INNOVATION STRATEGIES & ENTREPRENEURSHIP BONUS PROJECT: RETREAT & RETRENCH

The Ambassador: Changing Gears in Changing Times Retreating from the mass market, metamorphosing into a niche player Rakesh Rekhi Kumaran Sasikanthan Arnaud Descamps Cesar Sanchez Fernandez Nicolas Macquin Lucas Evans January 23, 2005

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INTRODUCTION . HINDUSTAN MOTORS > Hindustan Motors was the first Indian automobile company to start production in India in 1942. For almost 40 years after its inception the company was the market leader in the Indian car market. Its success has revolved around the first ever car made in India – The Ambassador. Modelled on the Morris Oxford Series III, it is a hardy vehicle suited to Indian roads and conditions. Stark contrast is an effective medium to highlight differences. Both Hindustan Motors and Toyota began production around the same time and faced similar growth challenges. And yet crucial differences in the political and economic environments in which they operated, have translated into different fortunes for both companies.

Comparison1 TOYOTA HINDUSTAN MOTORS

Year of Inception 1937 1942

Number of passenger car base models

10 2

Design changes since inception Too many to list None worth mentioning

Total vehicle production (2004) 6.7 million 20,000

Net Revenues in US Dollars (2004)

$150 billion $39 million

Earnings Before Tax in US Dollars (2004)

$14 billion in profits $5.5 million in losses

Until the 1980’s almost every car sold in India was an Ambassador. In the following decade, as India's closed economy opened up, auto sales increased rapidly. However, even with increasing consumption patterns, the Ambassador’s market share shrank to less than 2%. Meanwhile, Toyota continues to be a world leader in the automobile industry.

Today, Hindustan Motors produces two passenger car models. One is the indigenously produced Ambassador car. The other is the Mitsubishi Lancer in collaboration with Mitsubishi Motors of Japan.

1 Company annual reports from www.toyota.com and www.hindmotor.com ; "An Icon Falls On Hard Times; In India, the Ambassador Car Fights to Survive Competition," New York Times, March 4, 1999

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THE AMBASSADOR > The Ambassador is to India what the Chevrolet is to the United States. In many ways, the clatter and bang of the Ambassador, is the heartbeat of India. For years, one could buy any car in India, as long as it was an Ambassador. It is the only car which has been driven over Indian roads for more than five decades. Following is a timeline of the Ambassador’s history: 1957 : The first Ambassador, modelled on the Morris Oxford, takes to the roads. 1963 : Buoyed by popularity, the second version - Mark II - appears. 1975 : First exports: seven cars to South America and Mauritius. And the Mark

III is launched.

1993 : Hindustan Motors fires up the Old Lady with a powerful 1800cc Isuzu

engine.

1999 : Hindustan Motors pumps in $ 15 million to give a facelift to the dowdy old

lady. The Result - The Ambassador Classic.

2002 : London businessman Tobias Moss runs a fleet of customised Ambassadors

at Euro 40 an hour, the most expensive cabs in UK.

2003 : The Grand – another variant of the Ambassador is introduced into the Indian market with many technological upgrades.

2004 : The Avigo – the third variant of the Ambassador is launched. Technologically similar to the Grand the focus of this version is restyled design enhancements to make the car look more retro.

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CHANGES IN MARKET PLACE . CHANGE IN COMPETITIVE LANDSCAPE >

At first the disparity in what Hindustan Motors and Toyota have achieved may seem puzzling? However, the answer seems simple when one takes into consideration the controls, regulations and licensing requirements under which Hindustan Motors operated historically in India. While Toyota has competed on the global market, Hindustan Motors spent much of its life sheltered from competition. Due to near monopoly conditions, Hindustan Motors had little incentive to improve, innovate, and improve productivity.

The seeds of change in the Indian automobile sector were sown as early as the 1980’s when the Indian government announced a joint venture with Suzuki from Japan. The new public enterprise known as Maruti Suzuki offered the Indian public a modern and economical hatchback - The Maruti 800. Priced at just $5,500 - significantly cheaper that the Ambassador - it rapidly ate into the Ambassador’s dominant position. Between 1984 and 1991 the Ambassador’s market share dropped from 75% to 20%.

In 1991, when India launched a fast-track economic liberalization programme, the Ambassador’s fate appeared to be sealed. A reduction in barriers to entry meant that several foreign players would setup shop in India. Meanwhile, Indian drivers – starved of choice for years - rapidly embraced smaller, sleeker, and better made cars. Even though it now faced intense competition, Hindustan Motors did not adopt modern automotive technologies into the Ambassador design immediately. Instead it relied on the Ambassador’s Indianess and the companies extensive contact network to continue selling the car. What is remarkable is that even with more than 26 other passenger car models in the Indian market today, the Ambassador continues to sell.

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P.E.S.T. ANALYSIS > Using the P.E.S.T. framework [political, economic, social and technological factors] we analyze important changes in the external macro-environment in which Hindustan Motors operated. Ironically, an event which happened thousands of miles away - the collapse of the former Soviet Union, marked the beginning of the end of the Ambassador’s dominance. Only two years after the end of communism, the Indian government decided to shift away from a closed market system, encouraging foreign investments. The end of protectionist policy was without doubt a reaction to the dismantling of the U.S.S.R – a traditional Indian ally. As one can see, the P.E.S.T. factors above limited the Ambassador’s ability to capture value in an increasingly competitive marketplace. These factors were beyond the direct control of Hindustan Motors. Hence they are considered external threats rather than internal company weaknesses.

Political Economic Social Technological

1989: U.S.S.R collapses

1991: Liberalization of Indian policies

1991 onwards: Continuous reduction of

import tariffs

Increased Foreign Direct Investments

Lower income taxes

Increased consumer spending

Rapid economic growth

Upward mobility

Lifestyle changes

Fashion conscious (increased demand for

modern cars)

Higher incomes

Technology transfer from foreign car

makers

Ambassador becomes technologically obsolete

Ambassador forced out of mass market

Automotive industry focuses on new

technologies

1990: India embraces economic reforms

Political Economic Social Technological

1989: U.S.S.R collapses

1991: Liberalization of Indian policies

1991 onwards: Continuous reduction of

import tariffs

Increased Foreign Direct Investments

Lower income taxes

Increased consumer spending

Rapid economic growth

Upward mobility

Lifestyle changes

Fashion conscious (increased demand for

modern cars)

Higher incomes

Technology transfer from foreign car

makers

Ambassador becomes technologically obsolete

Ambassador forced out of mass market

Automotive industry focuses on new

technologies

1990: India embraces economic reforms

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DECLINING MARKET SHARE > Almost overnight the Ambassador’s Blue Ocean had turned into a bloody Red One. In a radically altered marketplace, and equipped with obsolete technology, it was inevitable that the Ambassador’s would take a beating. Three key drivers were shaping demand for cars in a New India.

KEY DEMAND DRIVERS

AMBASSADOR SATISFIES

CONDITION 80% of demand for easy to manoeuvre compact cars

NO

Increase in demand for modern high quality cars cutting edge technology and styling

NO

Consumer demands price conscious offerings YES As tariffs imposed on imported foreign components dropped, the availability of new models increased rapidly. This fuelled demand in the passenger cars segment. However, The Ambassador continued to lose market share year after year.

India Rising Passenger Car Sales [1984 - 2004]

0100000200000300000400000500000600000700000800000900000

1000000

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004Year

Num

ber o

f Uni

ts S

old

Ambassador's Declining Market Share [1984 - 2004]

5% 3% 2%

75%

11%

0%

20%

40%

60%

80%

1984 1994 1997 2002 2005

Year

Mar

ket S

hare

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BRAND CRISIS > With a freefall in sales, Hindustan Motors’ financials were haemorrhaging. Successive years of losses spurred rumours of bankruptcy. A real crisis was brewing with the company. Management knew that the value of the Ambassador brand had hit rock bottom. In the past the Ambassador had served all segments of the car buying population. This included the upper middle class, families in urban centres, rich families in rural areas, the government, bureaucrats, the armed forces, industrialists and taxi companies. Having lost its crown and kingdom, something needed to be done. The management at Hindustan Motors had some very tough decisions to make. Should they retreat entirely from the market? Would it be better to invest aggressively in a marketing campaign to reposition the car to the masses? Or should they retrench and position themselves as a niche player? The low perceived value of the Ambassador had:

• Destroyed consumer loyalty • Reduced willingness to pay among its traditional segments.

It was vital to have access to relevant information before deciding the Ambassador’s future. As a result, Hindustan Motors turned to consumer insights. A brand analysis exercise valuing the Ambassador on Differentiation, Relevance, Esteem and Knowledge revealed the following: BRAND STRENGTH

• Differentiation [HIGH] – The ambassador was viewed with nostalgia - when 20,000 visitors at India’s largest automotive exhibition were asked about car's greatest attribute, 90 percent responded with "the emotional connect".

• Relevance [LOW] – Most city dwellers believed that the Ambassador was not personally appropriate for their needs.

BRAND STATURE

• Knowledge [HIGH] - Awareness of the Ambassador was at almost 100%. • Esteem [LOW] – The Ambassador was viewed as being inferior in terms

of quality and performance; it was not viewed as a fashionable car

DIFFERENTDIFFERENT[high]

RELEVANCERELEVANCE[low]

KNOWLEDGEKNOWLEDGE[high]

ESTEEMESTEEM[low]

Brand Strength

Brand Stature

DIFFERENTDIFFERENT[high]

RELEVANCERELEVANCE[low]

KNOWLEDGEKNOWLEDGE[high]

ESTEEMESTEEM[low]

Brand Strength

Brand Stature

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RETREAT & RETRENCH . CREATING NEW MARKETSPACE > Based on the consumer insight study the decision was made to retreat from the mass market which demanded characteristics that the Ambassador could no longer offer consumers, and instead focus on niche market segments. The following is a S.W.O.T Analysis of the Ambassador brand. AMBASSADOR BRAND S.W.O.T. ANALYSIS>

STRENGTHS

• LARGE DISTRIBUTION NETWORK • STRONG AFTER-SALES SERVICE • EASY TO REPAIR • STURDY CAR • SPACIOUS WITH LOTS OF ROOM • THE AUTHENTIC INDIAN CAR • NEW FEATURES

WEAKNESSES

• PERCEPTION PROBLEM • LOW TECHNOLOGY

• FINANCIAL WOES

• SLOW DECISION MAKING PROCESS

• RESISTANCE TO CHANGE

OPPORTUNITIES

• EXPAND EXPORT BASE • JOINT VENURE WITH FOREIGN CAR

MAKERS FOR TECHNOLOGY

TRANSFER

• AUTO COMPONENT

MANUFACTURING

THREATS

• INCREASED COMPETITION IN TAXI

SEGMENT (TATA MOTORS) • INDIAN CONSUMER ASPIRING

TOWARDS MODERN FASHION

• POTENTIAL LOSS OF MARKETSHARE

IN GOVERNMENT SECTOR AS OLDER

POLITICIANS RETIRE AND ARE

REPLACED BY YOUTH

•

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To renew sales for an old horse Ambassador made the following decisions:

AMBASSADOR PRODUCT DECISIONS

SUBTRACT

KEEP

ADD

• Radically new

technology • New design

• Indian heritage • Space & sturdiness • Ease of maintenance • Sales and

Distribution Network • Low prices

• Nostalgia • Cultural bond • Small technology

upgrades

AMBASSADOR VALUE CURVE >

Technology (steering,

aerodynamics, consumption)

Modern Design Low cost Drivability inrural areas

Ease ofmaintenanceeverywhere

Armoredversion

Nostalgia Association withpolitical power

Ambassador Foreign models

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SEGMENTING AND TARGETING NICHE MARKETS > Going forward the Ambassador strategy was to target:

• Specific consumer categories [taxi companies & government]

• Focus its marketing efforts based on geographic characteristics [rural areas & exports]

DEMOGRAPHIC SEGMENTATION Taxi Companies [65% of Ambassador sales]: The Ambassador uses a unique approach when targeting taxi providers. Even in urban areas, the road infrastructure is not very good. In every metro there are pockets of bad roads, ridden with potholes. While owners of private cars can choose not to drive on such roads, a taxi driver is forced to deliver his customer to a final destination irrespective of road conditions. Highlighting the sturdy characteristics of this tough car, Ambassador successfully generates new sales in this segment.2 Government Contracts [16% of Ambassador sales]: Taking advantage of its “first Indian car” position, The Ambassador secures government contacts through aggressive networking with government officials. Hindustan Motors enjoys a long lasting relationship with the Indian establishment. Its founders - The Birla family – have strong relationships with the political establishment. Mr. B.M Birla the founder of Hindustan motors was a close associate of Mahatma Gandhi. And for decades, The Ambassador was the official car of every Indian prime minister, key ministers and top bureaucrats. Even today, the Indian President chooses to use The Ambassador as his official car of choice. While it maybe ironic that a car used as a taxi is also used by politicians, Ambassador has negotiated the fine line quite successfully. A recent marketing campaign involved sending 1,500 greeting cards to central government officials including the President and Prime Minister. To consolidate its government position, the company regularly launches public relations campaign to strengthen patriotic sentiments towards the car. For instance, the company released a series of advertisements citing the Ambassador’s recent use in the Kargil war with Pakistan.

2 Like the car he drives, taxi driver Kartar Singh is solidly built; As Singh navigates his 1984 Ambassador through one pothole after another, he nods appreciatively. "Take it anywhere you want and it won't complain," he says. "This is a mule of a car."

ADVERTISEMENT TEXT: In the mountains of Kargil, where man grudgingly ventured, only one car willingly did. It stood the test of the icy peaks and the almost unmotorable roads. It waged wars with the daunting elements of nature. The matter is quite understandable. After all, the smashing new Ambassador Classic comes with a power steering, generous boot space, multi-point fuel injection, a powerful 1800 cc, 74 bhp engine, disc brakes and 5-speed Isuzu gear box. What's more it also meets the stringent Bharat II emission standards. Test drive the Ambassador. It's a warrior.

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GEOGRAPHIC SEGMENTATION Semi Urban and Rural Areas [65 % of Ambassador sales]: A significant part of the Ambassador growth strategy hinges on targeting small towns and cities. In these areas the concept of “family” is different. Unlike in big cities where nuclear families are commonplace, families in rural India are larger due to the still prelevant concept of the joint family. As a result the large seating capacity of the Ambassador is very attractive to consumers. A major plus is that the car is rugged and sturdy allowing for easy manoeuvrability on India’s unpaved rural roads. With less disposable income than city dwellers, rural consumers are also more price-conscious and not as fashion oriented. Lastly the Ambassador’s vast distribution network ensures that spare parts are widely available, so that any roadside mechanic can repair the car. Export Markets:

With drastically reduced sales figures in India, The Ambassador has decided to focus on export opportunities - mainly in the British and Japanese markets. Importation in the UK is done through Fullbore Motors, and the Ambassador has been renamed the "Mark 10". The basic price is £11,425, reflecting the fact that the Ambassador is almost rebuilt on arrival in the UK. This price point also reflects the fact that the car is re-sprayed with higher quality English weather-resistant paint and the installation of a heater. New seals, tires and a front anti-roll bar were also fitted.

The Notting Hill-based minicab company Karma Cabs, uses Ambassador cars for all its taxis. As if the Ambassador's shape wasn't distinctive enough in itself, each of his cars' interiors is individually makeover in silk and flowers, and the bumpers are garlanded with flowers. Priced at about £40 per hour the company is one of the priciest cabs around and has several celebrities as regular customers

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CORE PRODUCT LINE AND GRADUAL INNOVATION >

Today the Ambassador is available in 3 variants: Classic, Grand and Avigo. The rational behind having variants is to continually innovate to modify the core product to better serve customer needs without retracting from the values of the original car. Hindustan Motors is following a two-pronged strategy to increase sales. First it is investing in replacing outdated modern ones by refitting the car with new accessories. Second, it is focussing on communicating its investments to the public. It hopes to overhaul image of the Ambassador and bridge the gap between outdated perceptions and current reality. The following is a summary of the 3 Ambassador Variants:

CLASSIC The traditional Ambassador upgraded for better performance Relaunched Summer 1999 Price: $7,950 – 9,300

GRAND An upgrade of the Classic with the same body shape. Launched Winter 2003 Price: $9,750 – $11,500

AVIGO Slightly restyled body to appear more “retro” with more upgrades.

Launched Summer 2004 Price: $11,500 – $12,750

New Features: • 3 Engine Types available:

- petrol - diesel - clean natural gas

• Improved suspension

• Smoother 5 speed gears

• Wider tyres

• Front Disc brakes

New Features: • Cabin noise reduction • New Rear brake design • New axle • Improved exhaust

• Digital Clock

• Reading lamp

• Child proof safety locks

• Head rest (Front/Rear)

• Anti-glare mirrors

New Features: • Redesigned front grille • New clear headlamps • Self coloured bumpers • Redesigned tail-light pods • Alloy wheels • Leather trimmed seats • Increased fuel efficiency

SPECIAL ORDERS >

Armour-Plated Versions: Special government orders are placed each year for fortified armoured versions of the Ambassador. On October 1, 2003 a state minister survived an assassination attempt when his armoured Ambassador was bombed. The blast was so powerful that the Minister's car was thrown up several feet in the air and fell off the road after overturning. It was a level three bullet proof Ambassador car. The Indian Home Minister was quoted as saying "Had it been some ordinary car, the situation would have been worse."

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The Amby Limo: Each year Limited orders are placed for the stretched version of the Ambassador, appropriately know as the Amby Limo. Inspired by stately limos in the West, the car is stretched by 48" between the wheels. A glass division is created behind the front seats, and extra seats installed in the rear allow up to five passengers to sit facing each other. The rear seats can be electrically converted to form a bed.

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MANAGEMENT TURNOVER > With the company ailing over the last two decades, Hindustan Motors has had two senior management changes since the year 2000, in attempts to infuse fresh thinking to turn the company around. August 2000: Hindustan Motors announced the appointment of a new Managing Director - Mr. B.K. Chaturvedi. Formerly, the Managing Director of the profitable Eicher Automotive Group, he took charge in August 2000. Despite several new initiatives and possessing industry experience, he could not improve the bottom-line. April 2003: On 2 February 2003, the company announced that Mr. B.K. Chaturvedi had put in his papers citing personal reasons. It was announced that Mr. Ravi Santhanam - a former Executive Vice President of the company - would lead the company as the new Managing Director. Mr. Santhanam earned a Mechanical Engineering degree from one of India’s premier educational institutions - IIT, a MBA from IIM and was a fellow of the Advanced Management Programme at Harvard Business School. Given the mandate to turnaround the company, he is still currently serves as the Managing Director. After his appointment, Hindustan Motors has stabilized and marginally increased its monthly sales at around 1,000 units per month from a low of 834 in July 2003. [see chart below]

Increasing Ambassador Sales

0

200

400

600

800

1000

1200

1400

Jul-0

3

Oct-03

Dec-03

May-04

Jul-0

4

Sep-04

Oct-04

Nov-04

Dec-04

May-05

Sep-05

Oct-05

Num

ber o

f Am

bass

ador

's S

old

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KEY TRENDS AND FINANCIALS >

• In June of 2005 the company reported an increase in net sales of 15% over the same period last year.

• In June of 2004 the company reported an increase in net sales of 7.3% over the same period last year.

• Despite these percentage increases the company still reported net losses of $5.5 million based on $39 million of sales (USD)

• The company attributes stable sales and marginal growth to the continuous improvements it has been made to its core Ambassador product line. With three variants the Ambassador has broader appeal to consumers. It will continue building its marketing network and providing strong after-purchase service.

• The company expects sales of the Ambassador to increase by 50% in the next three years [2006-2009] to 18,000 units annually.

• The bulk of sales will continue to come from the taxi and government sectors. Based on a projected sales volume of 1,500 Ambassador cars per month, the company expects the personal use segment to contribute only 150 units per month.

FINANCIAL SNAPSHOT [2004]

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CONCLUSION . In some ways it almost seems a miracle that the Ambassador is still being produced and marketed. Reflecting upon its rich legacy, the Ambassador stands out in the crowd, not just for its classical design but its sheer resilience for over half a century. For now, its philosophy of retreat and retrench has worked – but barely. The Ambassador’s future will depend on its ability to manoeuvre the twists and turns of the Indian automobile industry’s changing face. Already major Indian players such as Tata Motors have started making inroads into the taxi segment. How long will the Ambassador be able to defend its retrenched position? And is this the right strategy for Hindustan Motors? We feel that there are three possible routes for progress for Hindustan Motors and its Ambassador. First, if its “emotional connect” can extract a high enough premium to offset the technological downsides it faces it may continue to consolidate its current market position by targeting its existing segments and seamlessly upgrading the car with technological improvements. Second, Hindustan Motors can decide to discontinue the Ambassador and launch a modern contemporary car to compete in the marketplace. The company could remind the public that it is the “Authentic Indian Car Company” and position its new vehicle as a Made in India car. Transferring nostalgia associated with a product to the corporation may however pose a significant challenge. Third, it could licence the Ambassador design to another company to continue the legacy of the Ambassador. The licensee should be in a position to inject cash into the brand and upgrade obsolete technologies. Surely, when the Soviet Union fell, the Hindustan Motors management team could not have contemplated the fate of its prized Ambassador. They would have been too busy devoting their energies fighting off competition from the Maruti Suzuki. Ever since, the Maruti 800 started eating into the “grand old lady’s” market share, there were important choices and decisions to be made. As an old technology firm, Hindustan Motors could have rapidly adopted new technologies to modernize its flagship. Instead it reacted with caution, and was ultimately forced to redefine its marketspace. Rather than be proactive, the Ambassador’s legacy has been markedly reactive. It has always chosen to fight on its own terms – on familiar turf.

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BIBILIOGRAPHY . “China and India Autos – Time to Fill up,” Citigroup - Smith Barney report, 7 June 2004 “Indian car manufacturer campaign aims for the top,” - Precision Marketing Report, Feb 2002 “Indian Automotive industry – The Indian commercial vehicle industry,” ICRA Report, October 2005 “India Business Intelligence,” The Economist Intelligence Unit Report, May 1998 “India (Automotive),” World Markets Research Centre country Report, Jan 2006 “HM targets Rs 200 crore revenue from parts plant,” The Economic Times, 19 Jan 2006 “Hindustan Motors Limited - Business Description,” Datamonitor Company Profiles, 14 Jan 2006 “HM hopeful of 'turnaround' in few months,” The Press Trust of India Limited, 12 Jan 2006 “India Hindustan Motors Sep Ambassador Car Sales Up 7.4%,” Dow Jones International News, 3 Oct 2005 “Ambassador Registers 26% growth in Sales,” Indian Business Insight, Auto India Jul 2005 “Ambassador to change Car Designs,” Navhind Times. Apr 15, 2005 www.hindmotor.com www.hmambassador.com