Introduction
The Indian car market was dominated by Maruti Suzuki, a seemingly unshakable force. Then, Hyundai arrived, and within years, the landscape had shifted dramatically. How did the underdog disrupt the market leader?
Winning India: Hyundai’s Localization Play
When Hyundai entered the Indian market in 1996, Maruti dominated the automotive landscape, holding a commanding 60% market share. The middle class in India had almost come to see Maruti as a monopoly. However, Hyundai’s strategic approach to the Indian market set it apart from its competitors.
Hyundai’s key to success was its focus on localization. Instead of simply replicating its global models, the company took a step back and identified four critical gaps in the Indian market. First, the Indian automobile market did not respect the customer, with poor after-sales service and a lack of customer feedback. Second, the compact cars available at the time were not suited to India’s specific needs, such as the height required for turbans or the cooling capacity needed in 35-40°C temperatures. Third, the wealthy segment was underserved, with a need for multiple compact vehicles per household. Finally, Hyundai recognized the untapped potential of the compact vehicle segment, which had the capacity to reach 60-80,000 units in annual sales, far exceeding the mid-size vehicle segment.
The Santro Story: Tailored for Success
To address these gaps, Hyundai launched the iconic Hyundai Santro, a compact car that was meticulously designed for the Indian consumer. The Santro featured a taller body design to accommodate turbans, an improved air conditioning system that could cool the car even in high temperatures, and a focus on cost-effectiveness and scalable production. Hyundai’s decision to set up a large-scale manufacturing plant in India gave it two key advantages: low-cost production and the ability to produce cars at scale for the next 30 years.
Hyundai’s localization strategy extended beyond the product itself. The company made a concerted effort to establish a strong dealer network not just in Tier 1 cities, but also in Tier 2 and Tier 3 locations. Additionally, the hiring of Bollywood superstar Shah Rukh Khan as their brand ambassador helped Hyundai connect with the Indian consumer on a deeper level.
Disrupting the Streets: Hyundai’s i10, i20, Creta
Hyundai’s success with the Santro was just the beginning. In the early 2000s, the company identified another gap in the market – the lack of a mid-range product between the economy hatchbacks and the premium sedans. This led to the launch of the i10 and i20, which provided premium features at a reasonable price point, catering to the aspirational middle class.
source: alVolante
Hyundai’s third major leap came in 2016 with the launch of the Creta, a mid-size SUV that filled a void in the market. While SUVs only accounted for 10% of the cars sold at the time, the Creta offered a competitively priced, feature-rich option that appealed to customers looking for an upgrade from smaller vehicles.
Cash Flow Fuels Hyundai’s Rise
Hyundai’s success in the Indian market is not just a story of strategic product launches; it is also a tale of exceptional financial performance. Hyundai’s EBIT margins are on par with Maruti Suzuki, hovering around 12-13%. However, the key differentiator is Hyundai’s ability to generate free cash flow.
Free cash flow, which represents the cash left after paying for expenses and necessary capital investments, is crucial for an automotive company. Hyundai’s free cash flow stands at an impressive 93% of its profit after tax, allowing the company to invest in future infrastructure and technologies without relying heavily on external financing.
The Hidden Engine of Hyundai’s Success
Hyundai further enhances its financial prowess through its negative working capital cycle. While most automotive companies have to lock in capital for 20-22 days before receiving payments from customers, Hyundai has managed to receive payments from customers 26.5 days before it has to pay its suppliers. This means Hyundai effectively has access to free capital for over a month, which it can utilize for further investments and growth.
This negative working capital cycle, combined with Hyundai’s high free cash flow, has resulted in a remarkable return on capital employed (ROCE) of 27.1%, significantly outpacing Maruti Suzuki’s 19.7%.
Hyundai’s Roadblocks
Despite Hyundai’s impressive growth and financial performance, the company faces some potential challenges that investors should be aware of. Firstly, Hyundai’s manufacturing plants in Chennai are operating at over 90% capacity utilization, limiting the company’s ability to increase market share and address the rising demand for its vehicles.
Secondly, the upcoming IPO is an “offer for sale” IPO, which means that the parent company in South Korea will receive the entire proceeds instead of reinvesting them in the Indian operations. Additionally, Hyundai has increased the royalty it charges the Indian subsidiary from 2.5% to 3.5% of revenue, a significant amount considering the company’s high profitability.
These factors raise concerns that Hyundai may not be allocating sufficient resources to expand its manufacturing capacity and infrastructure in India, potentially hindering its long-term growth and dominance in the market.
Conclusion
Hyundai’s rise in the Indian automotive market is a testament to the power of localization, strategic product development, and financial discipline. By identifying and addressing the unique needs of the Indian consumer, Hyundai has carved out a formidable position for itself, outpacing even the mighty Maruti Suzuki.
However, as Hyundai prepares for its historic IPO, investors must closely examine the company’s plans to reinvest in its Indian operations and address the potential challenges it faces. The company’s ability to maintain its financial prowess and continue its customer-centric approach will be crucial in determining its long-term dominance in the Indian market.
eference
https://the-ken.com/story/hyundai-indias-ipo-pays-way-more-to-its-korean-parent-than-meets-the-eye
https://themorningcontext.com/business/hyundais-india-ipo-is-more-than-rank-opportunism
Link to my other case study
https://geocrit.com/Japan’s-lost-decade