Report - Distribution Channel in Indian Automotive Industry PDF

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Distribution Channel in Indian Automotive Industry...

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AMITY BUSINESS SCHOOL

Advanced Sales Management MKTG 705

Distribution Channel in Indian Automotive Industry

Submitted To:

Submitted By:

Dr Vandana Ahuja

Mallika Saikia (B10) Vikram Sinha (B23) 1|Page

TABLE OF CONTENTS

Introduction………………………………………………………………………...….…...…..3 Localization……………………………..……………………………….……..……………....4 Production and Distribution……………………………………………………….…….…....4 Distribution Channel………………………………………………………………….……….5 Functions of Distribution Channels……………………………………………………...…...5 Types of distribution Channel…………………………….…….……………………….…....6 Factors Determining Choice of Channels of Distribution………………………...….…......8 Research Methodology…………………..………….……………………………..…......…..10 Data Collection………………………………….…………………………………...........…..11 Indian Market Size……………………………………………………………....……………12 Investments…………………..…………………………………...………………………...…13 Government Initiatives………………………………………………………….……………13 Market Segmentation………………………………………………………………….……..16 SWOT Analysis of Indian Automotive Industry……………………………………………21 Current Scenario of the Indian Automotive Industry……………………..……………….22 New Entrants in Indian Automotive Industry……………………………………………...23 References……………………………………………………………………………….….…24

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Introduction

Automobile industry did not exist in India in the real sense before Independence. Only assembly work was done from the imported parts. General Motors (India) Ltd. started assembling trucks and cars in 1928 in their factory at Mumbai. Ford Motor Co. (India) Ltd. started assembling of cars and trucks at Chennai in 1930 and at Mumbai in 1931. The real development of the industry began with the establishment of the Premier Automobiles Ltd. at Kurla (Mumbai) in 1947 and the Hindustan Motors Ltd. at Uttarpara (Kolkata) in 1948. Automobile industry in India has made considerable progress during the last three decades. Today, it is one of the most vibrant sectors of economy. With gradual liberalization of the automobile industry since 1991, more and more players have set up manufacturing facilities in India. At present there are 15 manufacturers of passenger cars and multiutility vehicles, 9 manufacturers of commercial vehicles, 14 of two/three wheelers and 14 of tractors besides 5 manufacturers of engines. The industry has an investment of more than Rs. 50,000 crores. During the year 2003-04 the turnover of the automobile sector exceeded Rs. 1, 00,000 crore. The industry also offers substantial employment potential. Currently it provides 4.5 lakh direct employment and about one crore indirect employment. The contribution of Auto Industry to GDP has risen from 2.77 per cent in 1992-93 to 4.7 per cent in 2002-03.

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Localization

The automobile industry tends to be located near iron and steel producing centers because steel is the basic raw material used in this industry. The proximity of places producing tyres, tubes, storage batteries, paints and other ancillary industries is considered to be an added advantage. Port cities also find favor with this industry because of the import and export facilities offered by such places. Of late, automobile industry has become market oriented and prefers those locations which offer ready market for the manufactured vehicles. Under the Government plans for decentralization of industries, some locations in remote and industrially backward areas are given priority.

Production and Distribution

Mumbai, Chennai, Jamshedpur, Jabalpur and Kolkata are the chief centers producing automobiles. These centers produce almost all sorts of vehicles including trucks, buses, passenger cars, three wheelers and two wheelers. Motor cycles are also manufactured at Faridabad and Mysore. Scooters are also manufactured at Lucknow, Satara, Akurdi (Near Pune), Panki (near Kanpur) and Odhav (Ahmedabad dist.). Maruti Udyog Ltd. (MUL) at Gurgaon in Haryana started production of passenger cars in 1983. At present there are 38 units engaged in the production of automobiles producing four wheelers, three wheelers and two wheelers.

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Distribution Channel

The goods are produced at one place, but the customers are scattered over a wide geographical area. Thus, it is very difficult for a producer to distribute his products all over the country. Therefore, he takes the help of some intermediaries to distribute his goods. For example, Maruti cars are manufactured at Gurgaon but are available all over the country with the help of intermediaries. Channel of distribution refers to those people, institutions or merchants who help in the distribution of goods and services. Philips Kotler defines channel of distribution as “a set of independent organizations involved in the process of making a product or service available for use or consumption”. Channels of distribution bring economy of effort. They help to cover a vast geographical area and also bring efficiency in distribution including transportation and warehousing. Retailers, Wholesalers are the common channels of distribution. Channels of distribution provide convenience to customer, who can get various items at one store. If there were no channels of distribution, customer would have faced a lot of difficulties.

Functions of Distribution Channels

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Sorting: Middlemen obtain the supplies of goods from various suppliers and sort them out into similar groups on the basis of size, quality etc.

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Accumulation: In order to ensure a continuous supply of goods, middlemen maintain a large volume of stock.

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Allocation: It involves packing of the sorted goods into small marketable lots like 1Kg, 500 gms, 250 gms etc.

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Assorting: Middlemen obtain a variety of goods from different manufacturers and provide them to the customers in the combination desired by them. For example, rice from Dehradun & Punjab.

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Product Promotion: Sales promotional activities are mostly performed by the producer but sometimes middlemen also participate in these activities like special displays, discounts etc.

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Negotiation: Middlemen negotiate the price, quality, guarantee and other related matters about a product with the producer as well as customer.

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Risk Taking: Middlemen have to bear the risk of distribution like risk from damage or spoilage of goods etc. when the goods are transported from one place to another or when they are stored in the god-owns.

Types of Distribution Channels

Broadly, Channel of distribution is of two types viz: 1. Direct Channel or Zero Level Channels When the producer or the manufacturer directly sells the goods to the customers without involving any middlemen, it is known as direct channel or zero level channel. It is the simplest and the shortest mode of distribution. Selling through post, internet or door to door selling etc. are the examples of this channel. For example, Mc Donalds, Bata, Mail order etc. Methods of Direct Channel are:

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Door to door selling

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Internet selling

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Mail order selling

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Company owned retail outlets

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Telemarketing 6|Page

2. Indirect Channels When a manufacturer or a producer employs one or more middlemen to distribute goods, it is known as indirect channel. Following are the main forms of indirect channels:

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Manufacturer-Retailer-Consumer (One Level Channel): This channel involves the use of one middleman i.e. retailer who in turn sells them to the ultimate customers. It is usually adopted for specialty goods. For example, Tata sells its cars through company approved retailers. Manufacturer→ Retailer→ Consumer

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Manufacturer-Wholesaler-Retailer-Customer (Two level channels): Under this channel, wholesaler and retailer act as a link between the manufacturer and the customer. This is the most commonly used channel for distributing goods like soap, rice, wheat, clothes etc. Manufacturer→ Wholesaler→ Retailer→ Customer

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Manufacturer-Agent-Wholesaler-Retailer-Consumer (Three level channels): This level comprises of three middlemen i.e. agent, wholesaler and the retailer. The manufacturers supply the goods to their agents who in turn supply them to wholesalers and retailers. This level is usually used when a manufacturer deals in limited products and yet wants to cover a wide market. Manufacturer → Agent → Wholesaler → Retailer → Consumer

Factors Determining Choice of Channels of Distribution

1. Product Related Factors 7|Page

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Nature of Product: In case of industrial goods like CT scan machine, short channels like zero level channel or first level channel should be preferred because they are usually technical, expensive, made to order and purchased by few buyers. Consumer goods Ike LCD, refrigerator can be distributed through long channels as they are less expensive, not technical and frequently purchased.

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Perishable and Non- Perishable Products: Perishable products like fruits or vegetables are distributed through short channels while nonperishable products like soaps, oils, sugar, salt etc. require longer channels.

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Value of Product: In case of products having low unit value such as groceries, long channels are preferred while those with high unit value such as diamond jewelry short channels are used.

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Product Complexity: Short channels are preferred for technically complex goods like industrial or engineering products like machinery, generators like torches while noncomplex or simple ones can be distributed through long channels.

2. Company Characteristics

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Financial Strength: The companies having huge funds at their disposal go for direct distribution. Those without such funds go for indirect channels.

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Control: Short channels are used if management wants greater control on the channel members otherwise a company can go in for longer channels.

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3. Competitive Factors Policies and channels selected by the competitors also affect the choice of channels. A company has to decide whether to adopt the same channel as that of its competitor or choose another one. For example, if Nokia has selected a particular channel say Big Bazaars for sale of their hand sets, other firms like Samsung and LG have also selected similar channels. 4. Market Factors

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Size of Market: If the number of customers is small like in case of industrial goods, short channels are preferred while if the number of customers is high as in case of convenience goods, long channels are used.

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Geographical Concentration: Generally, long channels are used if the consumers are widely spread while if they are concentrated in a small place, short channels can be used.

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Quantity Purchased: Long channels are used in case the size of order is small while in case of large orders, direct channel may be used.

5. Environmental Factor Economic factors such as economic conditions and legal regulations also play a vital role in selecting channels of distribution. For example, in a depressed economy, generally shorter channels are selected for distribution.

Research Methodology

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A research methodology defines the purpose of the research, how it proceeds, how to measure progress and what constitute success with respect to the objectives determined for carrying out the research study. The appropriate research design formulated in detailed below. Exploratory research: This kind of research has the primary objective of development of insights into the problem. It studies the main area where the problem lies and also tries to evaluate some appropriate courses of action. The research methodology for the present study has been adopted to reflect these realities and help reach the logical conclusion in an objective and scientific manner.

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Data Collection

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Primary Data: An unstructured qualitative questionnaire was used to gather the needed information. The questionnaire was not filled in by the distributors. It was like an interview and we noted down their views and the information they provided. Secondary Data: Secondary data was collected through: 

Articles

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Reports

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Journals

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Magazines

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Newspapers

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Internet

Sampling Technique: The process employed to select the sample was simple random sampling. Simple random sampling refers to that sampling technique in which each and every unit of the population has an equal and same opportunity of being on the sample. In simple random sampling, which item gets selected is just a matter of a chance. Analytical Tools: Simple statistical tools have been used in the present study to analyze and interpret the data collected from the field. The study has used percentiles method and the data presented in the form of tables and charts.

Indian Market Size

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Overall domestic automobiles sales increased at 6.71 per cent CAGR between FY13-19 with 26.27 million vehicles getting sold in FY19. Domestic automobile production increased at 6.96 per cent CAGR between FY13-19 with 30.92 million vehicles manufactured in the country in FY19 In FY19, year-on-year growth in domestic sales among all the categories was recorded in commercial vehicles at 17.55 per cent followed by 10.27 per cent year-on-year growth in the sales of three-wheelers. Premium motorbike sales in India crossed one million units in FY18. During January-September 2018, BMW registered a growth of 11 per cent year-on-year in its sales in India at 7,915 units. Mercedes Benz ranked first in sales satisfaction in the luxury vehicles segment according to J D Power 2018 India sales satisfaction index (luxury). Sales of electric two-wheelers are estimated to have crossed 55,000 vehicles in 2017-18.

Investments 12 | P a g e

In order to keep up with the growing demand, several auto makers have started investing heavily in various segments of the industry during the last few months. The industry has attracted Foreign Direct Investment (FDI) worth US$ 21.38 billion during the period April 2000 to March 2019, according to data released by Department for Promotion of Industry and Internal Trade (DPIIT). Some of the recent/planned investments and developments in the automobile sector in India are as follows: 

Ashok Leyland has planned a capital expenditure of Rs 1,000 crore (US$ 155.20 million) to launch 20-25 new models across various commercial vehicle categories in 2018-19.

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Hyundai is planning to invest US$ 1 billion in India by 2020. SAIC Motor has also announced to invest US$ 310 million in India.

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Mercedes Benz has increased the manufacturing capacity of its Chakan Plant to 20,000 units per year, highest for any luxury car manufacturing in India.

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As of October 2018, Honda Motors Company is planning to set up its third factory in India for launching hybrid and electric vehicles with the cost of Rs 9,200 crore (US$ 1.31 billion), its largest investment in India so far.

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In November 2018, Mahindra Electric Mobility opened its electric technology manufacturing hub in Bangalore with an investment of Rs 100 crore (US$ 14.25 million) which will increase its annual manufacturing capacity to 25,000 units.

Government Initiatives

The Government of India encourages foreign investment in the automobile sector and allows 100 per cent FDI under the automatic route. Some of the recent initiatives taken by the Government of India are 

The government aims to develop India as a global manufacturing center and an R&D hub.

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Under NATRiP, the Government of India is planning to set up R&D centers at a total cost of US$ 388.5 million to enable the industry to be on par with global standards.

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The Ministry of Heavy Industries, Government of India has shortlisted 11 cities in the country for introduction of electric vehicles (EVs) in their public transport systems under the FAME (Faster Adoption and Manufacturing of (Hybrid) and Electric Vehicles in India) scheme. The government will also set up incubation center for start-ups working in electric vehicles space.

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In February 2019, the Government of India approved the FAME-II scheme with a fund requirement of Rs 10,000 crore (US$ 1.39 billion) for FY20-22.

Car Sales by Manufacturer for 2016-17 (or alternate period in brackets)

Manuf act ur er

Domest i c

Expor t s

AudiI ndi a

6463( 2018)

BMW I ndi a

11105( i ncl .700Mi ni s -2018)

FCAI ndi a

5665

9809( 2018)

For dI ndi a

91405

167910( 2018)

GM I ndi a( sal es endedi n2017)

25823

79495( 2018)

HondaCar sI ndi a

157313

HyundaiMot orI ndi a

550002( 2018)

I suzuMot or sI ndi a

~3000

160010( 2018)

Tot al

262784( 2017)

710012( 2018)

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JaguarLandRover

4596( 2018)

Lambor ghi ni

45( 2018)

-

26

Mahi ndr a& Mahi ndr a

233915( FY18)

28222( FY18)

262137( FY18)

Mar ut iSuzukiI ndi a

1653500( FY18)

111441( 2018)

1779574( FY18)

64720( 2018)

151001

Mer cedesBenzI ndi a 15538( 2018) Ni ssanI ndi a

57315

Por sche

348( 2018est . )

Renaul tI ndi a

135123

ŠkodaAut oI ndi a

17244( 2018)

Tat aMot or s

153151

Toyot aKi r l oskar Mot or

140645( FY18)

9361( 2018)

Vol kswagenI ndi a

45239( FY18)

64164( 2018)

Vol vo

2638( 2018)

12129( 2018)

135000+( FY18)

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Market Segmentation

1. Commercial Vehicles

Commercial vehicles industry is divided into two broad segments, viz., passenger and goods. The passenger segment is largely controlled by state owned transport undertakings (STUs) while goods vehicles are generally manufactured in private sector. The manufacture of commercial vehicles started in 1950s and the industry registered a rapid growth in the past-liberalization period as a result of incentives given by the government. The production of commercial vehicles (including buses, trucks, tempos, 3 and 4 wheelers) increased from an insignificant of 8.6 thousand in 1950-51 and to 145.5 thousand in 1990-91 and 327.3 thousand in 1996-97. However, varying trends in production have been observed after 1996-97. In the year 2003-04, India produced 275.1 thousand commercial vehicles. Currently 7 companies are engaged in manufacturing buses and trucks. Tata Engineering and Locomotive Co. Ltd. (TELCO) is the leading producer of medium and heavy commercial vehicles and accounts for over 70 per cent of such vehicles produced in India. Four plants, each at Hyderabad, Pithampur (M.P.), Arson near Rupnagar (Punjab) and Surajpur in...