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Cross badging – what are the implications?

R Jayaraman

Author: R Jayaraman

Date: Fri, 2018-05-04 14:25

The term “cross badging”, or “badge engineering” entered the lexicon in India sometime in early 2012. Examples are Micra / Pulse, Sunny/Scala, Terrano / Duster (all Nissan / Renault) combos. Similarly, Vento (VW)/ Rapid (Skoda). Tata and Fiat tried to tango, but became untangled soon. Same with Renault and Mahindra. So, why are Maruti and Toyota trying the same failed move again?

The logic is totally unclear. Two cars – with two different names – but looking the same, is one reminded of the ball tampering incidents? Appears like car companies are trying to cheat their customers, trying to take them for a ride, so to say, although that is their USP, when you look at it in the right way. So, where is the catch?

It is common practice that auto majors use the platform strategy to cut down on engineering costs, time to market, advertising  and other distribution costs by manufacturing using the same body. However, the names under which these are sold are quite different in different countries. For example, the Qualis, which morphed into the Innova, in India, was sold in Indonesia under the name “Kijang” for some years, before appearing in India as Qualis. This is a sensible strategy. Make a new car, introduce in a single market, get the learnings, and then roll out in other markets, with localisations, but using the same platform. This works, as, in the case of the Qualis, very few in India knew that the Kijang is the same car, but with a different name. This could be “not in sight”, “not registered in mind” type of a situation.

The car company is using the fact that, in spite of globalisation, familiarity of customers in different locations, with the several names, is not often high. On the contrary, selling the same car under two or more names in the same location is like using a ten rupee note with different pictures and colours in the same country, which will lead to confusion, counterfeiting and what not.

The platform strategy is useful as a great profit generating engine. In this strategy, one company engineers and produces the basic model. Then, adding bells and whistles, to embellish the base, the company rolls out a full suite of models, to cover a price range. The higher prices charged for the “higher” level models,  makes the profit picture rosy. This has been the strategy used in India and many other countries, by all auto companies, and customers are OK with this, as they understand the logic. For example, one can buy an Omni at a very low price, because it doesn’t come with an A/C. Similarly, one is willing to pay upto 4 lakhs for variants of the Maruti Alto, based on the accompaniments. This strategy has the effect of increasing the price tag, disproportionate to the cost increase, and provides a legitimate way to earn an extra rupee, sometimes even to subside the non-profitable low end models. However, cross badging forms no part of this strategy.

What, then, can be the reasons that Maruti and Toyota are looking at cross badging? The cars being mentioned are Brezza, Baleno and Corolla. It is clear that the companies are trying to build up their coverage of the market. Each one of these vehicles is a successfully selling car. Maruti has a completre coverage of the low end of the market, and is slowly moving up the value chain through Brezza, Baleno, Ciaz and Ertiga. However, this comes at a steep cost – engineering, testing, etc. Also, Maruti does not have any car in the Corolla range, except the Ciaz. Thus, by bringing in the Corolla, Maruti can hopefully speed up its market coverage in the upper end, and become the GM of India.

Whereas, Toyota is a niche player, with the Innova being the bulk seller, at about 75,000 per annum. The other best seller is the Fortuner, at about 10,500 last FY. Total Toyota sales for FY 2017-18 was about 143,000, whereas Maruti was doing 1.7 million. The reach of Maruti is unmatchable, especially in the rural areas. For Toyota to start doing the Maruti volumes will need a hefty investment in the distribution network, apart from the time issue, as well as the range issue. If at all Toyota wants be the number 2 to Maruti, then it needs to have a broader range of models, to cover the lowest to the highest price range. That would be following the lead of GM’s Alfred Sloan, who invented the theory of “a car at every price point”. And that can happen by the cross badging.

Maruti has done this quite well in India, with a very strong base, on which it is trying to erect the sedan/MUV/SUV/Luxury segments. The beginning has been successful. However, to give this strategy a kick start, nothing like selling the Corolla, and a few other sedans from the Toyota stable. Maruti is clearly hoping that it can sell 5,000+ Corollas, in addition to the 5,500 Ciaz;s. Toyota will be looking to complement its Etios range with the fully engineered, road tested Brezza and Baleno, to increase its volumes. While Toyota will benefit from the distribution width, Maruti will benefit from the sedan depth. It can avoid the costly engineering that it must have incurred in the Ciaz and Ertiga. No doubt, there is a synergy, unlike any of the earlier cases of cross badging. However, there is a catch.

Every car from a company, develops, over the years, a certain “vaasna”, a sort of karmic baggage. This is a bundle of emotions, developed largely through the experiences, from the time the customer sees the ad, to the time he goes to the distributor, buys the car, drives it, and then has a feeling of “paisa vasool” (value for money). The degree of the “paisa vasool” feeling is what makes a customer stick to a company. This can be seriously affected if the cross badged cars are not able to fit into the emotional connect due to the fact that the car was manufactured by another company. Like, a car without a “mai baap”. No lineage. No “ownership” feeling. The purchase of another company’s car from your regular company can still leave you with a feeling of “ye kya ho raha hai” (what’s going on). And no strategy can address this aspect. On paper, there might appear to be a mutual fit and benefit, but beyond the paper, there is a real world too.

 

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I agree with the given argument up to a certain extent as there is no compelling reason to believe in the cross badging process. Individually, both Maruti and Toyota are having their own product portfolio and satisfied customer base. There is no conflict of interest as both are addressing different customer segments. So, cross badging looks a win-win opportunity for both especially when the benefit is visible in terms of investment and time to market. I appreciate on thoughts given and convinced with the point of view of R Jayaraman, however, I want to add another aspect from customer base perspectives. Additional benefits are getting access to the customer base and in my view, both want to build on that. For Maruti, it is difficult to retain the customer as in the case of repeat buying, Maruti can offer robust products of Toyota and retain the customer which is still a better option than losing him. On the other side, Toyota is getting a loyal customer base who is maturing for an upgrade and a potential buyer of his premium products. In a way, he is reducing customer acquisition time and also eventually adds up his top line. Nowadays, the option to get customer details through other sources due to enforcement of the acts are narrowing, so this is much easier to get access to the rich customer database of Maruti through this route. So, in total, it seems to be a good idea to go for cross badging and focus on working towards building credibility with the customers.

Thanks for the interesting write up. Yes do agree cross-badging was a failure in India so far. At least, one of the brands is a disaster. Both Renault and Nissan are classic examples and have show that if the cars are offered with very identical looks and features will definitely be a failure. Infact the complete range of cars sold by Renault and Nissan merely developed on cross badging have failed (sole exception was Renault's Duster). However, Volkswagen and Skoda may have shown the secret and were successful with cross-badging their Vento and Rapid models are still selling in decent numbers in India. But we should understand that though these cars are made from the same platform, were launched maintaining their own signature looks and features and the market sees them as different cars. Further the relative success may be due to the fact that both these brand names have their own customer base who are loyal . Skoda right from the time it was launched in 2002 was well accepted as a brand which offers high level products at a competitive rate. Volkswagen too is looked up as a brand which offers cars with high build quality. It is true that the Indian market does not seem to accept cross-badged cars which are made by companies which has not made a mark independently. However, in the case of the Toyota and Maruthi, I am keeping my fingers crossed to see how their offerings will be recieved by the market as both these brands have earned the trust and love of the Indian market. Also the products which they have proposed to develop viz. Corrola, Breeza, Baleno,etc. are all flagship models and am really excited to see how the market will reacts when they see the cars they once recognized with one brand, being offered from a different stable….

Cross badging in India is not a new concept. In late 60’s Hindustan Motor launched Ambassador which was cross badged Morris Oxford and popular Premier Padmini was actually cross badged Fiat 1100. But the main difference was that the cross badged products were not put into the same market at the same time, unlike the current cross badging concept. The current concept of cross badging was introduced in 2011 when Skoda and VW simultaneously launched Rapid and Vento in the Indian market. Now, with not so successful stories of cross badging in the Indian market, it will be interesting to see Toyota and Maruti gearing up for cross badging. This time the products put on the stake are Brezza, Baleno, and Corolla. Learning from Skoda-VW cross badging, it worked fine in the short run but when Skoda launched updated Rapid, it completely cannibalized VW Vento. Now let’s look at the numbers. In the month of April 2018, Maruti sold 20,000 Baleno and 10,000 Brezza whereas Toyota managed to sell only 263 units of Corolla. It is understood that Corolla is positioned as the high-end product and one cannot expect Corolla being sold in bulk but the numbers are still discouraging. Now, drawing the parallels from past cross badging examples and current numbers, I believe that there is little gain for Maruti when it is offering its top performing models for cross badging and in return, it is getting Corolla which is in itself struggling to allure high-end customers. In fact, if cross badged Baleno and Brezza are launched at a lesser price by Toyota then it definitely will eat up the share of Maruti Suzuki in the market as cross badged products offer more or less same features. As product differentiation is low with no additional functional benefit for the consumer, other than brand appeal, pricing will play a crucial role in Toyota and Maruti cross badging. But there are challenges in front of Toyota and Maruti for their synergies to converge. It will be a big challenge for Maruti to sell sedan like Corolla through its existing sales channel NEXA and if at all Toyota manages to sell cross badged products in huge numbers then it will have to work on its reach and presence to provide robust service as more numbers will bring in more issues at the service end. But the underlying question is- Will the two behemoths benefit from this strategic move? Only time can answer this question when products will compete head to head in the real market because many times customer surveys are in perfect juxtaposition with reality.

CROSS BADGING – What are the Implications? by R Jayaraman. Is it an Intelligent move? (gmp18.atri@spjimr.org) The announcement of cross badging agreement will allow the Japanese automobile majors to manufacture vehicles for each other in Indian market. As very rightly put, cross badging in auto sector in India has been disastrous. There have been situations like, in spite of bringing a hike in the sales number, cross badging has rather tremendously bought the numbers down. Then is the cross badging move by Suzuki and Toyota an intelligent one? I defer significantly to the argument presented by the writer. India’s auto market in terms of customer expectation and satisfaction is not matured. The two auto brands have an established market segment and customer loyalty in India. While Maruti’s more than 95% of volume comes from vehicle priced at less than Rs 10 lakh, Toyota’s 75% of volume comes from vehicle priced at more than Rs. 10 lakhs. The coming together of Toyota with Suzuki, which dominates the Indian market, can be seen as a very thoughtful move when the local passenger vehicle market is expected to triple to 9.4 million units by 2026 from 3.2 million now, if we see the economy growing at the similar pace of 5.8% every year, as per government’s Auto Mission plan of 2016-26. And coming as an advantage to Suzuki, is the growing share of mature car buyers of India who are shifting to the luxury sedan sector at an accelerating rate. Cross badging is unlikely to prove fatal for the two auto majors as there is certain proportion of loyalty that has developed in the Indian consumers in auto sector for Suzuki as well as Toyota. Another important factor that accounts for success in cross badging, is the realization and visible changes arising from the not so famous strategy “Cross badging”. Indian market is rather performance and price centric than brand centric. So, when Baleno and Vitara Brezza comes into market under the brand name of Toyota, customers want to see a real picture of cross badging rather than mere cosmetic therapies and price changes. Same goes for Suzuki too, Corolla, when enters the market, customers will be highly enthusiastic for a better sedan with Maruti’s Indian touch in lowering price and better performance figures, which Maruti is known for, keeping in view the Indian customers’ expectations. So, overall, this cross badging comes with high expectations and real work of hybridization for the consumers, and stands at a greater potential to be a success rather than a failure.

Cross badging or badge engineering is a strategy used globally in the auto sector. This concept was introduced in 2011 when Skoda and VW simultaneously launched Rapid and Vento in the Indian market. Rather than working out as a win-win proposition, cross-badging resulted in cannibalization. Later in 2012, Japanese auto major Nissan & European manufacturer Renault also joined hands & launched Micra & Pulse. Both are essentially the same cars, with some cosmetic differences, made in the same factories, but sold under different names. As rightly put, both attempts so far have been failures. Cross badging did not expand the market; on the contrary, it shrank. Cross badging is being used for decades in the United States and Europe to boost sales, though it has not always been a success. In recent times the only instance of cross badging working is that of the Subaru BRZ and the Toyota Scion FR-S, both launched in the US Automakers also point out that the benefits of cross-badging have been proven in global markets. The biggest benefits of cross-badging are savings in design and engineering costs, and gains in sales with minimal incremental investments. But India as an automotive market is still evolving. Global original equipment manufacturers (OEMS) are appreciating that India is a different market and needs to be treated separately, which has resulted in a lot of iterations of their market strategy. Consumers in India do not have a clear perspective on different brands, their premium positioning, etc. How many of us know the difference in brand value between a Micra and a Pulse? We are not a country where a customer walks into a multi-brand showroom, looks at competing brands and understands the ethos of the different brands. Now it is a big challenge for Maruti & Toyota to sell sedan like Corolla through its existing sales channel NEXA and if at all Toyota manages to sell cross badged products in huge numbers then it will have to work on its reach and presence to provide robust service as more numbers will bring in more issues at the service end. Now, with not so successful stories of cross badging in the Indian market, it will be interesting to see Toyota and Maruti, which dominates the Indian market, gearing up for cross badging. This time the products put on the stake are Brezza, Baleno and Corolla.

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