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Let's Cross It

In a bid to contain costs, a number of carmakers, including Hyundai, Kia, Renault-Nissan, VW-Skoda and Maruti-Toyota, have shared platforms and even cross-badged products in India. Almost all have failed but the strategy continues
twitter-logoSumant Banerji | Print Edition: June 28, 2020
Let's Cross It

When 39-year-old Kushagra Gupta took delivery of his Kia Seltos in February, it was after months of deliberation. Gupta, who runs a pharmacy store in West Delhi's Paschim Vihar, started out with a long list of potential options in November and finally zeroed in on Hyundai Creta and Kia Seltos. In a photo finish of sorts, Seltos won owing to its more modern styling, and also because a newer version of Creta was on the anvil. He was also aware that the two cars are essentially the same.

"There were hefty discounts on Creta and if I had opted for a 2019 model, I would have saved over Rs 1 lakh compared to Seltos. But the car would have been outdated in a matter of months once the new Creta hit the roads," he says.

"Also, Seltos comes with BS-VI engine while Creta is still BS-IV, so the resale value of Kia will be higher. Besides these, and a few additional features that Kia offers, the two cars felt the same to me."

The entry of Seltos in the compact SUV segment in August last year had a direct impact on Creta, which had till then led the segment since its launch in mid-2015. Between August 2019 and March 2020, Seltos logged cumulative sales of 81,984 units, far outstripping Creta's tally of 47,604 units, which was a steep decline of over 42 per cent over the same period in the previous year. "The decline in sales of the old Creta is normal as the new version is around the corner. It does not compete with Seltos directly," says S.S. Kim, MD and CEO, Hyundai Motor India.

But as Gupta's example testifies, the two cars, Seltos and Creta, have ended up cannibalising each other even though they both come from the same parent company. Hyundai is the largest shareholder in Kia with a 34 per cent stake.

It is a classic case of cross-badging that sounds great on paper as it allows companies to minimise development costs of a product that can then be spread over multiple products across different brands. In markets like India, though, it does not quite play out as per script.

Doing More with Less

"Creating a new platform for a product or a range of products is very expensive and a long-term investment. So, typically manufacturers try to amortise the costs efficiently and one way to do that is by sharing it with other companies," says Ravi Bhatia, President and Director, JATO Dynamics - an automotive research firm. "In all these cases, a bit of cannibalisation does not matter as ultimately they are owned by the same parent firm. It is a matter of achieving marginal gains. If a Creta on its own sold, say, 10,000 units every month, then it is not like the addition of Seltos means both will sell 10,000 units each. But if together, the volumes go up to 15,000 units, then Hyundai's hold in that segment increases and profitability also improves. That is what they are looking at."

The launch of the next-generation Creta in March could lead to a repeat of what Seltos did to the Hyundai's SUV last year. The story does not end there. Kia's next product, the even more compact Sonnet SUV, will once again lock horns with its sibling Hyundai's Venue. This sibling rivalry is just warming up.

Hyundai and Kia are not the first to try bringing in similar products in same segments from different brands owned by the same company. In the past, a number of companies, including Renault-Nissan, Volkswagen and Skoda, Datsun and Renault, Maruti Suzuki and Toyota Kirloskar Motor, have tried out the model.

As part of a larger global tie-up, Maruti and Toyota would increasingly cross-badge each other's products. They started the process with Toyota Glanza, which is a carbon copy of Suzuki Baleno. Next in the line is Maruti's compact SUV Brezza, which will be badged as the Toyota Urban Cruiser; its mid-size sedan Ciaz is also likely to don Toyota colours. In return, Toyota's executive sedan Corolla could find its way to Maruti's Nexa branded showrooms.

"From a sales point of view, we are competitors. But this alliance is like a marriage. There are good and bad points. Of course, many alliances in the past have failed due to various reasons. We are not thinking about that but are focused on how to make this alliance work. It should benefit both of us," says Kenichi Ayukawa, MD and CEO, Maruti Suzuki. "Toyota has loyal customers, too. They don't buy our cars. But if our products are sold by Toyota and their loyal customers have a good experience with those products, then probably they will come to us directly for some of our cars. That is a possibility. We may end up getting some new premium customers who may have not looked at Suzuki otherwise."

Others that have tried this include Renault and Nissan with the SUVs Duster and Terrano, sedans Scala and Sunny, hatchbacks Pulse and Micra, and mini cars Kwid and RediGo (from Nissan's sub-brand Datsun). All of them, barring the Duster and Kwid to some extent, have been duds. The cross-badged products have not found any traction whatsoever and have only ended up hampering prospects of the original product.

The outcome for the Volkswagen Group with its Skoda Fabia and Volkswagen Polo, Rapid and Vento, and Octavia and Jetta, has been equally depressing. Fabia died a premature death in India with entry of Polo, while Rapid and Vento ended up eating into each other's plate without bothering the likes of Honda City or Maruti Ciaz.

The benefits of sharing products aside, cross-badging is still fraught with challenges. Products vying for the same set of customers results in intense competition between sales executives of the two companies that can get unhealthy at times. As was the case with Volkswagen and Renault-Nissan, it can end up benefitting rivals.

"It is difficult to carry off if volumes in general are not large. On our own, if we design each product, then the cost is huge. If we share, we keep it down but also run the risk of dividing the customers," says a senior executive who worked with Nissan India in the past. "Our dealer network was still separate and each dealer had his own business case. They were the ones who took the hit and as their balance-sheet weakened, so did our market position."

Making It Work

It is a catch 22 situation. In a high volume game, stronger players like Maruti and Hyundai have a better chance of pulling it off even though it is the marginal players that need this more.

"The real muscle players in India are only Maruti and Hyundai who have double-digit market share. Everybody else is a fringe player. So, if Maruti and Toyota gain about, say, 3,000 unit volumes by pooling in resources, others would only gain by 200 units because that is how much penetration they have in the market in the first place," says Bhatia of JATO Dynamics. "It is not a problem with sharing as bigger players are much more successful with it. It has to do with the inherent weaknesses that any small player has in the market."

Analysts also blame the poor strategic planning of some of the cross-badged products in the past for their failures. "Any customer in any part of the world always wants something unique in his car, so the timing of the launches is very important. If there is less gap in the introduction of the two cars, then the impact on at least one of them will not be very big," says Puneet Gupta, Associate Director, Automotive Forecasting, IHS Markit. "In the case of Creta and Seltos, for example, the gap between the launches was quite good. Creta was launched back in 2015 and Seltos came only in 2019. Now, the new Creta has also arrived almost eight months after Seltos. Same is the case with Venue and Sonnet as also Glanza and Baleno."

Despite the mixed bag of results in India, there will be even more of platform sharing and cross-badging of products in future. Like in the case of Maruti and Toyota, the Volkswagen group's second coming in the country banks on a bouquet of SUVs. The first of them would be VW Taigun and a similar product designed by Skoda based on its Vision IN concept vehicle.

"It (cross-badging) is only likely to increase and is as much a compulsion as a strategy now. The industry is witnessing widespread disruption with more stringent emission norms, connectivity solutions and electrification of powertrains. The cost of these changes is massive so manufacturers need to pool resources. Collaboration is the way to go," says Gupta of IHS.

@sumantbanerji

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