December 18, 2011

Private diesel vehicle sales should be taxed

The crux of my argument is that the diesel used for private purposes is not meant to be subsidized and such usage should be charged/taxed appropriately. 

The diesel price in India can be broken up into simple components. The retail diesel price = (actual cost of diesel) + (Central & State Govt. taxes) - (Subsidy by Central Govt.)

Economists would call it inefficient because the taxes and subsidy provided by the government neutralize each other a bit. The benefit is that the government does not let the local diesel price reflect the volatility of international prices.

The beneficiaries of subsidized diesel include farmers using tractors for agriculture, truckers who transport foodgrains and materials all over the country, public transport buses that transport millions across the country, and many others. But, the list also includes the owner of a diesel car/SUV for private use.
Make no mistake, a private vehicle is an item of convenience. In other words, a person owns a private vehicle (petrol or diesel) to avoid travelling by public transport. Absolutely nothing wrong with that, until the diesel vehicle owner expects the government to subsidize him for it.

It is quite shocking to see how many private diesel vehicle owners believe that subsidized diesel is their birth-right. Clearly, the subsidy is not meant for this category of diesel users. Since they pay the tax component of the diesel price, they claim that it is the government's obligation to subsidize them for their diesel joyride. But, they forget that the tax is paid even by the intended user of the subsidized diesel. On the other hand, there should be a mechanism to charge the private diesel vehicle owners for using subsidized diesel. 

Ideally, local diesel prices should be deregulated and reflect the international oil prices. This would even promote conservatism among the citizens and more efficient use of the fuel. But doing so in one sweeping move could prove catastrophic for the national economy. 

So, if diesel subsidy has to be maintained (and reduced gradually) it has to co-exist with a mechanism of charging the unintended benfactors of subsidized diesel. Possible approaches could include differential pricing of diesel (which could lead to black-marketeering), an annual tax on private diesel vehicle owners (which would be tough to implement efficiently) or a one-time tax on private diesel vehicle sales (could result in a dramatic reduction in sales of private diesel vehicles). A one-time tax on private diesel vehicle sales seems to be the easiest to implement efficiently. Such a tax could increase the revenues of our government which could be in-turn used to subsidize the fuel. Hopefully, this would also lead to the government reducing some of the taxes on diesel and in-turn its retail price.

The flip-side is that private diesel vehicle sales could drop dramatically from current levels. And people would go back to choosing a petrol or diesel vehicle based on parameters like performance, fuel-efficiency and the average kilometres they would clock in a week. Till we move to an ideal solution (which arguably might never happen), taxing private diesel vehicle sales seems to be the only way charge them for using subsidized diesel.

Do you see any other mechanism to implement such a charge? Then I would love to hear it.

Disclaimer: I maintain this opinion in spite of having a diesel vehicle in the family.

December 03, 2011

Suzuki Takes VW to Court

Do refer to our earlier post for a quick recap of how it all started.

Suzuki has filed for arbitration in the International Court against VW. Suzuki wants its shares held by VW (as part of the earlier agreement) to be returned, while VW is not interested in giving up a 20% stake in the competitor that easily.

While the details of the arbitration process do not concern us, our takeaway is that the back-door talks have failed. The co-operation agreement between VW and Suzuki has been effectively shelved.
Although a discussion on potential implications on Suzuki is out of our scope, the implication on our market is that nothing changes at Maruti Suzuki. Maruti will now continue to source diesel engine technology from Fiat Powertrain and we will continue to enjoy powerful yet frugal diesels from Maruti.

It is also likely that Maruti will license Fiat's new award-winning Multi-Air engines. These are petrol engines (developed primarily for Europe) that dynamically control combustion in each stroke within each cylinder of the engine. The end result is increased fuel-efficiency and lower CO2 emissions. A small displacement and fuel-efficient petrol engine sounds ideal for our market.

Apart from that, VW will now have to work alone and hard at cracking the Indian market using their VW and Skoda brands. They surely have their work cut out.

Finally a New (hopefully fixed) TATA Nano

And good sense has prevailed...

We believe that it is mighty important that the Tata Nano succeeds in the Indian market. Many families do travel (with kids perched precariously) on 2-wheelers. Even if few of these families shift to the Nano, it could save many from potential injuries/harm. That said, not at the cost of adding a more serious risk to their lives.

Someone at Tata Motors has finally realised that the only way to jump-start Nano sales was to shelve the current Nano and come up with a "new Nano".
2012 TATA Nano

It sure took them a lot of time to realise that more than two dozen Nanos bursting into flames will not be considered as "independent, unrelated  incidents" by potential buyers. Irrespective of how loudly Tata Motors claims it to be so. Buyers were not even moved by claims that the fire incidents were a propaganda against the company. Sorry Tata, we were not ready to bet our lives on that claim of yours. Heck, if this were the US, the NHTSA (National Highway Traffic Safety Administration) would have ordered the cars off the road within the first couple of incidents.

It was quite obvious, the only way get the fire monkey off Nano's back was to bring in a "new and improved" one and hope that those do not burst into flames. One sincerely hopes that Tata Motors' R&D department has identified the root cause of the fires and taken care of it.

Other than the potential fire fix, the new 2012 Nano is claimed to be more powerful (38PS vs. 35PS earlier) and fuel-efficient (25.4 kmpl vs. 23.6 kmpl, as per ARAI tests) than the earlier one. Also, features that were earlier offered in the mid and high end model would now make it to the base model.

We are eagerly looking forward to the 2012 Auto Expo and hope that we get to see the diesel Nano too. A car giving more than 30kmpl mileage, wouldn't that be something!!

November 05, 2011

Renault Pulse? Yaawwwnn...

Renault will launch a new small car in India... (Yay!)
It will be based on Nissan Micra... (Cool! that would save costs. Means competitive pricing)
And here it is... The Renault Pulse!

Renault Pulse - Front

Renault Pulse - Rear
Uhh... Isn't this the Micra?
Nopes, Renault wants you to believe that it is a different car altogether. Different front and rear bumpers should do the trick, yes? No?

To be fair to Renault, you cannot judge the car just by some pics. Surely, Renault will try to market the Pulse differently than the Micra.
But, they have lost half the battle already. It is going to be very tough to convince buyers that they are buying a product that is unique and different than what the competition offers. Especially, considering that there are more than 10 options in the hatchback space.

Renault wanted to cut down on costs but shouldn't they worry about selling the car in the first place? I mean, look at the interiors below. If it weren't for the Renault lozenge on the steering, one would think it is a Micra.

Renault Pulse - Interiors
We hope Renault comes up with a USP for the Pulse. Otherwise, it could compete for the same buyer as the Micra. If it's a guy, he picks the Pulse; else the girl picks the cuter Micra.

PS: Renault had indicated that they would launch a sedan version too. I'm taking bets that it would not look like the Sunny, anyone interested in placing one?

The Inaugural F1 Indian GP was a success!

and I humbly and gladly eat my words...

Yes, many of us expected the Indian GP to suffer from some glitch or the other. Glad that they disappointed us on that front.

Although, there were some things that could have been better. Like, 

  • The ticket pricing package.
  • Dust from the adjoining construction sites making the track slippery.
  • Run-off areas were more like dust-traps than grass-traps.
  • Kerbs didn't look high enough to deter the drivers from driving over them, etc.
But none of these were deal-breakers. And surely these would be improved upon, the next year.

Now that the Inaugural GP is over, we hope and wish that the BIC manages to organize enough races/trackdays to keep the circuit running. We sincerely wish it does not turn out like the Korean Yeongam circuit.

So, all the best to JPSI on the BIC and I hope to be there soon.
Thanks and we salute you for your effort.

October 22, 2011

The Inaugural F1 Indian GP Drama

An Indian corporate tells Formula One management that he can build an F1 track in India if they want to add India to their race calendar. F1 says "Why not!" and schedules the F1 Indian GP for end-October. So this Indian corporate (JPSI) goes about building an F1 track without any support from the Indian government (unlike other new F1 tracks built recently).

Scene 1:
(Sometime around 22nd August 2011)
JPSI: We have finally bagged Airtel as our title sponsor and we are now selling tickets. The cheapest one is for Rs. 2.5k and the costliest is Rs. 35k.
Indian F1 fan: LOL! Good one!
JPSI: No no, I'm serious! Rs. 35k is for the main grandstand while for Rs. 2.5k you get access to the picnic stand.
Indian F1 fan: Rs. 2.5k for sitting on the grass with no shade. And if I am from outside Delhi, add to it the cost of travelling to Greater Noida and back and staying there for three days. Sounds like I'm blowing one month's pay-cheque on this.
JPSI: Don't be silly. The tickets will be sold out in 7-10 days.

Scene 2:
(Around mid-September)
JPSI: But Formula 1 is a sport!
Sports Ministry: Looks like an entertainment event to me.
JPSI: But you have recognised motorsports as a sport.
Sports Ministry: So?
JPSI: So F1 is the pinnacle of motorsports. It is like saying cricket is a sport but the cricket world cup is an entertainment event.
Sports Ministry: How dare you bring cricket into this! Now you will pay an import duty when the F1 equipment reaches India and you will be refunded the duty back when it is exported out after the race.
JPSI: Ok Ok... So, you will just keep my money for some time and return it later.. I can live with that...
Sports Ministry: Not the whole thing. We keep 2% of the duty for the effort.
JPSI: Thats fine. I'm screwing the fans on the ticket prices anyway. Since the entire equipment is worth Rs. 150Cr, I can pay 2% of it from the ticket sales.
Sports Ministry: Only Rs. 150Cr for 24 F1 cars + their spares + the entire pit garages with equipment + entire race control equipment?
JPSI: (surprised at the Ministry's knowledge of sports) Sir, you scratch my back and I scratch yours.. Wink, Wink!
Sports Ministry: Hmm.. We'll see about that...

Scene 3:
(Around 19th October, less than 15 days to go)
JPSI: Good News! The media blackout of the track ends today. Today we take all media personnel on a lap of the track.
Media: The track looks good. What about the stands? Will they be done on time?
JPSI: Yes. We still have some work left on the stands. Hopefully, it will be done on time. Doesn't matter if it isn't, who cares for those suckers anyway!
Media: How are the ticket sales going?
JPSI: We are very positive. We have sold 70% of the tickets already.
Media: Ticket sales have been open since almost two months and you have sold only 70% of the tickets! Of the 18 stands, only two of the stands look fully booked. Will we see a full house on the Inaugural F1 Indian GP which is less than 15 days away?
JPSI: Oh! That reminds me. We now have a special offer. If anyone wants tickets only to the Sunday race, we are offering grandstand tickets at Rs. 15k (from Rs. 35k for all three days), normal stand tickets for Rs. 4k (from Rs. 12.5k) and picnic stand tickets for Rs. 3k (from Rs. 6k). Please quote me on this, "We had kept aside these tickets expecting extra demand".
Indian F1 fan: Yeah right! You want us to believe that you are dropping prices because there is extra demand.
JPSI: Whatever the reasons, cheaper tickets are now available. How about coming to the race?
Indian F1 fan: What is the point now? The trains are booked, airlines have jacked up their prices and don't even get me started with the hotel rates. All the best for the GP, I will be watching it at home.

Scene 4:
(Around 21st October)
Indian Public: How could JPSI get tax exemption reserved for sporting events when the Sports ministry itself doesn't consider F1 a sport? I am going to the Supreme Court..
JPSI: Oh crap.. No No, please don't go there... Let us settle it amongst ourselves.
Indian Public: Sorry, I have already filed a PIL. See you in court!
Supreme Court: JPSI, we will not stop you from conducting the event...
JPSI: Thank you sir. Thank you! Thank you!
Supreme Court: ... But, you will have to keep 25% of your ticket sales as a deposit with us till we give our decision on the taxation issue.
JPSI: WHAT!!! (and collapses on the floor)

Disclaimer: I am not against the organizers. I appreciate their courage to bring F1 to India and build a track here without official government backing. But, they really got the ticket prices wrong. It seems to me that there is a high chance that the Inaugural F1 Indian GP will not be a full-house. Unless they pack the stands with school kids. (Did I hear someone say CWG?)

October 06, 2011

We Don't Dig the "Family Look"

Imagine that your behind is being pampered on the plush seats of your crore-plus Audi A8. At a signal, a bike comes up and knocks on your window asking "Boss, how much average do you get on the A4?". Whack! You feel like you have been slapped. You grumble, 'How dare the moron mistake this for something less than half it's worth?"

Premium/luxury cars owners want their cars to stand out, and rightfully so. Heck, it is worth more than what most of us would earn over a lifetime. But, the "Family Look" of the recent generation Audis and BMWs robs them of this thrill.

A "Family Look" is not when the Maruti Swift and Swift Dzire are similar till the rear doors. In fact, both are based on the same vehicle and the similar look saves on costs. The "Family Look" is when a common design given to models (across segments) of a brand such that the cars are instantly recognisable as being from that brand's stable.
Like, BMW's "Kidney Grille", Audi's "Bulgarian beard" or even VW's recent "Scirocco" look.

The "Family Look" is purely for visual recognition. No costs are saved since the dimensions of the grilles, bumpers and front lights vary across the models (since they usually belong to different segments).

Now, this is what greets a prospective Audi and BMW sedan buyer in the respective showrooms.
The Audi A4, A6 and A8 sedans

The BMW 3-series, 5-series and 7-series sedans

I would pity the guy if he was looking for the A8 or 7-series. As a matter of fact, he wouldn't even be able to identify the sedans without a salesman's help. The uncanny similarity with their smaller siblings actually acts as a deterrent for the potential A8/7-series buyer. On the other hand, the A4/3-series buyer would be ecstatic the their models look similar to the elder and more premium siblings.

While this design strategy could increase the sales at the lower end of the premium spectrum, it is probably being done at the cost of the high-end models. The potential A8/7-series buyer would most likely prefer the Mercedes S-Class or the even Jaguar XJ (which, by the way, looks like it is from a different planet than the Germans).

Would it surprise you if I said Mercedes-Benz sells more S-Class' here than the corresponding flagships from the other Germans?

October 02, 2011

Toyota & Honda, Meet the Real Mr. Competition

Toyota and Honda have been selling cars in India for more than a decade. But in spite of their experience, I believe that we won’t see the Toyota Etios/Liva and the Honda Brio doing too well in about a year from now. And I just have two reasons for that.

The Competition
When Toyota and Honda entered the market, they only had to compete with each other. Then the Skoda Octavia came along. The terrific fuel economy of the Octavia diesel almost finished off the Japanese. Honda responded by bringing in the new City at a lower price point while Toyota managed to introduce a diesel engine much later than they would have liked. In the end, Toyota got busy with the Innova (and Corolla got the step-motherly treatment) while Honda was content with the City being a premium compact sedan with steadily declining sales.
In the Rs. 4-6L price segment, the biggest guys are Maruti and Hyundai. They probably account for two out of every three cars sold in India and they haven’t got there by being lucky. In fact, Toyota & Honda are facing these heavyweights for the very first time, and they do not even have the Home advantage. The Japanese would be competing against brands that are synonymous with frugality and low-maintenance. While the premium image of the Japanese translates to high maintenance costs and low fuel economy. Heck, almost everyone I know recommends nothing but a Maruti or Hyundai as a first car. Also, considering the sales and service network that Maruti and Hyundai have, Toyota and Honda might want to resort to black magic to succeed in this price segment.

The Buyer
Toyota and Honda have only interacted with buyers in the Rs. 10L (more or less) and above range. Typically, these are not first-time car buyers. They would have owned a car before and would be looking to trade up. And the premium Japanese brands made a lot of sense.
On the other hand, the Rs. 4-6L segment (where the Liva and Brio are coming) is a completely different ball game. These are mostly first-time car buyers. Their primary priorities generally are good fuel economy and low-maintenance. In this price segment, the premium image of the Japanese brands would imply high maintenance costs and low fuel economy. While I don’t deny that there will be buyers looking for a premium brand in this price segment; let’s face it, they would be too few to matter.

I believe the Japanese would not succeed for the same reason a Maruti or Hyundai does not do well above the Rs. 10L range – brand hierarchy. Indians typically form a hierarchy of brands in their mind and associate each brand with particular qualities. These perceptions are very hard and costly to modify. In order to change their perception, the Japanese would most likely have to sacrifice their high-end customers. Undoubtedly, a very tough choice to make.

October 01, 2011

The VW-Suzuki Spat: Should we be Concerned?

They might look like the neighbourhood couple squabbling on the front porch and washing their dirty linen in public. But make no mistake; the outcome of this deal is bound to have tremendous implications for the Indian car market.

Are VW and Suzuki fighting?
In December 2009, VW (with the consent of Suzuki) bought a 19.9% stake in Suzuki to facilitate “closer technological alliance” between the two automakers (like a marriage, if you may). Cooperation discussions went on all through 2010 and nothing concrete ever emerging. Finally, in June 2011 Suzuki went ahead and extended an existing engine sourcing deal it had with Fiat. This did not go down well with the big German and it publicly accused the little Japanese of infidelity. The humiliated Jap filed for a divorce and asked the German bully to tender a public apology. And that’s where things stand now.

Duh! Why should we care?
Well, we actually should. VW has this pet target of being the world’s largest carmaker by 2018. It already has a huge presence in China, Brazil and Russia. The only big emerging car market where it does not have a major presence is India. And that, mi amigos, is sole reason why VW did the deal in the first place. The deal was that in return for VW’s diesel, electric and hybrid powertrain technologies (which Suzuki needs for its international ops) Suzuki would give them access to Maruti’s “frugal engineering” and compact car technologies.

What happens if the Alliance works out?
If the VW-Suzuki alliance does works out, we would immediately see Maruti using VW’s diesel engines instead of the current ones whose technology is sourced from Fiat. On the other hand, VW would most likely get their hands on Maruti’s low-cost small car platforms. Which means we could see VW and Skoda branded small cars which share their underpinnings with Maruti’s A-star and Ritz. Needless to say, Maruti could end up losing significant market share to VW. But, the added economies of scale could bring down the costs of the cars which is never bad for the car buyer. Ones heart does go out for Maruti; for the parent’s benefit it would end up lending a helping hand towards its own market share loss.

Wasn’t there talk of VW taking over Suzuki?

Although the chances of it are very slim, it is worthwhile to examine the aftermath of such an acquisition. For starters, VW would instantly become the largest carmaker in the world, trumping Toyota and GM. Maruti, now under the VW umbrella, would have access to probably the world’s largest parts bin. It would be safe to say that the quality of Maruti cars would only improve. VW’s India strategy could then be to use Maruti as their lowest cost rural brand; Skoda a sub-premium rural-urban brand and VW a premium urban brand. All in all, an aggressive German carmaker would be controlling the largest share of the Indian car market and it would certainly do everything in its power to kill the competition.

I would definitely like to keep one eye on the VW-Suzuki developments. Because if the alliance breaks, things will go on as though nothing ever happened. If it works, Maruti could lose out but the car buyer could gain. But if VW takes over Suzuki, things could undergo a dramatic change; and it could be for the better or worse, who knows!