1OO Ecosport diesel diesel Maruti's discount to average Maruti's discount to highest Percentage of parts to car price Source: Autocar, Credit Suisse research Source: Autocar, Credit Suisse research India Passenger Vehicle Sector 24

25 Four kinds of players: Few challengers for Maruti We have divided car OEMs in India into four groups: (1) the main challengers those likely to present a challenge to Maruti Hyundai, Renault-Nissan, Tata Motors; (2) the niche players those focusing largely on the >4m segment like Toyota, Honda; (3) the help seekers those that have tried everything and are now seeking help via alliances with other players Ford, VW (GM, too, was earlier in this bracket but has now chosen to exit); and (4) potential new entrants not many left but the PSA group is the tenth largest globally and there will be Chinese players and Hyundai, Toyota could bring in sister brands, Kia and Daihatsu. Kia has already finalised the location of a manufacturing plant in India. Among the main challengers, Hyundai has the best product portfolio to address the four key trends highlighted above. Renault-Nissan has a very good CMF-A platform used on the Kwid; we believe that it will provide cost effective solutions for the compact sedan and compact SUV segments as well. Tata Motors which is getting its act together both on products and alliances is a dark horse because it could gain market share with support from these two factors. Figure 50: Upcoming/recent launches from various players expected in the next two years Entry Compact Hatchback Premium Hatchback Super-prem Hatch Compact Sedan Upper Sedan Rural UV Compact UV SUV MPV Source: Company data, Credit Suisse research Maruti Hyundai Honda Ford Toyota VW-Skoda Ren-Niss M&M Tata Eon Cervo facelift New Wagon R New Santro New Swift i20 facelift Xcent New Dzire facelift Ciaz facelift Vitara New Verna, Ioniq Carlino City 2017, New Civic Vios New Vento WR-V, Vezel Ecosport facelift Creta facelift HR-V Kuga New Innova, New Fortuner Tiguan HBC (CMFA platform) Kaptur, Duster 7 seater RBC (CMFA platform) S201 (Tivoli platform) U321 Tiago Sport, X451 Tigor AMP based sedan Nexon Q501 (AMP based SUV) India Passenger Vehicle Sector 25

26 The main challengers: Hyundai, Renault-Nissan, and Tata Motors To identify the main challengers for Maruti, we focus on OEMs that either already have or are planning to have products in the four key segments of the market identified earlier. Hyundai: Best product portfolio after Maruti Hyundai already has the widest product portfolio in the market after Maruti. It is addressing all the key segments in the market barring compact SUVs and compact hatchbacks. It plans to address both these gaps in the coming years with: (1) the launch of the new Santro in CY18 to be positioned between the Eon and the Grand i10; and (2) the launch of its compact SUV in 1H CY19. The key areas of strength for Hyundai today are the i20 and the Creta, thereby addressing two key segments of the market premium hatchbacks and SUV. Among our four key focus areas, the area of weakness is the entry segment where the Eon has lost out to Renault's Kwid, but with Hyundai now planning to focus on improving its premium image further, we do not expect the company to really focus on the entry segment in the future. Renault-Nissan: Milking the CMF platform is key Renault-Nissan (RN) was identified as a dark horse in our previous report in Nov-2013 but one single product has catapulted it into being one of the main challengers now in the market. Our key rationale for identifying the group as a dark horse was its commitment to the Indian market. RN realised early that the only way to compete against Maruti in the Indian market is to have a high localisation and that needs a certain scale. It invested in creating a large capacity which was to be used for exports in a big way. It also invested in developing a specific platform for the Indian market with a very high level of localisation. The RN group has its own version of VW's MQB platform called the CMF (Common Module Family) platform. This platform has a variant CMF-A for small vehicles of the kind used in the Indian market. The CMF-A platform became the base for the launch of the Renault Kwid the first MNC other than Hyundai to challenge Maruti in the entry segment. The Kwid has been a huge success for the company with its combination of SUV-ish looks, being feature-rich and aggressive pricing finding many takers in the market. The same platform has been used for the Datsun Redi-go, as well, which also has had a decent response in the market. We expect RN to further leverage the CMF platform. It has already announced that the platform will be used to make 5-7 different products with different body types. With the entry segment sorted, RN has to focus on the three other segments. We believe that launches in the premium hatchback and compact SUV segments can happen with the CMF-A platform itself in the next 2-3 years. The company had a strong product with the Renault Duster/Nissan Terrano in the SUV space before the launch of the Hyundai Creta. It plans to launch the Kaptur in CY17 to try to win back some share in the SUV space. The tie-up with Mitsubishi could help the trio plug some of the gaps in the portfolio in the higher end segment. Also, the alliance is looking at introducing an electric vehicle, which could see a pick-up in demand in India with a greater focus by government on reducing emissions as well as helping India reduce its energy import bill. Tata Motors: Dark horse with few expectations The only other player apart from Hyundai and Renault-Nissan which really has an aggressive product launch plan is Tata Motors. Its recent launches, though based on old platforms, have clearly been much better products than before. The fit and finish, and styling, have improved considerably. The Tiago launched in 4Q FY16 has done quite well with volumes >55k in FY17. The Tata brand, however, still remains weak and hence the company has had to use very aggressive pricing to gain acceptance for the Tiago after the India Passenger Vehicle Sector 26

27 Bolt and Zest, despite being good products, not gaining the desired response. Tata probably makes very little money on the Tiago, but we think management is adopting the right strategy as it first needs to arrest the decline in market share. We believe that from here on, market share will gradually improve as the initial response to the new launches that are likely to come in the next 12 months also seems very good. The response to the recently launched Hexa has also been good. The company has launched the new compact sedan, Tigor, and plans to launch the compact SUV Nexon this calendar year. The Tigor is based on the Tiago and has been priced competitively, which should bring in additional volumes. The response to the Nexon at the Auto Shows that it has been showcased in has been very good and hence that, too, should be a promising launch. Figure 51: Tata Motors has launched Tigor and will launch Nexon this CY Source: Company Future products focused on two platforms Going forward, Tata plans to launch products on new platforms. The company intends to reduce the number of platforms from six to two. It has spent a lot of time and resources over the past few years developing its own version of VW's MQB kind of platform called the AMP (Advanced Modular Platform). The platform will be made of 15 individual components with 80% parts commonality across cars based on the platform. It plans to launch up to eight individual products on this platform with different body types including hatchbacks, sedans, MPVs and SUVs. We expect Tata to start by launching a premium hatchback, compact sedan and compact SUV using this platform. For the other key segment of the market a large SUV Tata will rely on Land Rover's steel platform being used on the new Discovery Sport. Larger SUVs and softroaders will be based on this platform. Thus, Tata has plans to compete in every relevant segment for the market and despite poor brand positioning currently, we believe that it could be a dark horse in the market. RaceMo to help raise the brand profile Tata recently showcased its first product from the TaMo brand called RaceMo. The idea behind the product is not to garner volumes or profits, but to change the perception towards the Tata brand. It is made out of a patented multi-material sandwich structure called 'Moflex' instead of steel which allows for great freedom in design and for being extremely cost-effective, even at low volumes. It will also have connected car technologies from its partnership with Microsoft allowing for predictive maintenance, remote monitoring and over-the-air updates. India Passenger Vehicle Sector 27

28 Figure 52: RaceMo will be launched under a new brand TAMO Source: Company Alliance with VW to help spread costs Tata has also recently signed an MoU with VW group, with Skoda leading the alliance from the VW side. The two companies will focus on partnerships for joint product development work and joint value-chain activities, with the exact details to be announced once details are finalised. As per an AutoCar report, the two groups evaluated each other's platform and it was decided that Tata's AMP platform was more suitable for the Indian market. Thus, the two companies will be sharing this platform and thereby increasing the scale advantage for the platform. They will also indulge in joint sourcing thereby helping reduce not only development costs but also component costs for both the companies. Tata also gains access to VW group's electrical architecture and has mentioned that new products from this alliance can come as early as The niche players: Toyota and Honda Like a number of other MNC players before them, these players also tried launching small cars for the Indian market without too much success. For Toyota, Etios was a learning experience in getting the product price right but that cannot mean making the car a no-frill product. For Honda, the Brio platform, despite multiple product options, has been a realisation that the market is extremely value conscious at that price point. India Passenger Vehicle Sector 28

29 Figure 53: Toyota and Honda have much higher ASPs (lack of entry segment); Honda diluted its brand in the past but is reverting back to premium products 1, ASP of Maruti Hyundai Honda Toyota Ford GM Source: Company data, Credit Suisse estimates Toyota: The premium strategy seems to be working Toyota, particularly, has had great success on the premium side with its MPV Innova and the SUV Fortuner doing extremely well despite very high price points of >Rs2 mn. After the failure of the Etios platform; it has made it clear that it will not be launching any small cars specifically for the Indian market. We expect Toyota to launch a sedan in the Rs1-1.5 mn price bracket to compete with the Maruti Ciaz and Honda City but we do not think Toyota will launch any products under its brand in the <Rs1 mn price bracket. It might use Daihatsu if required in the future, but as of now it does not seem to have taken a firm decision on this. Honda: Trying to regain its premium image Honda has very good brand positioning and awareness in the Indian market. The brand awareness is enhanced by its strength on the two-wheeler and engine side. The Honda City for a long time was the de-facto sedan for the Indian middle class. The Honda Civic (the sedan is positioned above the City) also met with good success in the Indian market and aided brand perception. As it sought to enter the mass segment with products on the Brio platform, the premium image of the brand became diluted. It launched four products on the Brio platform the hatchback Brio, compact sedan Amaze, MPV Mobilio, and SUV BRV. Of these, only the Amaze has found moderate success; the rest have been failures with the company recently stopping production of the Mobilio. Going forward, the company is keen on resurrecting its premium image. It had a good product for the premium hatchback segment in the Jazz, but its high pricing killed the brand. It has recently launched a crossover on the Jazz platform - WRV; which has been launched with only two higher trims, as the company seeks to reposition itself as a premium brand. The new Honda City facelift has also received a decent response from the market. India Passenger Vehicle Sector 29

30 The help seekers: VW, Ford, and GM Despite being two of the early entrants into India more than 20 years back, the US companies, GM and Ford, have not really made any mark in India. GM has a sub 1% share to show for more than 20 years of effort. Ford, too, despite being the first player to introduce a compact SUV, has only a 3% share. Both are struggling to reach break-even capacity utilisation levels and hence are having a serious rethink on their India plans. General Motors: Rationalising its India investments GM was one of the early entrants into the Indian market and unlike some other MNC players that never launched products specific for the Indian market, it has launched a number of small cars suitable for the Indian market. It has also priced them aggressively but despite that has found little success, having failed to establish the Chevrolet brand in the Indian market. Chevrolet vehicles are perceived to have high maintenance costs, an image which GM tried to change with the launch of five-year warranty scheme but that did not find too much success. As a result, it has very low utilisation of ~35% and has been losing money for the past seven years with cumulative losses upwards of Rs82 bn. GM is in the process of rationalising its presence to only key markets globally. Within APAC, China clearly is the focus area as its JV with SAIC has done well. It recently sold off its European business to Peugeot for a sum of US$2.5 bn. In India, GM has put its investment plans on hold and is close to finalising a deal with SAIC for the sale of its Halol plant. GM has also announced discontinuation of sales in India by December 2017, and intends to use the Talegaon plant only for exports. Ford: Reviewing India plans Ford's India sojourn has not been as bad as GM s. It has had a couple of good products but has never been able to follow that up with other successful products to build on the momentum. The two products that have worked for Ford have been the Figo and the Ecosport. The Figo was a capable hatchback launched at the right time just as premium hatchbacks were evolving and the Ecosport created the sub-4m compact SUV segment which is so popular now. Ford had also set up a large plant in Gujarat to cater to the export market to increase its scale in India. Its export strategy has been successful but its recent launches, Figo and Aspire, have not done well as they have not really offered anything new to the customer. Also, Ford has had a change in global strategy. Earlier under the 'One Ford' plan, it was planning to launch global models. But, under the new CEO, Mark Fields, the strategy has changed and it is now focusing on products tailored to specific regions. And since this strategy cannot be followed in all regions, as it needs large investments, Ford is choosing the markets it wants to focus on. It has exited Indonesia and closed down manufacturing in the Philippines recently. As per its presentation on strategy for different emerging markets, the India strategy is under review, as it seems Ford doesn t want to commit a lot of money to new products for the market. However, with a large manufacturing footprint and the future potential of the market, India is not a market it can exit as well. We believe that the company will seek out partners and invest in products in an alliance with another OEM. India Passenger Vehicle Sector 30

31 Figure 54: Ford is reviewing its plans for India which is the only market where it is losing money Source: Ford Sep 2016 Investor Day presentation VW: India not a big priority; might use Skoda more going forward The VW group, too, has not had great success in India though, unlike Ford and GM which were early entrants, VW entered only in 2004 with the Skoda brand. VW-branded products arrived much later. The VW group has been late in launching products in the Indian market. Only after a segment has been really established has the company launched products, which has meant that despite the good quality of the products, it has not had great success and its premium pricing has not helped either. The group has realised that despite strong brand perception, it really could not afford to get a significant brand premium from the consumer and hence is having a rethink. There are no India-specific products being planned as of now. As part of its 2025 strategy, the VW group has revealed that after a serious think over whether it wanted to really target the segment, it has decided to focus on the economy end of the market as well, with a new budget brand. The first cars under this for the Chinese market will come in 2018 but it seems that India will take time. In fact, the presentation did not have any clear strategy for this brand for the Indian market whereas it has a detailed strategy for Brazil. It seems that in India, the focus will be on products from the product development and sourcing tie-up with Tata, which is being championed by Skoda. It is not yet clear if these products would come under the Skoda brand or this new budget brand. New entrants: Kia, Peugeot and Daihatsu? The PSA group is the only top 10 player in the world which is not yet present in India. It is planning to enter the market slowly and cautiously. It has entered into a JV with the CK Birlagroup (owners of Hindustan Motors) for manufacturing cars and engines. The JV is intended to use the existing capacity of Hindustan Motors and hence PSA would not need to spend on capacity. The PSA group has also acquired the Ambassador brand from Hindustan Motors suggesting it wants to use this well-known brand for its products in the future. Hyundai's sister concern Kia has already finalised land for its first plant in India in Andhra Pradesh with a capacity of 300k units. With Hyundai running at full utilisation; it won t be a surprise if Hyundai also shares the plant in the initial stages to boost utilisation. The other advantage that Kia would have is that it can piggyback on the supplier network that Hyundai has created so it should be able to start with a high level of localisation from the outset. India Passenger Vehicle Sector 31