The purchase of automobiles, one of the most significant consumer durables, is an important indicator of consumer buying behavior. Moreover, the contribution of auto-industry to the GNP has been increasing steadily ever since the sector had been de-licensed in 1993. This adds around 3 to 5 per cent to the GNP. The size of the passenger car is about 4 lakh at present, which is miniscule when compared to the US, Europe or the Japanese market.. Global car manufactures are paying heed to it and have flocked to the country. But in order to establish themselves, they have specific tastes, preferences and other generic demand determinants. We will start our discussion with the greatly untapped market—the non-urban car market in India, which contrary to popular belief, has potential.
To begin with, since cars are still a high-priced commodity (although the Maruti 800 has changed this perception), the level of income is presumably the most important determinant. More appropriately,
Assessment point 1; Case Study Analysis
per capita real GNP itself. Given that inflation is more or less under control, which in turn is because of
the active support to agriculture by the
ets floor prices for agricultural products
and gives huge amounts of subsidies to buy fertilizers and electricity, making the non-urban sector a big, potential market. There has been a huge increase in the real per capita non-urban (specifically non-metro) income. Non-urban society thus becomes the next potential market for car manufacturers after the urban metros. But can we treat the whole non-urban/no-metro society as a uniform group exhibiting a similar kind of demand in the market? Certainly not, because the non-urban area is divided into rich farmers, plantation owners and absentee landlords who have diversified into other kinds of businesses, including exports. All three groups will form potential buyers for the passenger car. Thus we get the first kind of market segment, on the basis of income group, and within the segment the sub-segment, i.e. from where the income is generated, rural or urban area, local or global market, income is generated, rural or urban area, local global market. Logically, buying behavior in terms of attitudes towards the price or price sensitivity, brand-consciousness and taste will be different for non- urban buyers when compared to their urban and metro counterparts.
UU-MBA-708- Managerial Economics
Car manufactures have already divided the car market on the basis of income. There are cars in the economy segment, mid-segment premium segment, within the mid-segment, one can find a lower mid- segment, comprising of the Maruti 1000 and the upper mid-segment, comprising of the Accent and Ikon. The premium segment is likewise, divided into the luxury segment and super-premium segment. But the kind of car to be purchased within that segment depends on other determinants. Let us take the case of a rich sugar farmer form UP. He might have the same purchasing power as that of an urban upper middleclass man, but may not prefer a delicate car like the Maruti, because of bad road conditions in his village. Further market research proves that people from semi-and non-urban India envisage heavy-looking, brightly colored goods as a sign of strength, durability and sturdiness. Thus, the demand with the same purchasing power will be entirely different.
The next crucial question is, how price sensitive are the buyers? Here the approach that has to be followed will vary greatly between urban and non-urban areas. Generally speaking, the demand is going to be elastic since cars are still considered luxury items, especially in small towns and rural areas. Heavy advertising and easier B2C communication in urban areas are helping auto-manufacturers develop a brand image easily, educating the customer on brand equity and acquiring brand loyalty. We all know that price sensitivity and brand loyalty are negatively related. Thus, an urban buyer tends to be less price sensitive. In the metros, other related factors like a busy lifestyle, makes depending on the unreliable public transport system a strictly avoidable situation. This makes the metro buyers price-insensitive as a car is treated more like an essential commodity. Non-urban buyers in general, tend to be fewer brands conscious (unless the brand becomes a logo for them—which is possible only in the long term) and more value-conscious. Further, in the cities one finds and equal number of women drivers who prefer delicate-looking cars. Hence we see that the law of demand, which states that there is an inverse relation between price and quantity demand, ceteris paribus (other thing remaining constant), need not always be true. The reason being that price itself becomes a function of lifestyle. The law of demand can be true once the market segment is clearly defined. Studying the demand pattern of the buyers for proper positioning of the car and gaining market share becomes more important as the supply of the passenger car, ever since the sector has been de-regularized, has far outstripped the actual demand for cars making this a ̳buyer‘s market‘.
Using your expertise knowledge of Managerial Economics with reference to the case above, prepare a report with clear sections based on the following.
Determinants of demand for passenger cars in India
The role played by the non-urban India in forming the demand in the auto-market,
State and justify your view whether you agree that the law of demand, technically speaking, cannot
work in an auto-maker.
Imagining you are a new global auto maker planning to enter the Indian auto market. List the
various demand aspects you think are important