In May 2005, Tata Motors had launched the Ace, a small truck of 0.75 tonne. The company had studied the market for three-wheeler goods carriers for a while and had concluded that small transporters were ready to switch to a mini truck.
It made them look good in their peer group. The Ace was economical and versatile. It could run over 500 km in a day on a top speed of 63 km per hour; it had a large flat loading area, short turning radius and high ground clearance with 12-inch tyres.
It could thus negotiate narrow urban lanes and potholed rural roads with equal ease, and was the right solution for last-mile connectivity. Its price was Rs 220,000, not very different from a three-wheeler which could cost up to Rs 190,000.
The Ace was a runaway success. In 2009-10, Tata Motors sold over 100,000 Aces. The Magic, the passenger carrier built on the Ace platform and launched in 2007, sold close to 50,000 during the year.
With the economy on the rebound after the year-long slowdown that started mid-2008, the market for commercial vehicles is growing fast at 12-13 per cent per annum; the small truck segment is growing faster at over 15 per cent.
No surprise then, competition for the Ace is set to rise in the days to come. Mahindra & Mahindra has launched two small trucks -- the Gio and Maxximo.
Piaggio too has put two rivals on the road, called the Ape Truk and Ape Truk Plus. The company claims these trucks can give a mileage of up to 22 km a litre, the best in class.
General Motors India will get at least a couple of models from the portfolio of its Chinese shareholder, Shanghai Automotive Industry Corporation, some time in 2012. Gujarat-based Atul Auto has declared its intention of making a rival to Ace. And the industry is rife with talk that Bajaj Auto too is working on a small truck.
Such vehicles don't require any rocket science; so technology is not an entry barrier. Mahindra & Mahindra, for instance, built the Gio from scratch for as little as Rs 25 crore.
While small trucks have displaced three-wheelers in the goods category with a market share of 80 per cent, the unfinished agenda in the passenger category remains huge.
The three-wheeler market there is alive and kicking with almost 80 per cent of the market. And companies have fortified their portfolios. Bajaj Auto has nine three-wheelers, Piaggio and Mahindra & Mahindra have two each and Atul Auto has seven.
And this market is growing at a fast clip. Ernst & Young Partner Rakesh Batra reckons the market for passenger ultra-light commercial vehicles will grow at 12 to 14 per cent per year over the next five years.
As a result, Tata Motors' share in the one-tonne and below category of goods carriers fell from 61 per cent in January-July 2009 to 54 per cent in January-July 2010. Clearly, it has a challenge on its hands.
Market approach
Only too aware of it, Tata Motors has unleashed a slew of initiatives. First up is a new platform in the 0.5-tonne category, called the Zip, which could be priced between Rs 160,000 and Rs 190,000.
But isn't it a bit late in the day? Mahindra & Mahindra created this sub-category with its Gio last year, which was geared to hasten upgrades from three-wheeler load-carriers to four-wheelers.
However, Tata Motors is hopeful that its 0.5-tonne passenger-carrier, the Iris, will be the first such four-wheeler in India. The vehicle is being tested in Rajasthan and will be rolled out by October.
But passenger carrier is a different market. "For passenger carriers, the operator economics is not as clear as it is with an Ace. Unlike better load carrying and ride quality, less wear and tear and turnaround times, for passenger carriers it boils down to carrying eight to ten people," says Tata Motors President (commercial vehicles) Ravi Pisharody.
"Most operators are unwilling to shell out a premium of Rs 100,000 or more over the existing options for a four-wheeler in this segment." Thus, the Iris will likely carry a price tag of Rs 180,000 -- very close to three-wheelers.
The Magic will continue to cater to the deluxe segment, while the Iris will try to take it deeper into small-town and rural India, places where the three-wheeler passenger share-taxis (as opposed to auto-rickshaws) ply over 20 to 30 km.
Tata Motors has no intention to leave its rural plans to chance.
"We have set up a rural marketing vertical within our sales and marketing departments. Earlier, individual marketing teams would strategise for the rural markets they reached. But now, with a larger portfolio of vehicles priced below Rs 200,000, it is worthwhile to look at it as a separate market rather than have every brand manager figure it out. The new team will analyse and implement what is needed," says Pisharody.
But how deep is the company willing to go? While Tata Motors will not go the fast-moving consumer goods way to towns with a population of 20,000 and below, it will have to assess the potential of towns that have a population of 25,000 to 50,000. (It already covers towns with a population of 80,000 and more.)
To help people with lower incomes, whom the Iris and Zip will address, Tata Motors has set up groups at dealer outlets to help them with sorting out their PAN card, driver's licence and financing. "They (the new customers) usually don't have a track-record of borrowing with the banks. We can help them with Tata Motors Finance," says Pisharody.
To expand the market, the company has been increasingly tapping quasi-public banks such as rural and cooperative banks which now contribute over 20 per cent of the loan funds. Eighteen months ago, these contributed less than 5 per cent of the loan corpus.
"They already have a good reach and afford us the same with financing options," says Pisharody. Purvanchal Gramin Bank with around 100 branches in the area around Gorakhpur in east Uttar Pradesh is one such example.
Expanding reach
Meanwhile, Tata Motors is also fortifying its warhorse, the Ace. It is expanding its dealer network in the hinterland, to begin with.
"When we had launched in 2005, the concept of dealership branches was not there in a big way. We had about 50 dealerships, which had another 50 to 75 branches. Since the launch of the Magic and the Ace variants, we realised that we need to get into smaller towns," says Pisharody.
Tata Motors has thus encouraged its dealers to set up 1 S (sales only) outlets as opposed to the full-fledged 3 S (sales, stocking and service) outlets. The dealer branches have to just set up a three-bay showroom with an attached sales office. This reduces the investment that a dealer is required to make.
Small commercial vehicles like the Ace do not have complex technology; as a result, independent workshops too can fix these.
Tata Motors though has also decreed to maintain not more than 50 km distance between two service stations, made possible by the Tata Authorised Service Centres. If there are 400 dealer workshops, there are 700 such centres. The company wants to raise the number of touch points from 1,100 now to 3,000 in five years' time.
Some time back, Tata Motors also realised that the Ace and Magic can be shipped directly to dealers, rather than route them through warehouses, because they are small and can be ferried in road and rail carriages.
At the moment, 75 to 80 per cent of the vehicles are sent straight to the dealers, up from 40 per cent a year ago. This has resulted in faster dispatches, quicker replenishments and real-time direct billing.
But this is a game others too can play. Bajaj Auto, the largest maker of three-wheelers in the country, has extended its rural reach in the last few years and added new features to its products keeping the demands from such markets in mind.
Mahindra & Mahindra has 550 touch points for its Gio and Maximo, and can leverage the huge brand equity of its tractors to sell small trucks in the rural markets.
To bolster the Maxximo, it is providing margin money for upfront payment and offering a year's service free of cost. Mahindra Automotive Chief Operating Officer Rajesh Jejurikar says:
"It might be a challenge to initiate new buyers in the segment, but with Maxximo we seem to have overcome that. It now has 23 per cent in the regions where it has been launched."
Rivals also point out that Tata Motors faces a shortage of manufacturing capacity. Sharing the Pantnagar (Uttarakhand) plant with the Nano has indeed meant that the production of the Ace and its family could not be cranked up to full capacity.
The projected growth for this category, according to Ernst & Young, is 25-30 per cent over the next two-three years. Hence, ramping up has to be done soon. With Nano production shifting to Sanand in Gujarat, Pisharody reckons production of the Ace family will shoot up to 21,000 per month, up from 15,000 to 17,000 now. The Iris will have a separate line of 8,000 per month.
Component shortage that had been a problem will soon be history with 80 per cent of the vendors already setting up shop near Pantnagar and the rest also planning to move in. Meanwhile, it is also looking at expanding the capacity of its plant at Dharwad in Karnataka.
One advantage that Tata Motors will have over its rivals is the resale market of its small vehicles. Its pre-owned programme has allowed it to consolidate the resale market of the Ace variants and given the company a chance to upgrade the customer to larger vehicles.
The life-cycle for the 500,000 Aces on the road is around three to four years. Since commercial vehicles make for more rational purchases than passenger cars, companies can't afford to ignore the vehicle's return on initial investment when being sold off.
Tata Motors hopes this will be good enough for it to stay the leader in the small truck and carrier market.
