From Ford Motor to Harley-Davidson, why US automakers stalled in India

Failure to read the market and taxes favouring small cars made some of the most storied names in the global automobile industry fail in the world's fifth-largest market

Besides their country of origin, General Motors, Ford Motor and Harley-Davidson have another trait in common: all three have failed in India, the world’s fifth largest automobile market. All three of them took a tough call to de-prioritise India as a market amid disruption from heightened regulations and sharper focus on capital allocation by the parent.

The restructuring announ­ced by Ford in India last week brings back the spotlight on why India’s auto market has rema­i­n­ed an enigma for global auto ma­jors, particularly those from the USA.  Why is it that in the very same market that Asian companies have managed to not only protect the turf but also grow the rest have struggled, capturing just about a 5 per cent share?

To be sure, the writing had been on the wall for Ford sometime. If anything, the global health crisis triggered by the Covid-19 pandemic forced the company to finally pull the plug on India. The premature divorce with Mahindra & Mahindra, which was to take over the company’s assets in India, only accelerated the decision.

Poor sales in the past 11 years is a reflection of the storied auto-maker’s struggles in India. Volu­mes in India peaked at 98,537 units in 2011 (see chart). To put it in perspective, the second largest car-maker in the pecking order, Hyundai Motor India, sells almost half of that amount every month.

Earlier, in September 2020 Harley, the Milwaukee-based company, said it was exiting the world’s largest two-wheeler market. Harley-Davidson’s struggles were not India-specific—globally, it has been struggling to grow its audience. As a result, the company, as a part of its “The Rewire” strategy, is narrowing its focus to the 50 most profitable markets—including Europe, China and the US — and pruning its global portfolio by nearly 30 per cent, leading to the India exit. Subsequently in October, it partnered with Hero MotoCorp. The latter will make Harley bikes and also take care of sales, service and spares.

So what has led to the undoing for these firms? The global theme of “Big is Beautiful”, which has somewhat worked for these firms in other markets, did not fit into the scheme of things in India, which is predominantly a market for small cars and inexpensive motorcycles. Seven out of every ten cars and motorcycles sold in the domestic market come from this segment.

Also, the global template for product portfolio and sales and marketing strategy was not as effective in the Indian context. It did not cut much ice with value-conscious buyers who seek differentiated sales experience and after-sales support. Besides Maruti Suzuki and Hyundai Motor India, the latest entrant, Kia, has managed this well, said an analyst.

Sudhir Rao, who headed the India operations of Renault and Skoda, blames it on poor management. “Unlike their counterparts from Japan and Korea, automakers from the West have faltered in India and elsewhere because of poor management and an equally poor understanding of how to compete in a market like India.”

Concurs as an analyst at a consulting firm. Both GM and Ford were managed by the regional headquarters, Asia-Pacific, and were quite removed from the ground realities of the Indian market. They lacked an India-focused strategy and by the time they realised its importance, it was quite late in the day when Asian rivals such as Hyundai had surged into this market, the analyst adds.

“Unfortunately, the local managers (in India) spend more time managing the bosses than managing the business and get away with it,” says Rao. Unlike their peers from Japan and Korea they don’t get their hands and feet dirty and still command a pay cheque twice as large as their Japanese and Korean peers. This makes them complacent and unwilling to push the boundaries, he adds.

One among the various reasons that caught GM, Ford and various other global carmakers in the wrong lane in India is India’s tax structure, point out industry executives. These companies boasted large product portfolios globally but hardly had anything that conformed to this specification.

India has a differentiated tax structure that is skewed heavily in favour of small cars.  Cars less than four metres in length and engine of up to 1.2 litres attract a duty of 29 per cent (28 per cent GST and 1 per cent cess). Imposts on larger vehicles (longer than four metres and with engine capacity higher than 1.2 litres) can go up to 50 per cent.

“Nowhere else in the world do you have this kind of structure,” Shekar Viswanathan, former vice chairman at Toyota Kirloskar Motor, points out. Even if you do have a small car, the volumes have to be high enough to justify the profit per car, he adds. For instance, to earn the profit equivalent to what Toyota earned by selling one Innova, the Japanese carmaker had to sell 80 units of the Etios, a compact sedan it phased out in April 2020 ahead of the emission change­over for this very reason.

Ford tried capturing the segment with the Figo and General Motors with the Spark. But the volumes were nothing close to what the companies had plan­ned. Several others, including Toyota Kirloskar, Honda Cars and Volkswagen, took a shot at the volume car segment but retracted soon.

Many of these companies, says Ravi Bhatia, director and president at Jato Dynamics — an automotive business intelligence firm — entered this market hoping that the car buying population would graduate to higher segments, but the narrative didn’t play out.

“After the economic liberalisation in 1991, the narrative gained strength that the large Indian middle class will become rich and create an attractive market for cars. This did not fully pan out,” he says.

India sells 3.2 million new cars a year, about the same in used cars and about 21 million two-wheelers a year. The average new car is $10,000, which is just one fourth of the US car price. The average used car price is $4,000. For scooters it is $1,000-1,500. Harley Davidson models in India start at Rs 10 lakh and go up to ₹50.3 lakh.

“This is what Indians can afford. There are only 120-odd million households with an income between $7,700 and $15,400 and this is the real pool,” says Bhatia. Had US car-makers figured that out earlier, they would have saved themselves a lot of pain.