Has India turned into an Automaker's Graveyard?
When India is looking for foreign companies to invest in its economy, major car manufacturers are shutting shops.
10/6/20215 min read
Companies are drawn towards India like a moth. And just like a moth burns in the flame, India eventually becomes a graveyard for these international heavyweights.
2017 - General Motors
2022 - Ford Motor
When India is looking for foreign companies to invest in its economy, major car manufacturers are shutting shops. The latest to hop on the exit wagon is the American automaker, Ford, widely renowned for its Mustang line of muscle cars. Don't worry, Mustang fans; the Mustang line is here to stay. But it doesn't look so good for other lineups—more on that in a while.
While being a significant automobile market in South Asia has attracted big players, few have been successful. Even the existing companies which still operating in India are cutting their losses. A Reuters article mentions that companies are shutting down their money-losing ventures and redirecting capital to electrification and investment in technology they need to survive. The auto industry is transitioning with significant auto manufacturers developing their electric car technology and slowly phasing out internal combustion engines. Most heavyweights are on track to introduce electric options in their lineup or plan to do so soon.
General Motors:
GM's lofty stint in India is mainly attributed to its lack of long-term strategy by industry experts. In an economic times article by Jagdish Khattar, he mentions some issues like frequent changes in corporate structure, which resulted in less than sustainable strategies in the long run. Moreover, in 21 years, GM had had 9 CEOs with an average tenure of 2.5 years. At the same time, Maruti, in 35 years, had had only 5 CEOs which takes the average term to 7 years per CEO. The 2008 financial crisis did not fare well for the company, and it filed for bankruptcy in 2009. Although government intervention saved it, this had ripple effects on its global operations. The company was inconsistent in its product and brand strategy. It debuted Opel in India, then introduced Chevrolet later before moving on to the other Chinese models. In 20 years, the company introduced 20 models, out of which 10 were withdrawn. It frequently launched models and removed some of them from its portfolio, which was a significant obstacle in building customer loyalty.
Finally, in 2017, GM decided to pull the plug from India operations but not entirely. GM sold its Halol plant to MG Motor but chose to keep running the Talegaon plant near Pune to manufacture cars for international markets. In December 2020, the company decided to close down operations in the country entirely and is on track to sell off its last plant to the Chinese automaker Great Wall Motors. However, due to India- China tensions, the GM-GWM deal has been put on hold by the Maharashtra government.
Ford:
In September 2021, the US-origin automaker decided to shut manufacturing in India and sell high-end cars such as Mustang through the import route. It is the second time Ford is leaving India. I guess the second time was not the charm that it expected it to be. Maybe the third time will be? Ford India began production in 1926. However, it was liquidated in 1953 due to severe import restrictions. Forty-two years later, Ford reentered the Indian market in 1995 but with a twist. It entered into a 50-50 joint venture with Mahindra & Mahindra as Mahindra Ford India Limited (MFIL). By 1998 it increased its interest and renamed the company Ford India Private Limited (yet again). That's the history.
Fast forward to 2021, the company's second exit comes as a shocker to dealers and customers alike. It could not find a sustainable path forward to long-term profitability, says Ford India head Anurag Mehrotra. On 26th September, he put down his papers too (everyone's cutting their losses). Jokes aside, what went wrong with such a prominent manufacturer? Auto experts suggest that Ford did not read the Indian market well enough to offer products that the market wanted. The company did not get the product strategy right. Small cars are the lifeline of the Indian Auto market, and that is where Ford faltered.
Internationally, Ford did not have any small car offerings, same as GM. Ford's message around its offerings often revolved around power and performance. What happened to answering "Kitna deti hai?". For a country that is obsessed with mileage, everything else comes later. Ford tried to view the Indian market from a global perspective. This top-down approach from global to Asia to India perspective is where it lost sight of the country's preference, thus leading to a less than optimal performance. Even with models like Figo, Aspire, EcoSport, Endeavour, etc., it could not increase its share in the market. By the end of 2019, it was sitting on only 2.8% market share. Coupled with rising operating losses over a decade and here we are in 2021, looking at Ford's exit, albeit a second time. The company will close its Sanand plant by the end of 2021 and the Chennai plant by 2022.
What else? And What's next?
Apart from GM and Ford, other major manufacturers in two-wheeler, heavy-duty vehicles segments have also exited India in recent years, such as MAN Trucks (Volkswagen Group) (in 2018), Polaris (2018), UM Motorcycles (in 2019), Harley Davidson (in 2020). Many other small electronic vehicle players have also exited the country. Federation of Automobile Dealers Associations or FADA reports that since 2017, more than 64,000 jobs have been wiped out due to exits of the top five global automakers. The departures have affected around 464 auto dealerships across the country and cost a dealer investment loss of INR 2,485 crore.
Most of the companies that left were unable to judge the needs of the market correctly. Many tried to go up against the waves. It seems like Japanese and Korean carmakers have figured out the price-sensitive Indian market since they hold almost 65% of the market share. If you notice, there has been an emerging pattern in India. Companies are restructuring and consolidating themselves by merging or acquiring new businesses, which has resulted in an oligopoly market across various significant sectors.
A great example would be the telecom sector; today, we have only three players, i.e., Jio, Airtel, Vodafone-Idea. With the rising debt of Vodafone-Idea, the company may shut operations soon. Then we will be left with a duopoly. This phenomenon stifles competition and innovation in a way that is not overtly visible. When a company becomes too big, it becomes tough for a new company to compete with it unless it introduces something entirely radical. Since there is no new competition emerging, the big company gets comfortable with its position. Since its providing essential service or product to the mass, there are no alternatives. Then the end consumer starts getting bullied with price hikes, lackluster services, and many other issues. Since there is no competition, the company does not need to innovate or provide better services. Then the company lobbies for regulations and government policies that would benefit them. Ultimately customers are at the mercy of the company. I am not saying this is always the case, but it is a possibility. And we have no reason to trust big companies not to act this way. If the automobile sector moves in the same direction, it would limit customers' choices and expectedly affect the quality of products and services that they receive. We need a solid oversight to protect the mass from disruptive changes.
Sudden exits by companies tend to create a ripple effect across their supply chain. The exit has affected everyone, starting from workers in the factory to the customers. It hurts customers' interests, dealers' business interests, and factory workers' livelihood hangs in the balance. Ford reported that it is taking a loss of USD 2 billion, but what about the human cost? I do not intend to go all gung ho against capitalism. Even businesses need to survive, and sometimes an arm needs to be amputated to live another day. But at the same time, the interests of people who depend on these companies need to be protected adequately. How can big companies make the same mistakes repeatedly and call it quits when it gets too tricky, leaving everyone associated high and dry? That's a question to ponder upon.
Resources for further reading:
https://www.livemint.com/companies/news/gm-harley-davidson-and-now-ford-why-big-us-automakers-are-leaving-india-11631256273800.html
https://auto.economictimes.indiatimes.com/news/vw-group-owned-man-trucks-exits-indian-truck-market/65306898
https://www.businesstoday.in/latest/economy-politics/story/5-auto-companies-shut-shop-in-india-in-last-5-years-287151-2021-02-10
https://www.reuters.com/business/autos-transportation/ford-motor-cease-local-production-india-shut-down-both-plants-sources-2021-09-09/
https://www.team-bhp.com/forum/indian-car-scene/231153-big-companies-leaving-india-retaining-limited-presence-what-reason.html