Global automakers scour India’s backroads in search of dream market

Global automakers scour India’s backroads in search of dream market

4:26pm EST

By Aradhana Aravindan

MUMBAI (Reuters) – For global automakers, the dusty backroads of rural India could be the new El Dorado.

As economic torpor suffocates demand for new cars in India’s megacities, incomes are growing faster in small towns and country areas. That’s pushing the likes of General Motors (GM.N: QuoteProfileResearchStock Buzz) and Honda Motor Co (7267.T: QuoteProfile,ResearchStock Buzz) to fan out in search of buyers in places where fewer than 20 people in every thousand own a car – for now.

Standing firmly in the way are strong home-grown brands. With local services plentiful and repairs cheap, Maruti Suzuki India Ltd (MRTI.NS: QuoteProfileResearchStock Buzz), Mahindra and Mahindra Ltd (MAHM.NS: QuoteProfileResearchStock Buzz), and Tata Motors Ltd (TAMO.NS: QuoteProfileResearch,Stock Buzz) dominate the rural vehicle market where foreign automakers are seen as expensive and distant.

Foreign companies showing cars at the Delhi auto show, starting on Wednesday, have already poured billions of dollars into factories, product development and marketing in India’s once-booming car market.

Still, no foreign car maker has a share of more than 6 percent in India’s passenger vehicle market aside from South Korea’s Hyundai Motor Co (005380.KS: QuoteProfileResearchStock Buzz) with 15 percent.

Car makers see success in rural areas as vital, as slow economic growth, high interest rates and rising fuel prices mean overall sales are headed for their second straight year of decline. Though the need for rural sales has been recognized, success could yet prove illusory.

Japan’s Honda entered India nearly two decades ago but will still have only 170 dealerships by end-March, compared with market-leading Maruti’s current 1,300. Of the 60 sales outlets Honda plans to open in India in the fiscal year that starts in April, 43 will be in small towns.

“It’s very easy to travel once in three-four years to a place 100 kilometers away to buy,” said Jnaneswar Sen, senior vice president of sales and marketing at Honda India. “It becomes a bit of a hassle for the customer to travel 100 or 150 kilometers every few months to get the car serviced.”

Like most foreign carmakers in India, however, Honda is seen as a premium brand, beyond the reach of price-sensitive rural buyers. To expand its potential market, Honda last year launched the entry-level Amaze sedan, which starts at about 520,000 rupees ($8,300) and has helped it nearly double its market share to 4.7 percent.

Smaller towns and cities account for nearly two-thirds of Amaze sales, the company said.

“Smaller towns and rural areas are a gold mine that foreign automakers are yet to tap efficiently,” IHS Automotive analyst Anil Sharma said.

“One of the prerequisites for any automaker to be successful in rural areas would be availability of after-market services. Since the population is more dispersed in rural areas, what we probably need is services like mobile workshops.”

Selling foreign cars to rural India remains tough. Deepanshu Rai, who lives in Raigad, a small town about 100 kilometers from Mumbai, said he never considered buying a foreign model when he bought his first car about 10 months ago, an Alto 800 hatchback made by Maruti.

“If you buy a foreign brand, it won’t have a service centre everywhere. You may have to travel far even for a small issue,” said the 22-year-old Rai, who works for a mapping company.


For Maruti, the opposite is true. Founded in Gurgaon, outside the Indian capital of New Delhi in 1982, Maruti accounts for nearly one in two new cars sold in India.

Though it has drawn on the small-car knowhow of Japan’s Suzuki Motor Corp (7269.T: QuoteProfile,ResearchStock Buzz), its majority shareholder, Maruti is seen as so home-grown that in the 1980s, the word “Maruti” was used generically to mean any car.

On narrow rural roads, it’s cheap small cars jostle for space with Mahindra’s sturdy utility vehicles, tractors, motorbikes and bullock carts, with foreign models scarce. Spare parts, including fakes, are cheap and ubiquitous, and mechanics everywhere can fix a Maruti, keeping maintenance costs down.

Maruti’s deep rural penetration has helped it defend its market share amid the industry’s two-year downturn. That’s despite the onslaught of new models launched by foreign rivals.

Next in line will be Nissan Motor Co’s (7201.T: QuoteProfileResearchStock Buzz) relaunched low-end Datsun brand. At the Delhi auto show Datsun will showcase a hatchback to compete with Maruti’s Alto 800, which starts at 280,000 rupees.

Areas with populations of less than 10,000 people account for 31 percent of Maruti’s sales so far in the fiscal year that ends in March, said Mayank Pareek, Maruti’s chief operating officer for marketing and sales, adding the company began a heavy push to target rural buyers five years ago.

“Unlike urban markets, in the rural markets customers are very loyal. So you get a big first-mover advantage,” he said.

General Motors has been selling cars in India since 1996. It has a market share of just 3.5 percent and 273 dealerships, increasing to 300 by the end of the next fiscal year. Most of the new outlets will be in smaller towns and rural areas, said P. Balendran, vice president at GM India.

“With higher growth expected in rural areas as compared with the metros, we expect the share of rural markets in our overall sales increasing in the future,” he said.

One thing that is certain in the push by global car makers beyond India’s big cities is more choice for the growing number of rural buyers. Until a few years ago, many rural buyers essentially had just one choice to make – the color of their Maruti 800, the hatchback predecessor to the Alto.

Krishnakant Shinde, a farmer in Gove, a village about 250 kilometers from Mumbai, says he was the first in his village to buy a Volkswagen AG (VOWG_p.DE: QuoteProfileResearchStock Buzz) when he upgraded last October to a Vento sedan from a Maruti Swift Dzire entry-level sedan.

Volkswagen, which has market share of just 2.25 percent in India, said it doesn’t plan new outlets in the country this year. But it opened a dealership in Satara, a regional hub about 15 kilometers from Shinde’s home, about two years ago.

“Volkswagen the company wasn’t new to me, but I didn’t buy earlier as I was worried about spare parts and servicing,” said Shinde, a sugar cane and dairy farmer.

“Now, since they have opened a showroom and service centre in Satara, I decided to buy.”

($1 = 62.4600 Indian rupees)

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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