Indian aftermarket is no afterthought

Growing sales and ever-increasing customer expectations are driving a transformation in the Indian aftermarket.

The automotive aftermarket is not so-named because OEMs think about it after they have developed their new vehicle sales channels, but in developing markets that is often the way things work. In recent years, rapidly emerging economies have become a vital driver for vehicle sales growth and as the size of the car parcs of developing nations have exploded, manufacturers and their LSPs have scrambled to put effective aftermarket support systems in place.

India provides a compelling example of such change. With a population of 1.2 billion people, a rapidly growing middle class and a liberalising economy, India is becoming a compelling market proposition for many of the world’s carmakers. The profile of the Indian market remains distinctly different from that of many other regions, however. According to the latest data from market research consultancy Frost & Sullivan, motorcycles still made up 76% of the 15.5m vehicles sold in India during 2010-11, while passenger cars accounted for only 16% of sales. Against a background of rapid overall growth (26.2% last year), passenger car sales rose at a market-beating 29.6%, making them the fastest growing segment in the automotive market.

According to VG Ramakrishan, vice president of Frost & Sullivan’s Automotive and Transportation practice in South Asia, the Middle East and North Africa, growth in the automotive aftermarket roughly reflects the overall shape of the market. The total Indian aftermarket–which Frost & Sullivan considers to include services and parts sales at dealerships and the independent aftermarket including lubricants, tyres and batteries for all vehicle segments including two and three wheelers, commercial vehicles and agricultural tractors–was worth $10 billion last year. Overall growth in the sector was between 15-17% last year, with the passenger car aftermarket growing at a slightly higher 18-20%.

India remains a land of social extremes and the profile of its automotive market reflects this. The country’s number one carmaker, Maruti Suzuki, still commands more than 45% of the total passenger car market, while Tata and Hero Motocorp (formerly Hero Honda) enjoy similar market dominance in trucks and two-wheelers, respectively. Market growth, according to Frost & Sullivan predictions, will be tempered slightly over coming months by rising costs and economic uncertainty, with the fastest growth happening at opposite ends of the market; sales of smaller, low-cost vehicles driven by customers trading up from two wheelers and large luxury vehicles bought by India’s rapidly growing cohort of high net worth individuals.

Whether you are a successful local entrepreneur or an international captain of industry, the importance of the car as a status symbol in India has profound implications for aftermarket provision. “The Indian car customer is particularly demanding, with extraordinarily high, even unrealistic expectations,” says Ramakrishan. “The customer is less like a king and more like a dictator. It is quite common for customers to walk into dealerships without an appointment and expect immediate service; between 30-40% of service interactions are made without appointments.”

Such high expectations place enormous demands on service parts logistics operations, notes Ramakrishan, making forecasting difficult and dealer inventory levels critical. Combined with a rapid growth, the required number of SKUs has risen thanks to model proliferation and shortening product lifecycle and, therefore, aftermarket costs for manufacturers are rising rapidly.

The opportunity for vehicle manufacturers to capture more of the all-important aftermarket value is significant, however. On average, says Ramakrishan, vehicle manufacturers in India control around a third of the aftermarket business for new (less than three years old) vehicles, although that figure varies significantly from brand to brand. India’s number two player, Hyundai, for example, does not officially make parts available to the independent aftermarket, allowing it to retain more than half the aftermarket business for its vehicles into the 5th and 6th year of ownership. Beyond the manufacturercontrolled dealerships and service centres, the aftermarket rapidly fragments into thousands of tiny, independent service operations spread across the country. Between these, the larger chains of all-makes servicing operations, such as those provided by Bosch, TVS and Mahindra, remain relatively small today, although their importance may be set to rise.

Complexity and potential for change

For logistics service providers, establishing an effective, cost efficient infrastructure for any kind of network in India is complex. The country’s notoriously chaotic road system makes for long transit times between distribution centres and dealers. More frustrating, in many respects, are costs and complications incurred by red tape. The lack of a standard sales tax between states is one critical issue, making it harder for manufacturers to move inventory back and forth across state borders. Reform of the tax system is under way with a proposed centralised tax, the GST, and when it happens it will, according to Ramakrishan, “change the logistics game completely”.

When they no longer have to worry about the tax implications of inventory movements, carmakers will be able to consolidate their inventories into fewer, larger distribution centres and to keep the slow-moving components that drive so much cost in the aftermarket at fewer locations, fulfilling dealer and local DC requests with express shipments.

But with the introduction of a national sales tax already delayed by two years, manufacturers and LSPs are reluctant to reconfigure their networks until they are sure the rule change really is going to come into effect. “Most LSPs have their blueprints in place, but they are waiting before they make changes on the ground,” explains Ramakrishan.

Reconfiguring those networks won’t be straightforward either, explains Bill Olver, vice president of automotive in the Asia-Pacific region for DHL. “One big challenge in India is acquiring land and getting the necessary permissions to build new distribution centres. We are acquiring property in various places today and building speculatively, as we see India as a key growth market.”

Peter Baumann, global director of automotive at freight management company Geodis Wilson, echoes much of Olver’s excitement about the potential of the region. “India is a strategic market for us, we are investing in people and offices around the country and we have a strong management team in place. If you want to succeed in India, you can’t wait.”

He also agrees with many of Olver’s concerns. “The aftermarket in India has traditionally been very focused on cost,” he says. “But now the balance is changing a bit and we are beginning to see more of a focus on quality of service.” Building the right infrastructure to deliver that quality is tricky, however, he notes: “There is lots of complexity; it isn’t only national regulations but also those of townships and local communities that affect where you put your warehouses.”

Labour availability and regulations are other areas where LSPs have to work hard. According to Baumann, rigid labour laws can make it difficult to flex staff volumes up and down as demand changes. “In some cases, you can’t keep contract staff for more than six months without making them permanent, which means you end up repeatedly having to train new people”, he notes.

For Olver, getting and retaining talent at all levels in the business is a challenge. “In India you have great availability of smart, well-educated people but it is much harder to get people with the relevant automotive or logistics industry experience,” he says. DHL’s response to this challenge has been to invest in its own training and staff development facilities across India, which it hopes will provide the skills and talent it needs to grow rapidly with its customers’ requirements. Naturally, with the entire economy undergoing such rapid growth, smart, experienced people are in demand everywhere, leading to rising salaries and difficulties in retaining skilled staff. “Managing careers is a big topic for us today,” he says.

As logistics networks stabilise, providers expect the focus to shift towards the operational aspects that are critical in providing the right balance of cost and service elsewhere in the world. “Eventually, we will see more attention paid to issues like the standardisation of trucks,” notes Baumann.

Ceva Logistics’ Dave Dudek, director of automotive for Asia Pacific, agrees that the region has significant potential to improve efficiency by applying internationally-accepted best practices. “There are some cases already, like the operation of warehouses, where we are already running pretty close to global standards,” he says. “But there are other areas where the differences are huge. In distribution, for example, we aren’t using normal trucks, we are using two wheels and three wheels and a host of different transport modes. Standardisation here may take a long time and the standards we end up with in India may not, ultimately, be the same ones we use in the rest of the world.”

At DHL, Olver says he is already seeing increased interest in the more subtle aspects of logistics performance from clients “There was a time when all the focus was on the point-to-point prices, but more and more we find ourselves advising clients on packaging efficiency, for example, and other ways they can reduce the overall costs of their logistics processes.”

Integration of aftermarket operations with wider supply chains is one area where providers see the potential for both growth and increases in efficiency. “The free trade zones that are now being set up in various parts of the country are very interesting,” says Ceva’s Dudek. “You have the potential there for India to become a hub in that part of the world, not only servicing the local market but also exporting to neighbouring countries.”

Broadening the reach

In the medium term, geographic shifts in the market may present the biggest challenge for aftermarket providers. Today, says Ramakrishan, the country’s top ten cities and the regions around them account for 40-50% of the total automotive market and a far higher share for expensive foreign brands. Most manufacturers have built their parts logistics networks to service these markets; an approach that has helped them to keep the cost and complexity of their logistics operations under control.

As an increasing number of manufacturers develop lowercost vehicles aimed at a much broader section of the population, they will need the ability to supply a service network in small cities and towns spread right across the country. “This isn’t going to be a big issue for the next three to five years,” says Ramakrishan. “But it needs to be on the agenda of LSPs and manufacturers now.”

Bringing high parts service levels to the whole of India at acceptable costs will be challenging in many ways for car companies and parts suppliers. Multiple-level distribution networks are likely to provide part of the answer. Manufacturers are already doing this by engaging regional distributors to supply local markets or using a three-tier system, in which distributors supply master stockists that, in turn, supply the aftermarket.

TCI, the Indian logistics service provider, has considerable experience supporting the aftermarket networks of local and foreign automotive companies in both the two and fourwheeled markets. Jasjit Sethi, CEO of TCI Supply Chain Solutions, suggests that the motorcycle market provides a model that might be replicated in the passenger car segment. “Many big motorcycle dealers run a network of sub-dealers in the smaller towns around,” he says. “Those local dealers will provide basic services, with support from the main dealer for more complicated work.”

Keeping costs down in these complex, sprawling networks will be difficult. “At the moment, companies control costs through better integration,” notes Ramakrishan. “If the dealer uses the manufacturer’s dealer management system, the manufacturer has full transparency over inventory and demand in its network, and can plan accordingly. But many of these smaller service outlets have never even used a computer–their inventory requirements are in the heads of the owners, which creates huge difficulties for forecasting and inventory management.”

Other providers suggest the shared infrastructure offers significant potential for cost efficiencies. For example, DHL’s Blue Dart domestic express service is an important part of its offering to automotive clients in India, notes Olver.

In practice, says Ramakrishan, the demand for an increased level of service sophistication across more of the country will drive significant growth in all-makes servicing chains. “The established retail chains like Bosch, Carnation Auto and Mahindra First Choice are likely to grow,” he says. “Rather than being positioned as competitors to the car companies’ dealer networks, these chains are likely to become partners to them, offering increased reach without the need to invest in a dedicated network. It is happening now.”

The next generation of the Indian aftermarket offers significant opportunity for innovative LSPs too, suggests Ramakrishan. “My impression is that the big LSPs operating in India are still trying to find their feet,” he says. “Up until now they have concentrated on very traditional formats, but technology has moved on and there has been no concerted effort to change things at ground level. The logistics industry could do that and create a valuable space for itself.”