Ford (NYSE:F) has been doing well in India, but the company has a new problem now. The demand for Ford's new EcoSport has been so overwhelming that the company is not able to keep up its production. While this doesn't seem like a major problem at first look, the impending arrival of many peers may prevent Ford from benefiting from this opportunity.
EcoSport's booking closed
Ford was swamped with more than 30,000 bookings within 17 days of the launch of EcoSport in India on June 25 last year. The EcoSport's economical price, size and stylish looks lured many drivers and even made it the highest selling SUV in the country over its primary rival, Renault Duster. It is obvious that the EcoSport was well received in India, and I really thought that it was going to be the game changer for Ford.
But the Blue Oval stopped EcoSport bookings during the end of August. However, given that Ford is a massive company and has been trying very hard to expand its presence in the Indian market, I wasn't really expecting this to be a major problem. But, many reports claim that Ford might resume bookings for EcoSport by October 2014. While the long waiting period was already frustrating many potential buyers, the production shortage will further hurt sales.
- Warning! GuruFocus has detected 3 Warning Signs with F. Click here to check it out.
- F 15-Year Financial Data
- The intrinsic value of F
- Peter Lynch Chart of F
Hands down, the EcoSport has been Ford's most successful car in India over the last three years, and its sales would have definitely skyrocketed further if the company could have kept up with rising demand. Ford has been struggling to gain market share in India for a very long time, and the lack of production may have blown its opportunity to increase market share.
Rivals May Hurt Sales
If Ford fails to increase production to clear the order backlog for the EcoSport, it risks losing consumers to peers. Moreover, the fastest growing and the hottest segment in the Indian automotive scene is about to get hotter and even more competitive. The impending launch of many new compacts SUVs will make matters worse for Ford. Let's take a look at the peers one by one.
1) Maruti Suzuki
Maruti Suzuki, a subsidiary of Suzuki Motor of Japan, has dominated the Indian market for years. The company has conquered the small car segment and commands close to 40% of the market. Since the popularity of the compact SUV segment is growing, it was obvious that it wouldn't be long before Maruti enters this segment.
The company will be launching the Maruti Suzuki XA Alpha in early 2014. The base model XA Alpha will be priced at nearly $11,500, which is a little more than EcoSport, but given that Indian drivers prefer Maruti because of low maintenance costs and cheaper spare parts and accessories, price won't be a restricting factor for potential buyers.
The XA Alpha's production version will be powered by a 1.3 Liter Multijet engine and a 1.2 Liter K-Series 4-cylinder petrol powertrain, both of which are highly-popular in the country. It will also showcase future design elements in terms of interiors and exteriors while sharing components from the current crop of Maruti's wide offerings.
2) Honda Motor
Just a few years ago, Honda Motor (NYSE:HMC) had a prominent presence in the Indian market. However, with the increase in the prices of petrol, Indian drivers started leaning towards diesel-powered cars and Honda didn't adapt to this trend, which led to a decline in sales.
Honda recently started producing diesel-powered cars and its new sedan, Honda Amaze, pleased many Honda loyalists. Honda was pretty slow in adapting to the trend of diesel-powered cars; however, it looks like it won't be making the same mistake again and will jump on the compact SUV bandwagon very soon.
Honda recently released pictures of what it calls the "Urban SUV Concept" and will be launching it in mid-2014. The Urban SUV concept features a large grille and long horizontally stretched headlamps, compact overall proportions and a swooping roofline. From the rear too, the horizontally stacked tail lamps and the large chrome accent piece running across the sculptured tail gate would be in line with Indian tastes.
The expected price of the base model of this car is roughly $13,000, which is more than its peers, but Honda has satisfied many customers in the past. Therefore Honda loyalists will not shy away from spending some extra cash to get their hands on it. However, like Ford, Honda may also struggle to keep its production on track. Honda's current production capacity is only 10,000 cars per month and it may struggle to satisfy the demand, if its starts selling like pancakes.
Ford needs to pick up production in India fast and it is working towards the same. Ford has invested $1 billion in a vehicle assembly and engine plant in India in the state of Gujarat, which is expected to be operational by next year. It had also increased the capacity of its existing Chennai plant through a $142 million investment, adding an assembly line and an engine manufacturing unit. Once both plants are operational, Ford will be able to produce 440,000 cars and 610,000 engines annually.
Ford is rapidly growing its dealership network in the country. Ford has 265 sales and service outlets in 142 cities across India and its plans going forward are quite ambitious. By 2015, it plans to have around 500 sales and service outlets in India. Its employee headcount is also expected to increase 50%.
The Indian auto market is slated to grow at a CAGR of 16% till 2020, hitting a size of 9.3 million units annually — triple of what it is now — according to JD Power. So, even though Ford might lose some sales in the short run owing to production incapacities, it might be able to benefit from this big growth market in the future.