Mumbai, Nov 15: Why has Honda pulled its successful City off the roads? Two weeks back, Japanese auto major Honda’s Indian venture, Honda Siel Cars India, flouted convention in the 5.42 lakh units (April-March 2003) Indian passenger car market. It announced that, after a five-year-run, the company had pulled its successful model, Honda City — a C-segment three-box sedan car — off Indian roads.
The replacement: a weaker-powered, lower-priced (Rs 6.5 lakh to Rs 7.7 lakh from the Rs 6.3 lakh to 10 lakh bracket earlier) and smaller-sized three-box car. Only the City name has been retained for the new vehicle.
The move comes as a surprise as the Honda City has had a reasonably smooth run, selling nearly 12,000 cars in January-December 2002 and 10,338 cars in January-October 2003. So what prompted the Japanese car maker to pull a successful car off the production line and replace it with an all-new one? A closer look at the market dynamics provides the answers, and could hold a significant strategic lesson for corporations: even if it ain’t broke, it could still need fixing.
When the Honda City built on the old Honda Civic platform was launched on Indian roads in 1998, it was positioned as a premium offering. Says a former Honda executive, “The Honda City was a luxury car in India, but an entry-level car elsewhere.”
But with a price tag of Rs 7 lakh to Rs 8.6 lakh, the top-end Honda City was still cheaper than the Opel Astra or Mitsubishi Lancer by nearly a lakh.
With the Ford Escort, Maruti Esteem and Daewoo’s Cielo and later Daewoo’s Nexia competing at lower price points, this mid-priced strategy worked and got Honda City sales of 800 units per month. But there was a small issue. The Honda City was not considered by buyers graduating from the two-box or small car segment to their first mid-sized car.
Till 1999, buyers who wanted to upgrade to a mid-sized car had the choice of the lower-priced Esteems or Cielos. Then in 1999-2000, the Hyundai Accent and Ford Ikon entered the market with their combination of style and power (both attributes strongly associated with the Honda City till then). And these new entrants were priced far lower than the City. For instance, a base model of the Ford Ikon was Rs 4.98 lakh and the Accent was priced at Rs 5.60 lakh.
The Hyundai Accent and Ford Ikon achieved volumes of more than 2,000 units per month and collectively managed to corner a 10 per cent market share within six months of launch.
This was partially because these new entrants exploited the gap in the mid-sized car segment as both the Daewoo Cielo and Ford Escort were losing sales.
By March 2000, Daewoo Cielo was recording sales of a mere 150 units per month, while the Ford Escort was phased out to make way for the Ford Ikon. However, Honda City was still sailing comfortably at 1,000 units per month.
But with the success of the new entrants, the mid-size car segment was changing rapidly. For example, when the City was launched in 1998, the segment (then classified as mid-sized and luxury car segment) was less than 10 per cent of the passenger car market.
At present, the segment makes up 19 per cent of the passenger car market and the number of players in it has increased from eight models in 1998 to 14 at present.
For Honda City these changes have impinged on market share, which dropped from 14 per cent in 1998-99 to 10.3 per cent in 2003.
For comparison’s sake, the Accent has a share of 20.05 per cent share at present while Ikon’s share is 14.72 per cent. Meanwhile, newcomer Tata Indigo launched early this year has a market share of 21.7 per cent.
The other major change has been the emergence of the semi-luxury car segment over the past two or three years.
To be sure, the Honda City’s steady performance in the early days was boosted by the fact that this segment practically did not exist.
In the late 1990s, after top-end mid-size offerings like the Opel Astra and Mitsubishi Lancer, the other offerings were from the luxury class — either imported CBUs (completely built units) like BMW or the made-in-India Mercedes Benz E-class.
For Indian buyers who found the other models on offer a trifle expensive, the Honda City was a better bet. But today, there are five models of semi-luxury cars available in the Indian market, ranging from the Mercedes C-class and Ford’s Mondeo to Honda’s own Accord.
Segments are also getting sharply defined than ever with models like Chevrolet Optra and Skoda Octavia finding accommodation in the upper end of the mid-size category.
For the old Honda City, which was in the middle of all these, it was an identity crisis of sorts.
Hence, the new Honda City, which has been launched at a lower price point, will be aimed at customers who are considering buying Maruti Esteem, Ford Ikon and Hyundai Accent.
“We will aim at the upgraders to widen our customer base and thereby our volumes,” says H Yamada, president and CEO, Honda Siel Cars India.
But the old City could have co-existed in India with its new version. The move to phase out the earlier car completely is surprising because most car manufacturers in the country have flogged their old models — primarily because the Indian market pays off in the long run.
Take the success of Maruti’s small cars, Zen and Wagon R. Both the models were late-starters off the block.
But today both are recording healthy sales. After nearly 35 years in the market, Hindustan Motors’ old war-horse, the Ambassador, still stretches its model.
But in the case of the old Honda City, playing a small role in a global gameplan could have spoilt its party. With the Indian Honda City’s negligible contribution to Honda’s global sales, the survival of the old Honda City became a weaker case.
For instance, the old Honda City was sold only in Asian markets like India and Thailand. One reason that auto analysts attribute to the limited presence is that the Honda City was not conducive to European stipulations like crash testing and emission norms.
For instance, the City was developed much before Euro III emission norms came into force. In contrast, for car makers like Hyundai, conforming to Euro III standards has become a rallying point.
Besides, over the last two or three years, most global markets were graduating to the newer version of the Honda City called the Fit Aria.
For European markets, the same model is being sold as the Jazz. With markets like Thailand also shifting to the Fit Aria, the older version of the Honda City was nearing the end of its road in India.
This was because Thailand, which is a major manufacturing hub for Honda, stopped rolling out the earlier version of the City from its shopfloor.
For the Indian market, which had improved localisation of the Honda City from 52 per cent in the late-1990s to 70 per cent at present, engines and gear box were still being procured from Thailand.
If this option was cut, the engines would have to be procured directly from Japan, making them costlier. From Honda’s point of view, the volumes in India would not deliver economies of scale.
Also, Honda Siel Cars India will be unable to take advantage of the free trade agreements that India has signed with Thailand for auto components and sub-assemblies if the components were procured from Japan.
Then, the most important argument in favour of the new Honda City is that every car manufacturer with the exception of the luxury car makers like Bentley or Mercedes Benz survive on volumes in India. But why was the Fit Aria badge not chosen for India? The company says the name has been retained because of the high recall for the City brand. With a lower price tag, the new Honda City offers other benefits like 40 per cent more fuel efficiency than the previous offering.
Analysts, however, rue the fact that the new vehicle is underpowered — while the ea