Mumbai: Rural India, with its poor and at times non-existent roads, has been dominated by rugged multi-utility vehicles from Mahindra & Mahindra and the Tatas for a long time.
But in the past one year or so, car manufacturers like Maruti Udyog (MUL) and Hyundai Motor India (HMI) have been trying to make inroads into villages and small towns in an attempt to grow sales and maintain leadership status in the domestic auto market.
The Indian rural market, heavily dependent on the monsoon as it is, is undependable. But with the exception of the previous year, when the rains failed in many regions, an unbroken record of successful monsoon years before have resulted in substantially improved farming incomes in many parts of the country.
According to a 2001 study conducted by the National Council for Applied Economic Research (NCAER), there are as many 'middle-income and above' households in the rural areas as there are in the urban areas and about twice as many 'lower middle-income' households.
At the highest income level there are 2.3 million urban households as against 1.6 million households in rural India. The study also says the number of middle- and high-income households in rural India is expected to grow from 80 million in 2001 to 111 million by 2007.
Enthused by studies of this kind, a number of fast-moving consumer goods (FMCG) companies have been pushing consumer goods like refrigerators, washing machines and colour televisions in rural areas quite successfully. But car purchase entails significantly higher investment than consumer durables and though MUL has been pushing ahead with its rural foray the going has not been as good as hoped.
The Maruti game plan
MUL managing director Jagdish Khattar admits that his company is having trouble making progress in rural areas where despite poverty there are many buyers. MUL was the first predominantly passenger carmaker to explore the rural market for its entry level M-800. The company is making an all-out effort to expand its consumer base in rural and semi-rural areas as its urban marketshare is sliding.
MUL's entry-level M800 has been seeing falling sales for the past three years or more and last year its sales declined despite a price cut. The B segment with cars like the Santro, Indica, Palio, Zen and the Alto began replacing the A segment as the fastest-growing one in 1997. At the same time the Maruti 800 accounted for nearly 55 per cent of the total domestic passenger car sales.
At present, A, B and C segment cars account for 98 per cent of the passenger car market with B and C segment accounting for 73 per cent. Thus, the A segment now accounts for about 25 per cent of the market. Taking all its car models together, MUL sold the highest number of cars in India last year but is in a bit of a quandary regarding its M800, which many in the company feel still has a future as an entry-level car.
But faced with falling urban sales, MUL's concern is that if it continues to focus on existing markets it could end up having to phase out the M-800. The other choice it has is to try and find untapped markets. The rural market offers good potential for growth given the rising aspiration and awareness levels of rural consumers. It is also a good market for used cars that do not have Euro II certification.
The main problem in rural areas is lack of financing facilities for automobiles. Earlier this year, MUL removed this hurdle by entering into a tie-up with State Bank of India (SBI) for financing car purchases in the remotest corners of the country where the bank has its branches. With the tie-up, MUL obtained access to SBI's 14,000 branches and 120-million accountholders across the country.
Not only this, to make second-hand car purchase more attractive in small towns and villages SBI and MUL have begun financing used-car sales at the same interest rates, at 10.5-11.25 per cent, as on new car purchases. Most auto finance companies charge at least 2-percentage points higher interest on used cars than on new car purchases. SBI's budget is about Rs 500 crore to finance Maruti car purchases through this venture.
Says a Maruti spokesperson: ''SBI has given us an extensive geographical reach. Our sales outlets have increased tenfold. This will help us immensely in expanding the four-wheeler family.''
At the same time, in an attempt to reinforce its rural foray, MUL has been expanding its True Value network, its used car business, in semi-urban and rural areas to market the car at very reasonable prices. The company is now offering two- to four-year-old used M-800 models for below Rs 1 lakh at its True Value outlets along with financing.
The company is also targeting to open additional 31 True Value outlets across the country in the next one year, taking the total number to 50. Next, it is aiming to get all its 183 authorised dealers, selling Maruti cars through 241 outlets, to open at least one True Value outlet each within two years.
Hyundai not behind
Hyundai is another car manufacturer with an eye on the rural market because it perceives a great future potential there but is facing competition from MUL's M-800, which has attained prime movers' advantage. The company is pushing its B-segment Santro and its diesel Accent CRDi with road shows in Punjab, Haryana, Uttar Pradesh, Maharashtra, Kerala and Andhra, regions with a sizeable affluent rural population.
HMI believes that with its huge sales and service network, second in size only to MUL, it is well positioned to move into these markets. HMI has taken up initiatives like tying up with dealers for conducting road shows in villages where it does not have a physical presence. It is also offering test-drives and options for upgrading cars in areas where HMI is focusing.
Also as part of a car purchase deal, HMI is offering on the spot financial assistance. HMI managing director B V R Subbu feels that once rural buyers become aware of the quality of cars the shift to Hyundai cars will take place. ''Once the rural market is well supported by a strong service network, it will grow significantly faster through the B segment.'' At present the price difference between an A and a B segment car is more than Rs 1 lakh.
Due to overall higher income levels in cities and easy finance schemes this may seem negligible but against a rural backdrop where the overall income levels are lower this might make all the difference between success and failure.