Mix of small and big cars

The focus on small cars had an unexpected fall out. Sector experts say that Hyundai faces a problem similar to Maruti Suzuki consumers feel that it is good only with small cars. Globally, Hyundai is strong in middle and large-sized cars. But that imagery is somehow missing in India.
Mix of small and big cars mirrors that of the industry 75:25 but people perhaps are more familiar with the brand Santro than Hyundai.
Privately, car makers admit that real money is in middle and large-sized cars. The profit margins in small cars are just a fraction. To be fair, Hyundai does have more than one brand in this segment: the Verna, Accent, Sonata and Tuscon. It has withdrawn the Elantra and wants to plug that gap between the Accent and Sonata with a new brand. The SUV portfolio will see the Santa Fe in addition to the Tuscon.
Huundai has to fight an unfair battle against the likes of Honda and Toyota in this segment as they import parts free of duty from Thailand. (India and Thailand have a free-trade agreement.) The answer is to buy more and more components from within India. The Hyundai MD admits that not all his cars sell at a profit, in India as well as abroad. Some exports of “developing country” models are being done at a loss.
Some experts believe there is enough headroom in the small car market for all to grow. More car buyers are getting into the market says Ernst & Young Partner. Customers were always price-sensitive; they have now become value conscious — they want small cars with more features. This might be true. Hyundai gets almost 45 per cent of its volumes from first-time buyers, up from 33 per cent a few years ago.
To cater to price-sensitive customers, several car makers have extracted the last ounce of profit from their vendors. Component manufacturers have complained for long that business is tough. Car makers have used the threat of sourcing from China to beat down prices. More and more of them also want full control over sales in the lucrative retail market. Hyundai has offered all vendors who get a majority of their business from Hyundai financial compensation in case they begin to lose money. Thankfully, nobody has approached them so far.
India has for long subsidized diesel more heavily than petrol. As a result, a growing number of consumers want to buy cars that run on diesel engines. This was about 20 per cent of the market three years ago. Now, it stands at 27 per cent. The projections are that the figure will hit 35 per cent in the next three years.
Maruti Suzuki got a strong foothold in this market after it set up a plant at Manesar near Delhi to make 100,000 diesel engines per annum. Hyundai has a limited play in the diesel market. Its only presence is the diesel i20 fitted with an imported diesel engine. But the company knows that if it wants to increase its market share, it needs to do much more. At the moment, the company is studying the feasibility of a factory to make 120,000 to 150,000 small diesel engines every year. The investment could be as much as Rs 1,200 crore. A decision is expected by the end of the year. The industry has to move towards diesel. Hyundai needs to move fast with its plans.
The top ten cities sell 60 per cent of the cars in the country, and the top 20 sell 75 per cent. Beyond what planned is not profitable.