A top auto ancillary manufacturer in Japan was looking to expand its market share for car batteries in Middle East given the slump in its domestic market
Japan is world’s top 3 car producing countries since the early 1970’s. Some of its most well-known global brands are Toyota, Honda, Nissan, Mitsubishi, Subaru, Daihatsu, Fuso, Hino, Mazda, Lexus, and et al.
Automotive components and vehicles account for 18 percent of all manufacturing shipments in Japan. Japan’s automotive component industry comprises of companies whose business areas include chemicals, electronics, textiles, and mechanical components.
Automobile parts manufacturers in Japan are more diversified, producing automotive goods in addition to products for other industries within their competencies. However, due to global and local competitive pressures our client wanted “Market entry strategy” to expand in Middle East.
The scope of work for the assignment was following:
- Assessment of current and future demand for replacement demand for four wheeler batteries in Middle Eastern Countries
- Assessment of capacity viz. existing, expansion, and greenfield in four wheeler batteries
- Assessment of key competitors, areas of strength and their performance in Middle East
- Regulations related to investment in four wheeler batteries
- Prices of different types of four wheeler batteries with break-up of each cost component and profit margins
- Mapping the purchase process of four wheeler batteries & influence of various factors and stakeholders
- Distribution channels
- Recommendation on Modes of Entry in Middle Eastern countries
Approach and Methodology
Bottom-up approach was utilized to map the demand for replacement batteries for four-wheelers in Middle East countries. Time horizon for Forecast of demand for replacement batteries was 2015-2020. For mapping the purchase process of four wheeler batteries and key influencers of data was collected from both primary and secondary sources (international databases).The primary sources of data were Retail outlets, Service centres, customers and industry experts.
A mathematical model was used to produce forecasts. The major variables of the model were total four wheeler vehicle pool, replacement frequency and estimated market size of local batteries. The replacement frequency was estimated based on consumer and mechanic survey. Replacement frequency adjusted for percentage of vehicle owners not replacing batteries. The Instrument of data collection was semi structured Questionnaire and Face to Face Interviews.
- Four-wheeler owners (more than 2.5 years old vehicle). A mix of customers in 60:40 ratio of those who have replaced their batteries and those who are planning to replace batteries
- Four-wheeler Auto dealers cum service shops
- Service workshops / Technicians. Mix of small and big service shops. Respondent experience of 4+ years preferred
- Auto spare parts shops / battery shops / Auto electrical shops
- Four wheeler service centres
Analysis and observations
The demand for four wheelers was expected to grow at a healthy CAGR. The underlying economic growth and the expected growth in personal incomes were expected to drive demand. Share of luxury cars in Middle East countries varied from 35% to 45%.
Based on our analysis, vehicle scrap rate for four-wheelers was around 3.5% in 2010-11 and has decreased to around 3% of vehicle pool by 2015 as the rate of growth of the vehicle pool has been substantially higher in last 4-5 years than in the past.
We estimated that presently around 1 million four wheelers are scrapped annually, which is expected to increase to 1.5 million by 2019-20. Brand name followed by warranty period and price were the most important purchase criteria for four wheeler batteries. Various modes of entry like exports, Greenfield Foreign Direct Investment, Joint Venture et al were studied.
After studying the consumer behaviour, preferences, regulations and policies related to manufacturing and imports, fiscal regimes in Middle Eastern countries- taxes and duties it was recommended that the client should enter in the battery replacement of luxury segment of four-wheelers as it has the highest margin. Initially it was recommended that the client shall enter into franchise agreement with local distributor to see the brand image of its batteries before entering in the market. Subsequently, if the client is able to create a distinct brand image, it shall enter into a collaboration with the local manufacturer as it is preferred in Middle Easter countries for production of batteries.
Key benefit derived by client
The client saved a substantial Capex by not producing the four wheeler batteries in Middle East as in most of the countries the existing competitors had garnered a significant brand image and it would entail our client enormous advertisement expenditure to increase its penetration in the initial at least five years therefore the client chose the export mode for entry in Middle East for five years.