NEWS
INTERVIEW
SPECIALS
CHAT
ARCHIVES

Struggling to stay invested in India

Last week we saw how most consumer goods and automobile manufacturers seem to have saturated their target markets. Especially the manufacturers of higher-end premium products, whose targets would naturally be the 'creamy layer' of Indian society.

At the same time, the yuppie middle class, coasting on a stock market boom, has suddenly found the market cut out from under its feet, and upward mobility now is more difficult than earlier. This has come as a second blow to the premium product manufacturers, whose natural second target would have been the salaried middle class.

Take the example of a top-end luxury car like the Maruti Esteem or the Daewoo Cielo. At prices hovering round the Rs 700,000 mark, a car like that is every young upwardly mobile young person's dream. But sales of such vehicles have dipped in 1996-97 by more than 20 per cent, reflecting the lower buying power in the Indian middle class.

Meanwhile, a car like the Cielo has to sell enough to grab a major market share before the real invasion begins. Already cars like the Opel Astra and the Ford Escort (which have, dare we say it, evoked more acquisitive feelings among the middle class than the Cielo) are giving both the Esteem and the Cielo a hard drive for their money, even though the Cielo came before the other two.

But how can a new entrant create a viable niche in a stagnant market? The Cielo has chosen to offer potential customers a period of time when they can drive the car without buying it, hoping this will hook them on the car's features. There is also extremely cheap finance available for such cars, putting them within easy reach of even the lower middle classes.

Has it worked? The answer is no. The miscalculation is that while the Cielo and the Escort and the Astra are middle class cars in their respective countries, they will remain 'creamy layer' cars in India for many more years. This is evident from the fact that the Maruti 800, the cheapest car available in India today, still outsells all other cars by a wide margin.

The irony is that until the Indian middle class's buying power rivals that of more developed nations, such cars will remain sought-after but unaffordable status symbols for the multitudes. And the buying power will not increase until salaries take a substantial jump. And if salaries become substantially higher, India will no longer hold the attraction of a cheap manufacturing base for the multinationals, including the car makers.

The downside of making a 'big' brand available to the masses through cheap finance and exchange schemes is the erosion of the brand's cachet. No longer will such a brand be viewed as one that is used by the cream and sought-after by the second rung of buyers. It becomes degraded in the eyes of the envious.

What these manufacturers should be doing is introducing models that target -- from the word go -- the middle classes themselves. Maruti Udyog has shown that it is only a car with a mass base that will support the profits of a car manufacturer. The lesson has been taught by manufacturers like Reliance and Hindustan Lever -- both of whom target the masses, but also have products for the 'cream'. And both are immensely profitable.

It is impossible for a manufacturer to sustain his profitability with a product targeted solely at the 'creamy layer'. Akai, Sony, and Panasonic learnt this lesson the hard way. They were forced to either pull out of the top-end television set business, or make their top-end TVs affordable for the masses. How long can a company survive on a single expensive product -- especially if the target market is not really large enough to sustain sales?

Samsung, the latest entrant in the consumer goods market, has learnt from the others' mistakes. It has positioned itself as the brand to aspire to. Its TVs, refrigerators and other products are placed in the market just a rung higher than the mass-base products -- attractive, but not out of reach of the masses. This is ensured by some of the cheapest finance available, plus the usual exchange schemes.

Most multinational manufacturers run lean outfits. Their production costs are low and margins relatively higher -- relative, that is, to most of their Indian competitors. That gives them a staying power in the market that is stronger than a lot of Indian brands. But how long can even a multinational manufacturer survive losses year after year. More important, their domestic shareholders will not allow them to do that.

Cola makers Pepsi and Coke have announced that they are willing to take losses for as long as they have to -- but at the end of it, they will have carved up the market among themselves, and sewn it up so tight that the entry barriers for a new player would be phenomenal. Even so, Pepsi's and Coke's strategies have been forced into a rethink by a cola (Sport, launched recently by Cadbury Schweppes) that has positioned itself lower. By pricing itself a good 25 per cent less than Pepsi and Coke, with a smaller quantity, Sport has forced the two giants into reworking their packaging and pricing strategies.

The cola market has also revealed how difficult it is to effect a change in Indian tastes and buying habits. The old war-horse -- Thums Up -- still commands 65 per cent of the market, in the face of the high-decibel marketing blitz by Pepsi and Coke. This extends to most other segments, including white goods and cars.

So the nature of the Indian market is such that a long gestation period for any project is built-in. Coupled with that is the multinationals' miscalculation about the size of the 'creamy layer' that can afford to sustain sales of top-end products. And finally, the recent slowdown in earnings growth, and savings rate -- both individual and corporate -- has left the consumer with less cash to spare.

Is it any wonder that most new entrants into the consumer goods field are struggling to stay invested in India?

Tell us what you think of this column