General Motors

Why India is Not Buying as Many Cars as Carmakers Want

Yesterday morning, there was a news flash that the carmaker Toyota does not want to expand any further in India.

Shekar Viswanathan, vice chairman of Toyota’s Indian unit, Toyota Kirloskar Motor, told the news-agency Bloomberg: “The government keeps taxes on cars and motorbikes so high that companies find it hard to build scale.”

The company later released a statement saying: “Toyota Kirloskar Motor would like to state that we continue to be committed to the Indian market and our operations in the country is an integral part of our global strategy.” General Motors quit India in 2017.

In 2019, Ford Motor Company agreed to move a bulk of its assets into a joint venture with Mahindra and Mahindra. Whether Toyota wants to expand in India or not remains to be seen, but this sort of prompted me to look at car sales data over the years and it makes for a very interesting read.

Motown Slowdown

Source: Centre for Monitoring Indian Economy.

The car sales data is available from 1991-92 onwards, a year in which around 1.5 lakh units were sold. The actual jump in car sales came in the decade between 2001-02 and 2011-12, when the car sales jumped from 5.09 lakh units to 20.31 lakh units, an increase of 14.8% per year on an average.

The car sales in 2019-20 were at 16.95 lakh units and lower than the sales in 2011-12. Of course, some of this was on account of the spread of the covid-pandemic. But car sales had been slow even before covid struck. Let’s ignore the car sales for 2019-20 and look at car sales for 2018-19, which were at 22.18 lakh units.

The car sales between 2011-12 and 2018-19 grew at the rate of 1.3% per year, which basically means that they were largely flat.

If one looks at the increase in car sales over the decade between 2008-09 and 2018-19, when the sales jumped from 12.2 lakh units to 22.2 lakh units, it works out to an increase of 6.2% per year.

Irrespective of whether Toyota is leaving India or not it is safe to say that car sales haven’t been going up much in the last ten years or more. In fact, if we look at data a little more minutely, things get more interesting.

A bulk of the cars being sold are essentially mini and compact cars (3201mm to 3600mm and 3601mm to 4000mm). Data for this is available from 2001-02 onwards. Take a look at the following chart, which plots the number of mini and compact cars sold as a proportion of total cars sold.

Value for Money?


Source: Author calculations on Centre for Monitoring Indian Economy data.

In 2001-02, mini and compact cars formed 82.4% of cars sold. It fell to a low of 72.9% in 2012-13. It has largely risen since and in 2019-20 reached a high of 93.7%. The point being that over the years a greater proportion of car buyers have bought value for money cars, making it difficult for many foreign car companies, given that this end of the market is dominated by Maruti Suzuki and Hyundai.

In the last five years, the sales of cars of up to 4,000 mm in length has simply gone through the roof. This is a function of the fact that the economic growth and the income growth have both stagnated in comparison to the past. Take a look at the following chart, which plots the increase in per capita income over the years in nominal terms.

Show Me the Money


Source: Centre for Monitoring Indian Economy.

The per capita income growth has fallen over the years and that is reflected in the kind of cars people buy. There is a straightforward connect between the second chart and the third chart. Car sales have gone up at a fast pace whenever there has been a consistent double-digit growth in income. Between 2014-15 and 2019-20, the per capita income has consistently grown in single digits, except in 2016-17, when it grew at 10.4%. This reflects in the car sales as well.

This slowdown in income growth indicates an economy which has slowed down majorly over the last few years. And this shows in the slow growth in car sales.

Of course, this is not the only reason for slow growth in car sales. There is also the problem of higher taxes. And Viswanathan of Toyota is not the only one who thinks so.

As RC Bhargava, the current chairman of Maruti Suzuki, India’s largest carmaker, and the grand old man of India’s car industry, puts it in his new book Getting Competitive—A Practitioner’s Guide for India:

“In India cars have always been considered a luxury product and taxed accordingly till the present… [this] despite being one of the few globally competitive industries. Both the Central and state governments levy taxes and the total is 2–3 times the tax in the developed countries.”

Of course, these taxes make cars expensive and that leads to lower sales growth. The car industry has tremendous multiplier effect on the overall economy. As Bhargava puts it:

“It generates high volumes of employment and leads to the development of many technologies and industries whose products are used in the manufacture of cars. These include steel, aluminium, copper, glass, fabrics, electronics and electricals, rubber and plastics.”

Essentially, high taxes on cars have ensured a slow growth of the industry. Slow growth of this industry has contributed to the overall slow growth of the economy. And the overall slow growth of the economy and incomes have contributed to the slow growth of the car industry. This is how it links up.

Hence, lowering taxes on the automobile sector in particular (something I have written about in the past) and on cars in particular, will work well for the economy. It might lead to lower per unit tax collections for the government, but the increase in sales volume should gradually make up for this.

Also, as I explain here, an expansion in manufacturing creates many services jobs as well. But for all that to happen taxes need to come down. Nevertheless, as Viswanathan told Bloomberg: “You’d think the auto sector is making drugs or liquor.”

What Team Anna can learn from Nirma, Sony, Apple and Ford


Vivek Kaul

The decision by Team Anna to form a political party has become the butt of jokes on the internet. A Facebook friend suggested that they name their party, the Char Anna Party and someone else suggested the name Kejriwal Liberal Party for Democracy (KLPD).
The jokes are clearly in a bad taste and reflect the level of cynicism that has seeped into us. Let me paraphrase lines written by my favourite economist John Kenneth Galbraith (borrowed from his book The Affluent Society) to capture this cynicism. “When Indians see someone agitating for change they enquire almost automatically: “What is there for him?” They suspect that the moral crusades of reformers, do-gooders, liberal politicians, and public servants, all their noble protestations notwithstanding are based ultimately on self interest. “What,” they enquire, “is their gimmick?””
The cynicism comes largely from the way things have evolved in the sixty five years of independence where the political parties have taken us for a royal ride. Given this the skepticism that prevails at the decision of Team Anna to form a political party isn’t surprising. Take the case of Justice Markandey Katju, who asked CNN-IBN “Which caste will this political party represent? Because unless you represent one caste, you won’t get votes…Whether you are honest or meritorious nobody bothers. People see your caste or religion. You may thump your chest and say you are very honest but you will get no votes.”
Former Supreme Court justice N. Santosh Hegde said “Personally, am not in favour of Annaji floating a political party and contesting elections, which is an expensive affair and requires huge resources in terms of funds and cadres.”
Some other experts and observers have expressed their pessimism at the chances of success of the political party being launched by Team Anna. Questions are being raised. Where will they get the money to fight elections from? How will they choose their candidates? What if Team Anna candidates win elections and start behaving like other politicians?
All valid questions. But I remain optimistic despite the fact that things look bleak at this moment for Team Anna’s political party.
I look at Team Anna’s political party as a disruptive innovation. Clayton Christensen, a professor of strategy at the Harvard Business School is the man who coined this phrase. He defines it as “These are innovations that transform an existing market or create a new one by introducing simplicity, convenience, accessibility and affordability. It is initially formed in a narrow foothold market that appears unattractive or inconsequential to industry incumbents.”
An excellent example of a home grown disruptive innovation is Nirma detergent. Karsanbhai Patel, who used to work as a chemist in the Geology & Mining Department of the Gujarat government, introduced Nirma detergent in 1969.
He first started selling it at Rs 3.50 per kg. At that point of time Hindustan Lever Ltd’s (now Hindustan Unilever) Surf retailed for Rs 15 per kg. The lowest-priced detergent used to sell at Rs 13.50 per kg. The price point at which Nirma sold made it accessible to consumers, who till then really couldn’t afford the luxury of washing their clothes using a detergent and had to use soap instead.
If Karsanbhai Patel had thought at the very beginning that Hindustan Lever would crush his small detergent, he would have never gotten around launching it. The same applies to Team Anna’s political party as well. They will never know what lies in store for them unless they get around launching the party and running it for the next few years.
Getting back to Nirma, the logical question to ask is who should have introduced a product like Nirma? The answer is Hindustan Lever, the company which through the launch of Surf detergent, pioneered the concept of bucket wash in India. But they did not. Even after the launch of Nirma, for a very long time they continued to ignore Nirma, primarily because the price point at which Nirma sold was too low for Hindustan Lever to even think about. And by the time the MBAs at Hindustan Lever woke up, Nirma had already established itself as a pan-India brand. But, to their credit they were able to launch the ‘Wheel’ brand, which competed with Nirma directly.
At times the biggest players in the market are immune to the opportunity that is waiting to be exploited. A great example is that of Kodak which invented the digital camera but did not commercialize it for a very long time thinking that the digital camera would eat into its photo film business. The company recently filed for bankruptcy.
Ted Turner’s CNN was the first 24-hour news channel. Who should have really seen the opportunity? The BBC. But they remained blind to the opportunity and handed over a big market to CNN on a platter.
Along similar lines, maybe there is an opportunity for a political party in India which fields honest candidates who work towards eradicating corruption and does not work along narrow caste or regional lines. Maybe the Indian voter now wants to go beyond voting along the lines of caste or region. Maybe he did not have an option until now. And now that he has an option he might just want to exercise it.
While there is a huge maybe but the thing is we will never know the answers unless Team Anna’s political party gets around to fighting a few elections.
The other thing that works to the advantage of disruptive innovators is the fact that the major players in the market ignore them initially and do not take them as a big enough force that deserves attention.
A great example is the Apple personal computer. As Clayton Christensen told me in an interview I carried out for the Daily News and Analysis (DNA) a few years back “Apple made a wise decision and first sold the personal computer as a toy for children. Children had been non-consumers of computers and did not care that the product was not as good as the existing mainframe and minicomputers. Over time Apple and the other PC companies improved the PC so it could handle more complicated tasks. And ultimately the PC has transformed the market by allowing many people to benefit from its simplicity, affordability, and convenience relative to the minicomputer.”
Before the personal computer was introduced, the biggest computer available was called the minicomputer. “But minicomputers cost well over $200,000, and required an engineering degree to operate. The leading minicomputer company was Digital Equipment Corporation (DEC), which during the 1970s and 1980s, was one of the most admired companies in the world economy,” write Clayton Christensen, Michael B Horn and Curtis W Johnson in Disrupting Class —How Disruptive Innovation Will Change the Way the World Learns.
But even then DEC did not realise the importance of the personal computer. “None of DEC’s customers could even use a personal computer for the first 10 years it was on the market because it wasn’t good enough for the problems they needed to solve. That meant that more carefully DEC listened to its best customers, the less signal they got that the personal computer mattered — because in fact it didn’t — to those customers,” the authors explain.
That DEC could generate a gross profit of $112,500 when selling a minicomputer and $300,000 while selling the much bigger ‘mainframe’ also didn’t help. In comparison, the $800 margin on the personal computer looked quite pale.
Another example is Sony. “In 1955, Sony introduced the first battery-powered, pocket transistor radio. In comparison with the big RCA tabletop radios, the Sony pocket radio was tiny and static laced. But Sony chose to sell to its transistor radio to non-consumers – teenagers who could not afford big tabletop radio. It allowed teenagers to listen to music out of earshot of their parents because it was portable. And although the reception and fidelity weren’t great, it was far better than their alternative, which was no radio at all,” write Christensen, Horn and Johnson. Sony went onto to come up with other great disruptive innovations like the Walkman and the CDMan. But did not see the rise of MP3 players.
The point is that incumbents are so clued in to their business that it is very difficult for them to see the rise of a new category.
So what is the learning here for Team Anna? The learning is that their political party may not take the nation by storm all at once. They might appeal only to a section of the voters initially, probably the urban middle class, like Apple PCs had appealed to children and Sony radios to teenagers. So the Team Anna political party is likely to start off with a limited appeal and if that is the case the bigger political parties will not give them much weight initially. Chances are if they stay true to their cause their popularity might gradually go up over the years, as has been the case with disruptive innovators in business. The fact that political parties might ignore them might turn out to be their biggest strength in the years to come.
Any disruption does not come as an immediate shift. As the authors write, “Disruption rarely arrives as an abrupt shift in reality; for a decade, the personal computer did not affect DEC’s growth or profits.” Similarly, the Team Anna political party isn’t going to take India by storm overnight. It will need time.
Business is littered with examples of companies that did not spot a new opportunity that they should have and allowed smaller entrepreneurial starts up to grow big. The only minicomputer company that successfully made the transition to being a personal computer company was IBM. “They set up a separate organisation in Florida, the mission of which was to create and sell a personal computer as successfully as possible. This organisation had to figure out its own sales channel, it had its own engineers, and it was unencumbered by the existing organization,” said Christensen.
But even IBM wasn’t convinced about the personal computer and that is why it handed over the rights of the operating system to Microsoft on a platter. Even disruptive innovators get disrupted. Microsoft did not see the rise of email and it’s still trying to correct that mistake through the launch of Outlook.com. It didn’t see the rise of search engines either. Nokia did not see the rise of smart phones. Google did not see the rise of social media. And Facebook will not see the rise of something else.
Team Anna is a disruptive innovation which can disrupt the model of the existing political parties in India. There are three things that can happen with this disruptive innovation. The Team Anna political party tries for a few years and doesn’t go anywhere. That doesn’t harm us in anyway. The Team Anna political party fights elections and is able to build a major presence in the country and stays true to its cause. That benefits all of us. The Team Anna political party fights elections and its candidates win. But these candidates and the party turn out to be as corrupt as the other political parties that are already there. While this will be disappointing but then one more corrupt political party is not going to make things more difficult for the citizens of this country in anyway. We are used to it by now.
Given these reasons the Team Anna political party deserves a chance and should not be viewed with the cynicism and skepticism which seems to be cropping up.
(The article originally appeared on www.firstpost.com on August 4,2012. http://www.firstpost.com/politics/what-team-anna-can-learn-from-nirma-sony-apple-and-ford-404843.html)
(Vivek Kaul is a writer and can be reached at [email protected])