The Honda Amaze scores on almost every parameter against the Maruti. It is priced strategically (diesel variant at Rs 7.5 lakh on-road Mumbai price) at 7% higher than Swift and on par with the Dzire. Its diesel variant has superior power as well as mileage compared to Maruti's products. Supporters of Maruti might well argue that it has countered competition from the likes of Hyundai and Toyota which have tried to make a dent. In reality, Hyundai and Toyota have never had a product to counter the Swift and Dzire. (i20, Liva and Etios are much more expensive).
Besides these specifications, Maruti has something which is relevant for a buyer of a product in this category: brand. In one of the research reports for my previous employer, it was revealed that a Honda car is a preferred option when buyers wish to upgrade. It is to Honda's discredit that it has failed to leverage on its brand value by launching products that were destined to fail in the Indian market whether it was the disastrous pricing of Jazz and then not having a diesel option for the Brio.
Does it mean that the Amaze will be a definite blockbuster? Far from it. Production capacity will remain a constraint until its Rajasthan plant gets operational in 2014. Given its capacity constraint, it will be able to produce no more than 4,000-5,000 cars per month initially. This is hardly going to create a dent to models like Swift/Dzire which generate sales of 20,000 each every month. However, Honda's impact may be reflected in its capacity to restrict the indiscriminate price hikes that Maruti has been able to get away with over the last year. It will only be in 2014 that capacity constraints will ease up. Besides capacity constraints, Maruti has an unparalleled advantage on account of its low maintenance costs.
Although newer players are increasing their localisation levels, there is still a long way to go. Typically maintenance costs for a Maruti car are half of its peers like Honda, Skoda etc over a period of five years. While it is not the most critical factor for a buyer in this segment (as against an Alto buyer), it still holds relevance for an Indian car buyer. How Honda tackles this part of the challenge along with a capacity ramp-up will determine the sustainability of its threat to Maruti's volumes of Swift and Dzire - and its profitability.
Price war on the anvil in two-wheeler segment?
While Honda's launch in the car market has garnered strong enthusiasm, expectations from its motorcycle are moderated. The Dream Neo is its new product to penetrate the 100cc mass segment dominated by Hero's Splendor and Passion. Although the creation of a strong brand is much tougher in the two-wheeler market than in the four-wheeler market, its previously launched Dream Yuga inspires little confidence that it has the characteristics to be a big-selling bike. Customer feedback indicates that there is a slip in mileage for the bike within six months of use.
While the initial price is the key factor at the time of purchase for a car, the most important criteria for a two-wheeler buyer in the 100cc segment is mileage. Bajaj Auto
products in this segment also failed to penetrate Hero's market share on account of the perception that its models witnessed a drop in fuel efficiency over a period of time. Splendor and Passion have had a stranglehold over the 100cc market on account of their sustained performance over the life of a motorcycle. (It's resale value is 25-30% higher than its peers.)
If the Neo has the same issue that has plagued the Dream Yuga then Hero can sleep peacefully. But if it doesn't and its mileage continues to be steady over a period of time, then we might just see something that has not been witnessed since 2007 - a price war. Hero and Bajaj witnessed margin compression then of 300-400 bps on account of the pricing battle as well as rising input costs. Companies learnt their lesson and have maintained pricing discipline. But then that was when it was a battle between Hero Honda
and Bajaj. Now it is Hero, Bajaj and Honda. Honda's new product comes at a price which is equivalent to that of Hero's top selling Splendor. To lure customers, Honda's Neo comes with a maintenance-free battery. In sync, Hero announced a warranty for five years on all its two-wheelers, the first time ever the company has announced such a scheme.
If Honda's Neo takes off, the free warranty might not be the last incentive offered by Hero. Hero will need a lot more than a favourable currency move to offset a price-war damage.