Toyota to launch cars with mass segment focus

Bracing for 2020, when India switches to stricter Bharat Stage VI emission norms, Toyota Kirloskar Motor (TKM) plans to launch multiple models in the mass segment of the passenger vehicle market.

This change, from being an entity that has been sharply focused on the premium end of the market to one considering mass models, is prompted by the high taxation structure on premium vehicles, says Shekar Viswanathan, vice-chairman and wholetime director at the company, known for its Fortuner and Innova brands.

Over the next two years, Toyota plans to introduce various models, addressing multiple price points, said a person familiar with the plan. At least two of these, the Yaris sedan and its hatchback version, are expected in April 2018 and 2020, respectively and will address the volume car segment, said the person. The former will be positioned in the mid-size sedan market and compete with the Honda City, Suzuki Ciaz and Hyundai Verna. Its hatchback version will compete with the Suzuki Baleno and Hyundai i20, among other models.

Also in the works is the HiAce, a 12 to 14-seater van, and a premium compact SUV, expected sometime in 2020, that will compete with Hyundai’s Creta.

The country’s taxation structure is weighing on the minds of senior officials at TKM. Viswanathan says the next two years will see models that are BS-VI compliant. “There could be something in the small car segment (upper end of the compact car segment). We will be refreshing or adding to the line-up. A lot of thinking is going on,” he said, to a query on whether Toyota would bring another SUV or a model in the small car segment (sub-four metres).

Having models at multiple price points helps in higher market share, he said. On top of a 28 per cent tax goods and services tax (GST), there’s a levy of one per cent on petrol cars with engine capacity less than 1,200cc and one of three per cent on diesel cars with engine capacity less than 1,500cc. Hybrid cars, including mid and large ones, and SUVs, attract a cess of 15 per cent.

The differential cess on models has made Toyota’s more expensive and dragged down its

volumes, albeit marginally. It sold 93,098 units in the first eight months of the current financial year, as compared to 94,942 units in the year-ago period, according to the Society of Indian Automobile Manufacturers (Siam).

While TKM is entrenched in the premium market, it has a token presence in the compact car segment that is 70 per cent of the total market.

Which has limited its volume and market share growth. Its share in the overall market has been less than five per cent.

Viswanathan says a higher number of model offerings would also add credibility to the bigger offerings. “There is no doubt that our strength is big cars but given the tax structure and affordability, there are limitations. If taxes remain at 28 per cent without the cess, we will talk a different story.”

With the number of models in the premium car market having gone up over the past five years, he says Toyota would have to de-risk itself and consider entry in select segments within the mass car market which are profitable.

Puneet Gupta, associate director at IHS Markit, a sales forecast and market research entity, said the rethink on strategy despite the setback in the form of higher cess on hybrid vehicles, “reflects on the aspiration they have for the Indian market”. Well thought and competitively priced models in the mass segment will give them a needed volume push, he added.

This is the second time in its 20-year history in India that the company is changing lanes. With ambitions to capture a bigger slice of the market, Toyota entered the volume car market with the Etios sedan in December 2010 and the Liva hatchback in June 2011. Its bet on economies of scale from the Etios brand to drive profits came a cropper due to lack of consumer interest and pushed the India arm of the Japanese vehicle maker into the red. In the financial year that ended in March 2014, Toyota Kirloskar incurred a loss of ~180 crore, a dubious first in its 15-year history in India.

That performance, led by inflated costs, prompted the company to rethink its India strategy and stay clear of a competitive segment where rivals Maruti Suzuki and Hyundai, with models that boasted of high localisation levels and competitive pricing, had a clear start. The company instead chose to focus on the more profitable premium segment, relatively less crowded.

The change in focus and performance improvement measures, which included reducing the break-even volume levels at its factory to 125,000 to 150,000 yearly, half its installed capacity, helped. Toyota has turned in annual profits since, albeit with hiccups, owing to changes in government regulation. In 2015-16, the profit was ~550 crore, as compared to ~520 crore the year before.