Jagdish Khattar wants to fill the gap in the service infrastructure for cars. Will he succeed?
Every Sunday, Jagdish Khattar makes it a point to call his customers to find out if they are satisfied. Was the quality of the service up to the mark? Was his staff polite or not? Was the bill high or low? Though a few complain of high bills, the answers are mostly positive. Khattar feels Carnation Auto, his venture which deals with automobile service, spares, accessories and now pre-owned cars, has begun on the right note.
The business mind you is still small — Carnation has 10,000 customers out of the 11 million cars on the country’s roads. So, Khattar can afford to give a call to his customers. He may have to engage a call centre if the business grows in the days to come.
At the moment, automobile dealers say it will be hard for him to win the trust of customers and there will always be the element of doubt in their mind if they will get genuine spare parts at Carnation. Carmakers show mixed reactions — some say it will help them expand into towns where they don’t have a service station, others say there is no way Carnation can deliver on its promise. Experts raise doubts on his ability to source parts made with patented technology.
Still, Khattar feels he has hit upon the right formula for success. He is not the first mover in the market — the TVS Group (MyTVS), Mukesh Ambani Group (Reliance Auto Zone) and Mahindra & Mahindra (First Choice) got in before him. But none has the national presence that Khattar plans to soon put in place.
Sitting in his small office situated on a high-rise off the expressway to Greater Noida, he talks investments of up to Rs 1,000 crore in the next four to five years, breakeven in two years and profits from the third year, joint ventures and strategic alliances. He has put in place a team of over 600 men and women drawn from top companies like Bharti Airtel, Schneider and Reliance Petroleum. Khattar took none from Maruti Suzuki, of which he was the managing director from August 1999 to December 2007, though two of his men have worked in the past for the country’s largest carmaker.
Demand vs supply
“My starting philosophy was that there is a big gap between demand and supply in this field,” says Khattar. He first thought of this venture in 2006-07 when huge investments were announced by car companies in India. Volkswagen, Nissan, Peugeot and others had all committed big bucks to the country. But there was no sign of any corresponding investment in the service network.
Subsequently, Khattar commissioned consultancy firm AT Kearney to research the sector. It said that top carmakers are slated to spend up to Rs 30,000 crore to up production capacity from 1.7 million in 2007 to 3.8 million by 2015. This, said AT Kearney, will require an investment of Rs 15,000 crore by 2012 in sale and service infrastructure. The all-important question was that who will bring this money?
Experience at Maruti Suzuki had shown Khattar that dealers were losing interest in the business. The new generation didn’t want to dirty its hands and was keen to use resources in sectors like information technology, retail or real estate. Some top dealers did not have male heirs and didn’t know who to build the business for. When the car market took a turn for the worse earlier this year, many dealers were on the verge of bankruptcy. (The situation has improved in the last few months as car sale has picked up.)
This was the space Khattar decided he had to enter. The car population in the country, AT Kearney had projected, would grow from 11 million in 2008 to 15 million in 2012 and 19 million in 2015. This would strain the service infrastructure. Research also showed that over 50 per cent car owners move out of the dealer workshops for service after two years when the service warranty gets over. To save money, these people go to small unauthorised garages. With new emission norms, these garages may not have the right tools to service cars.
With the right price and product, Khattar says he can get business from dealers as well as these garages. It is worth noting that for the first two or three years, which are covered by the warranty, cars do not suffer much wear and tear. It is only later that fatigue sets in to parts. “My average revenue per car will therefore be higher,” says Khattar.
Sector experts say that there is growing dissatisfaction with service standards of automobile dealers the world over. “When you go for service, the focus is on the car and not the customer,” says Synovate Motoresearch Global Director Richard Rice. “I don’t think very many manufacturers have actually made that link in terms of how important it is going to be for ongoing prosperity to deliver at the dealer’s level.”
Globally, third-party service chains have emerged as a serious alternative to authorised service stations and independent workshops. According to Khattar, these chains have cornered 13 per cent market share in Germany, 29 per cent in France and 30 per cent in the United Kingdom. Khattar, to be sure, had gained important insights into the service business while at Maruti Suzuki. Under him, the company had come out on top on as many as seven occasions in the JD Power survey on customer satisfaction. In fact, Khattar is one of the four individuals from the automotive industry to win the JD Power Founder’s Award.
Khattar also found support from an unexpected quarter: Motor insurance companies. “Insurance claim today is 120 per cent of the premium,” says Khattar. Clearly, insurance companies want a chain of transparent service and repair workshops.
Spare parts
The starting point for Khattar was to find suppliers of spare parts. To make sure he doesn’t end up chasing low-volume cars, he has decided to focus on 28 cars that cost up to Rs 9 lakh. He is learnt to have tapped component makers who are small suppliers to carmakers, and hence don’t have much to lose, as well as overseas suppliers for spares. In fact, he is learnt to have imported some Honda components at low prices from Thailand.
Component makers say that they are free to sell some parts to the after-sale market, especially those which go under the hood like piston rings and so on, but they are not free to sell parts that are visibly distinctive to each model and have been developed jointly with the carmaker — headlights, taillights, bumper and so on. How does Khattar source such parts? Khattar says the law is very clear and he cannot be stopped from buying components. “In Europe, this is a matter of anti-trust,” says he.
So far as imports are concerned, carmakers say that Khattar’s costs would be high as he can buy only from independent dealers and not the original component manufacturer. Some of them even say that spare parts of recent models cannot be procured through dealers. “An independent dealer, for instance, cannot stock parts of the new City or Accord,” says a Honda Siel Cars executive. Khattar knows this is a problem but is confident that he can still solve most of the problems that could happen in any car.
If Khattar is able to scale up his venture, he is bound to hurt car dealers and hence carmakers. In India, profit margins for car dealers are not more than two or three per cent, way below eight to nine per cent elsewhere in the world. Where they make money is spares and service. There the profit margins can be as high as 50 to 60 per cent.
At the moment, dealers are blasé about Carnation’s challenge. “I don’t know if customers will have confidence in an independent service provider. He goes to an authorised service centre because he is assured of genuine parts,” says a Delhi-based dealer. “It is difficult to say at this stage what will happen to imported parts. Carmakers can put their foot down on such parts.” To deal with the challenge, Carnation offers warranty on all parts — something Khattar claims no car maker provides at the moment.
Not that everybody is opposed to Carnation. At least one car industry executive says that it can be of great help for small car companies that do not have a nationwide service network. “We expect our customers to go to our dealers. But it is a good thing for places where we do not have an outlet,” says General Motors India Director P Balendran.
Real estate
A Carnation outlet can cost anywhere between Rs 3 crore and Rs 4 crore. Khattar has so far opened 10 centres and his target is to reach 30 by the end of 2009-10. Premji Invest has invested Rs 80 crore and IFCI Ventures another Rs 28 crore. Though Khattar does not disclose how much stake he sold to the two investors, the buzz was that Carnation was valued at Rs 350 crore for the two deals. Khattar, of course, retains a controlling stake in the company. He has also lined up bank credit worth Rs 170 crore.
Khattar’s original plan was to set up a subsidiary company, Carnation Realty, to house all real estate. The obvious idea was to raise money in that company. But the slump in real estate has made him shelve the plan. Khattar claims he has received over 200 applications for franchises. But that is not the model he wants to follow. In each state, Carnation will form a joint venture company with a local businessman, which will cover the whole state. So far, he has formed six such joint ventures. Carnation retains majority control in all. Joint venture partners are all mid-sized businessmen worth Rs 50 to 100 crore.
Through the joint ventures, Khattar wants to target small towns which do not have service infrastructure. “People from such towns go to large cities to purchase a car. To take the car back to the same city for service is an inconvenience. Carnation can take care of service in such towns,” says he. Though market leader Maruti Suzuki has a huge network with some 2,000 authorised service stations, other carmakers lag far behind. At the same time, the market in small towns and even villages has gained a buzz because of improved rural prosperity. Support prices for all crops are up, monsoons (except the current one) have been bountiful and farm income is not taxed.
Price & convenience
India is a price-sensitive market. According to Khattar’s own admission, over half the people take their cars to neighbourhood garages for service after two years. How will Khattar make sure his prices are competitive? Khattar says most authorised service stations look at the first opportunity to replace parts and that inflates the bill. “Our philosophy is to repair and not replace, unless it is absolutely necessary,” says he.
For convenience, Carnation stations open at 9:00 in the morning and stay open till 9:00 at night. It offers car pickup and drop. Khattar even plans to have service vans which can park in a neighbourhood and service all the cars there.
But there are other ways Khattar is trying to keep his costs under check, which will help him keep the price tag on his service low. Instead of buying space in newspapers for advertisements, Khattar has put inserts in weekend editions — a cost-effective way of reaching the customer. He expects word-of-mouth publicity to play a big role in his campaign.
Of course, the inserts carry prominently Khattar’s photograph. Even the logo of his company says, “A Jagdish Khattar Initiative”. Brand experts will tell you that such a plan runs two risks: One, people perceive it to be a one-man show that lacks management depth; and two, what happens if the promoter is not around?
Khattar says the tagline was attached on the advice of Piyush Pandey, the chairman of Ogilvy. A dipstick carried out by Pandey showed that Khattar’s credibility amongst automotive industry heavyweights was the highest across various parameters. Pandey therefore insisted that his name should be brought in one way or the other. Service, of course, is a highly personalised business and Khattar hopes it will help.
Meanwhile, Khattar has begun selling pre-owned cars. Most carmakers offer similar services but with a difference: They may buy any brand but they will only sell their own cars. The trick here is to sell a car within three to four weeks of buying it. Or else, it can add to costs. While the plan for pre-owned cars has begun to roll, Khattar is in no hurry to start car dealership. However, he has inked a deal with car designer Dilip Chhabria to become his exclusive dealer in the country. At the moment, his focus is on service, spare parts, accessories and pre-owned cars.
