Economy

Why GM Won’t Be The Last Car-Maker To Wind Up Shop Here; Some Lessons For India

(Bill Pugliano/Getty Images)
Snapshot
  • Like many markets in India, the four-wheeler market has just far too many players and other companies may follow in GM in its exit from the country.

    However, that should not distract the government from enacting market friendly reforms which are needed anyway.

Even as India has remained the world’s top foreign direct investment (FDI) destination for two years running, topping China and the US, a small trend of disinvestment and near exits are also worth noting.

Last week, General Motors announced its decision to exit India, after failing to set the automobile buyers’ heart aflutter for over two decades. A few months ago, Vodafone effectively said it is facing investment fatigue in India, and agreed to merge with Idea Cellular, and even giving Kumar Birla a chance to equal his stake in the combined entity. And three years ago, Nokia wound up shop in Chennai and fled to Vietnam, where the tax regime is less taxing.

In part, the Nokia exit was the result of a dramatic shift in demand for mobile phones from feature to smart. It went too downmarket to survive when demand patterns changed.

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The Vodafone fatigue relates to low returns in a price sensitive market that had spectrum costs going through the roofs, thanks to the shift from arbitrary allotments of low-priced spectrum to auction-determined ones. It is also the victim of tax terrorism, having been forced to face the taxman despite a Supreme Court verdict in its favour.

The GM exit is the result of pure and simple market forces. It simply was not competitive enough, and in a market with over 15 players, GM cars were simply unappetising.

The surprise in not that GM is leaving, but why so many others who are in the same boat are still thrashing about in the Indian car pool with unviable market shares. Even given its current market size of three million cars sold annually, and the possibility for further growth in the next five years, there is no way India can support 15 car makers. Of these 15 – and we are not counting luxury car sellers like Mercedes, BMW, Audi, Porsche, et al – eight have market shares below 2.5 percent (GM had around 1.3 percent), and another five are in the 4-7 percent range, leaving only market leader Maruti Suzuki (over 47 percent) and Hyundai (around 18 percent) certain of survival and prosperity.

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While the top two have an assured future as long as they remain innovative, only one or two more from the next five players will have a shot at remaining in the broad market. The rest will have to choose their niches to survive. They could be small volume players, with reasonable profits. What they won’t be doing is sell cars in lakhs.

Jagdish Sheth and Rajendra Sisodia, marketing professors at Emory and Bentley College, have posited what they call The Rule of Three, which says that in any competitive market with no major regulatory constraints and limited entry barriers, three players will dominate with 70-90 percent market shares between them. The rest of the players will have to be niche or specialist. In an article written some time ago in the Ivey Business Journal, they wrote: “Contrary to traditional economic theory….evolved markets tend to be simultaneously oligopolistic as well as monopolistic. In competitive, mature markets, there is only room for three full-line generalists, along with several (in some markets, numerous) product or market specialists. Together, the three ‘inner circle’ competitors typically control, in varying proportions, between 70 percent and 90 percent of the market. To be viable as volume-driven players, companies must have a critical-mass market share of at least 10 percent.”

In the Indian car market, only Maruti Suzuki and Hyundai seem to be viable enough to offer a full range of vehicles covering the market from bottom to top. The next five players, M&M, Toyota, Renault, Tata Motors, and Honda, with market shares ranging from 7 percent to 4.5 per cent, will sooner or later have to decide where to specialise – or quit. They can always sell a small volume of cars imported from other manufacturing plants. As for the rest, which include Ford, Volkswagen, Skoda, Fiat, Mitsubishi, and Nissan, they will sooner or later have to bid goodbye, or grow through major acquisitions.

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In other words, GM will not be the only one to exit India over the next decade.

In fact, the Rule of Three will soon begin to operate in the two-wheeler industry, where Hero MotoCorp and Honda are likely to be the top two, followed by Bajaj, TVS Motors and Eicher (Royal Enfield). Smaller players like M&M, Yamaha, Suzuki will have to choose their niches or exit.

Not just automobiles, even in services – telecom, for example, and IT services – will see the Rule of Three starting to bite. With the entry of Reliance Jio, we have already seen two exits (Telenor and Idea, which is merging with Vodafone), but the total number of players is still too large to sustain: there are six with Airtel, Vodafone-Idea, Jio, Reliance Communications (RCom), Tata Tele, and BSNL. If we assume that BSNL happily bleeds in government hands, both RCom and Tata will have trouble staying in business. In labour arbitrage-driven IT services, TCS, Infosys, Cognizant, HCL Tech and Wipro are all focused on the North American market. Some will have to shift gears and focus on other markets, or merge. It may not happen tomorrow, since they are all cash-rich, but it is inevitable.

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There is no escaping the logic of the Rule of Three.

But going beyond the Rule of Three in competitive markets, India needs to focus very hard on make its tax regime simple and competitive; it will also have to focus on driving down the cost of doing business in India by taking an axe to excessive regulation and bureaucracy.

It is understandable that Narendra Modi is keen to win re-election in 2019 by positioning his party to the Left of its earlier position on economic issues.

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But if wants India to attract more investment, both domestic and foreign, he has to re-emerge in his Gujarat avatar, and focus on making life easy for business – not through favouritism and cronyism, but by genuinely pursuing market- and business-friendly policies.

To be a true believer in poverty alleviation, Modi also needs to believe in the wealth- and job-creating potential of business.

Reaching the top of the world FDI league may be the result of good fortune and a gathering reform momentum under the Modi government; staying on top means we have to run faster. The world will not sit still while India gains at its cost.

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(A part of this article was first published in DB Post)

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