Auto sector Riding the rural wave

Auto sector: Riding the rural wave

It is common knowledge that FY09 was a difficult year for Indian automotive industry. The spectacular growth phase from FY03 to FY08 slowed down and the global automotive markets witnessed one of the worst slumps ever.  But there have been several lessons and learnings from this slowdown, which are worth analysing.
Although, majority of these lessons have been on the efficiency and cost management front, one of the most important learnings on revenue generation has been the need to diversify, both customers and products, and the growing importance of focus on niche markets.

Rural India is one such niche automotive market which is generating opportunities and has helped to insulate players from the recent slowdown. This has been possible because of the difference between urban and rural lifestyles and consumption patterns.

While agriculture has dominated the Indian rural sector for decades, lately, there has been a shift towards agricultural services and other sectors. OEM’s like Maruti Suzuki and Hero Honda have performed relatively better than their peers, and a part of this success is attributed to their successful penetration of the rural market.

Considering a population base of 750 million persons with increasing purchasing power and a need for transportation, vehicle manufactures can no longer ignore rural as an increasingly important revenue stream.

Rural vs Urban Markets

Let’s look at the various factors which differentiate the rural market from a typical urban market. First and foremost is the lower level of average income. If one were to segment the entire population in five equal parts based on average annual income, the highest income strata in rural earns only half as much as the highest income strata in urban areas. Further, the ratio of earning-members-to-dependants is comparatively lower in rural areas, which translates into a reduced disposable income per household.
Rural is characterised by a different-than-urban purchasing pattern. Maximum expenditure is done around the harvesting season when the farm produce is sold. On account of this seasonal nature of agricultural earnings, the ability of rural consumers to pay back loans is lower; therefore rural customers would typically prefer to buy without using credit in the rural market.

Owing to the lower income and even lower disposable surplus, customers prefer products at the lower spectrum of the portfolio. The need for value-for-money offerings is intense and the brand does not get any significant premium in contrast with the current urban market where customers are more brand conscious.
There is also a historical preference towards domestic brands since the current level of awareness of global products and information pertaining to them is relatively low. Haats and melas, mandis and word-of-mouth publicity are the usual channels of communication for product promotion in rural areas, whereas television and the print media are the primary means of advertising in the urban market.

Rural markets have continued to grow in the last two years when the traditional urban
markets were under the pressure of liquidity crunch, higher finance cost and a weak income outlook leading to weakening of demand.

Rural India: An Attractive Destination

Having outlined the differences between urban and rural, some of the reasons why rural segment is gaining prominence include:

Market Size: The strongest point about the rural market is its huge size. A total population base of more than 750 million demonstrates its sheer potential.

Growing income levels: In addition to the size, there has been a considerable improvement in the income levels in rural market. According to estimates, the percentage of households earning