Two years ago, when General Motors exited India, we had predicted that it won’t be the last. A news story about Ford also exiting the country, by shifting most of its operations to a joint venture in which Mahindra & Mahindra (M&M) will hold the majority stake, confirms that this trend will continue. Even Ford’s exit will not be the last we will hear about consolidation in the industry.

India can, at best, support three or four full-line auto players, with the rest being niche producers catering to smaller segments of a specialised market. They can also choose to collaborate and label their cars differently – as Renault and Nissan do in India, and as Maruti and Toyota have agreed to.

But right now, even after the Ford exit, we still have eight multi-segment players – Maruti-Suzuki, Hyundai, Tata Motors, Honda, M&M-Ford, Toyota, Renault-Nissan, and Volkswagen-Skoda – apart from several niche ones, including JLR, Mercedes, Audi, BMW, Kia, MG Rover, Ssongyang, Jeep, Porsche and Mitsubishi.

The niche products, which are mostly at the upper end of the game, will manage to survive, since they depend on small volumes and imports, but the multi-segment players cannot all survive the next few years.

In the context of the structural issues facing the auto industry, not only in four-wheelers but also two-wheelers, the industry needs to downsize and focus. Apart from the steady improvement in public transport, and the threat posed by shared mobility and electric vehicles, the auto industry has to not only slim down, but also invest in more exciting products to entice the customer in future. This calls for more exits and collaboration among those remaining back.

The industry also needs to build a more solid export base, as that is the only way for generalist players to build volumes and keep overall costs down. The costs of innovation can then be spread over a larger market.

As we had noted in an earlier article when GM packed its bags and left, the Rule of Three will begin to apply in India. We said:

“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 per cent 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 per cent and 90 per cent of the market. To be viable as volume-driven players, companies must have a critical-mass market share of at least 10 per cent.

“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.

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

M&M-Ford

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