Can Kia’s two-model magic hold India spellbound for long?

Hyundai’s sibling made a sensational debut but it will have to go beyond Seltos and Sonet to retain its edge

There is something about the Korean culture and products that fascinates India. Be it K-pop and its bands such as BTS, or K-dramas with its romantic entanglements and intrigue, or Korean knickknacks and consumer durables, all things K are flying off the shelves. But, here we are talking of Kiathe once-bankrupt carmaker that has risen like the proverbial Phoenix from its ashes after Hyundai picked up 51% stake in 1998. Today, it remains the single biggest shareholder with a one-third (33.88%) stake. Though they are sister companies, they share distinct brand identities and also compete with each other.

In India, this eighth-largest automaker in the world, clocking $56 billion in revenues, has achieved an extraordinary feat. One that other automakers here have only dreamt about. At the annual auto jamboree in 2018, when Kia announced its plans to enter India, the-then President and CEO of Kia Motors Corporation, Han-Woo Park, sounded prophetic when he remarked: “Even though we have arrived late, we have come fully prepared.” ‘Prepared’ now seems an understatement. In just 17 months of its debut, Kia managed to sell a record 200,000 units in India. In doing so, in CY20, the Korean car maker has emerged the fourth-largest player with an overall market share of 5.8% on the back of a strong 19.1% market share in the sports utility vehicle (SUV) segment.

What makes Kia’s debut sensational is that the performance comes in the midst of a pandemic that has ravaged businesses across the globe. In India, while SUV sales plummeted 20% to 458,000 units, Kia sales zoomed 208% to 140,000 units (See: Smashing debutant). The performance has continued well into CY21, with Kia selling 35,758 units (January-February), clocking a sales growth of 30% YTD.

Outlook Business reached out to the company with queries on their exceptional performance, but they haven't responded yet.

Getting it right
When well-entrenched players such as Honda, Nissan, and Ford have been struggling to get their India act together, Kia read the market right, got the products bang-on and, more importantly, timed its entry well.

The domestic auto industry, which was on a roll since 2009, lost momentum beginning 2017 after the sudden demonetisation announcement in November 2016 and worsened by the hasty introduction of GST in July 2017. In September 2018, the NBFC crisis set in with the IL&FS fiasco. All of this contributed to 300 dealerships going bust and loss of more than 200,000 jobs in the sector, accentuating the pain for auto makers who had to invest towards the sudden transition to BS-V1 norms.

But, as the dominos had begun to fall, in April 2017, Kia announced that it would enter India with an investment of $1.1 billion with a manufacturing site at Andhra Pradesh with a 300,000-unit capacity. The months that followed would have scared away the weak-of-heart but Kia kept on course, and played its India game with a great strategy.

At the Auto Expo 2018, held in February that year, the brand showcased 16 products from its global portfolio. However, in India, it first chose to unleash the Seltos (August 2019) in the Rs.989,000 to Rs.1.7 million range (ex-showroom Mumbai) since it found that compact SUVs were making headway even as the overall auto sales were slackening. The model is pitched against Hyundai Creta, Mahindra XUV500, Renault Captur, Nissan Kicks and MG Hector. That is, Kia chose to skip the entry segment, the biggest volume generator for companies such as Maruti Suzuki, the market leader, and Hyundai, the second biggest player. 

Was it wise to opt out of the volumes game in a tough market?

Suraj Ghosh, associate director, IHS Markit, a global industry analytics and information firm, believes the strategy has hit the nail on its  head. “Kia didn’t play the cost of ownership game of ‘yeh kitna deti hai, kya cost hai.’ Instead, it chose to debut in a segment that was growing and aspirational, and the model that it launched was loaded with features, gizmo, safety and infotainment.”

Tae-Jin Park, executive director and chief sales officer at Kia India, says, “We have disrupted the mid-SUV and compact-SUV segments and created a huge demand with the Seltos and the Sonet.” Seltos, has already surpassed the 100,000-sales mark, garnering almost 40% segment share since its launch, while the Sonet has become the highest selling compact SUV with 20% segment share since its launch in September 2020. The Sonet, priced between Rs.671,000 and Rs.1.29 million (ex-showroom Mumbai), is positioned against the Vitara Brezza, XUV300, and Nexon.

The brand had timed it right.

“With the Creta relaunch delayed, nothing from the Tatas, and XUV 500 already old, the market was ripe for a debutant,” says Vinkesh Gulati, director of United Automobiles, a dealer for Mahindra and Bajaj Auto, and president of the Federation of Automobile Dealers’ Association (FADA). The pricing was also done intelligently. He says, “Their strategy of having options in the Rs. 800,000 to Rs.1.6 million range helped them build a brand identity. The XUV 500 is in the Rs.1.2 million to Rs.1.5 million range, while Creta sells at Rs.1 million to Rs.1.4 million, so Kia had pricing that wooed a person who was open to spending anything between Rs.900,000 and Rs.1.5 million.”

Kia had a tough act to do, to be successful without eating into Hyundai’s sales, especially in the SUV segment. Hyundai Motors India declined to participate in this story. In 2018, the then Hyundai India managing director YK Koo told the media that Kia and Hyundai were different companies. “Management, operations and network, everything will be different. Vendors can be shared for cost reduction, but strategy will be different. Their DNA is different. They have different sales and marketing strategies, they are competition.” In CY20, while Hyundai topped the SUV market with a 25.5% share, Kia came second with 19.1%. As a result, within a year, Hyundai and Kia's combined market share surged from 28.7% to 44.6%. Half of the six SUV models launched by Hyundai and Kia are among the top five best-selling SUVs in the country

Former Hyundai Motors India president BVR Subbu believes the two siblings have managed competitive complementarity in every facet of operations. “Considering that both models share the same platform and powertrain, the Kia introduction has only helped improve the production cost efficiencies and profitability of its stablemate. It has crunched product life-cycles.”

While Kia has not set up its manufacturing unit in Tamil Nadu where Hyundai’s manufacturing plants are located, Kia’s plant is 390 km away in Anantapur district of Andhra Pradesh. “This proximity between the two facilities will benefit both of us, in terms of logistics and economies of scale,” Kia Motors' former president Park had stated. Deepak Jain, CMD, Lumax Industries and president of ACMA, which represents the interest of over 830 auto component manufacturers in the country, points out that homogeneity of sourcing has also been one of Kia’s strengths. “While the plant is different, marketing is different, the backend, which defines the competitiveness of a brand, is completely homogenous. Nearly 80% of its Kia’s vendor base is common to that of Hyundai.” Kia is looking at close to 80% localisation of its components in India initially and also aims to leverage economies of scale.

Giving boost to Kia’s manufacturing foray is the opportunity to also exploit the production-linked incentive (PLI) scheme which offers incentives of Rs.570 billion over five years for the automotive sector by driving exports. Tae-Jin Park was quoted as saying that the PLIS makes India even more important in Kia’s global scheme of things. Of the 300,000-unit capacity in India, Kia is targeting to ship 100,000 units for the export market; globally, it has 15 manufacturing companies in nine countries and recorded sales of 2.61 million units in CY20. The company is already exporting made-in-India Seltos to South American, Middle Eastern and South Asian markets. In doing so, it has emerged as the sixth-largest vehicle exporter in India with exports accounting for 15% of its production even as it aims to hit 20% in CY21.

While it is working on manufacturing efficiencies, Kia is also building stronger distribution channels. It has dealers eating out of its hands.

In 2018, during the expo, Kia called in 100-odd dealers for a dinner in which the management discussed the roadmap for its India entry and the models that were to be launched. More importantly, the company stuck to the timeline and also engaged with its dealers to ensure that they made money too. “Kia was dealer friendly. It didn’t push dealers to make a lavish, Taj Mahal-like showroom with swanky interiors, therefore dealers aren’t forced to sell that many numbers to become viable,” points out Gulati.

Today, Kia has a network of 265 touchpoints, which includes over 100-plus dealer outlets. “Excluding land and building, investment in a reasonably-sized showroom ranges between Rs.20 million and Rs.40 million, and breakeven normally happens in three years. But in the case of Kia, many dealers have broken even in one year. While I don’t have the exact numbers, I think 60-70% of the dealers have broken even,” says Gulati. Kia dealers also make a steady stream of income from a service workshop usually after two years of a new model’s launch (See: Icing on the cake). Not surprising that Kia has come out as the best and most supportive OEM brand in a study conducted by Indian dealers’ association FADA in 2020.

While Seltos and Sonet have brought bumper returns for Kia and its dealers, its priciest offering, the Carnival, did not really take the market by storm.

Music dies down
Though Kia did create a whole new segment with the Carnival, the model did not yield the numbers that were needed. Since its launch in January 2020, Carnival has sold 5,938 units (See: Slow and unsteady).

Its launch was seen as a brand building exercise, to showcase Kia as a company that also produces premium vehicles. Ho-sung Song, President and CEO, Kia Motors Corporation had stated in an interview that the Carnival appeals to “the premium business people” as a grand utility vehicle and had not direct rivals. But Song did concede that it was just poor timing and not enough was done in the way to marketing and communication around the model. Later, the company shelved plans to bring the newer Carnival, launched overseas, to the Indian market.

Gulati believes though superior to Innova, Carnival was way too expensive with its Rs.4 million price tag. “It wasn’t a people mover, it was a comfortable high-priced highway mover for a family of four or six, and never meant to ferry people such as Innova.”

Kia was looking to keep the local content high, to price the Carnival MPV more competitively, but Gulati believes the company will not tweak the pricing since it will hurt the brand positioning. Though Song had mentioned that model’s prices could slide lower with higher localisation, he hedged that with a comment that the extent of localisation would “depend on the kind of economies of scale we have.”

Rajiv Chawla, chairman of JaiRaj Group of Industries and founder of the Integrated Association of Micro, Small and Medium Enterprises of India, however, believes the model has a zing and is actually competing in a higher category. “Many of my friends who are entrepreneurs have bought it and so have three relatives in my family. It cannot be compared to Innova Crysta but should be seen in the league of Ford Endeavour and Fortuner,” he says.

Whatever the appeal Chawla sees in it, Carnival only sold 400 units in February, an over 75% decline from the 1,620 units sold in the corresponding month past year. Maruti Suzuki Ertiga, the leader in the MPV category, sold 9,774 units this February while Toyota Innova Crysta, the second-largest player, sold 6,018 units.

For now, Carnival seems to be the only misstep in Kia’s India journey. However, the Korean maker will have to keep up the tempo after its sensational debut with a product line-up, especially with the competition snapping at its heels with newer models.

In the chase for numbers, Kia is now looking to penetrate deeper, beyond the metros and into cities in the northeast, the northern part of Telangana, Karnataka, and western Rajasthan. But, even as it ventures forth, it will have to counter increased competition in the days to come and it is unlikely to have an easy time like it did in CY20. It’s not without reason. “The profitability of the SUV and MPV segments will draw a lot of competitive attention,” explains Subbu.

Beginning CY21, a host of automakers are rearing to stir up the SUV market. Hyundai will be rolling out its seven-seater version of the Creta SUV. Mahindra is working on a mid-size SUV codenamed Mahindra XUV400, and new generation XUV500 and Mahindra Scorpio. Skoda Auto is looking at launching the Kushaq SUV, while Volkswagen’s Taigun will mark its entry into the mid-size SUV segment. Jeep India is also readying a seven-seater SUV, pitching it against the Fortuner, Endeavour, Gloster and Carnival. But the biggest challenge will come from Maruti. 

“They had given up on the diesel engine which is at the core of the SUV, and it hasn’t really done anything with Ertiga,” points out Mahantesh Sabarad, head-retail research, SBICAP Securities. But that is changing. After having exited the diesel market in April 2020, the Japanese car maker is now re-entering this market in which Hyundai and Kia sell 30-50% of their current models. Maruti is reportedly looking to launch five new SUVs by the end of 2023. The line-up includes a mini-SUV, new-generation Vitara Brezza, a Baleno-based crossover, a mid-size SUV and a seven-seater SUV. A couple of models will be based on Toyota’s Daihatsu New Global Architecture modular platform.

Gulati too says that Maruti is impatient to get back. “A company official has said that yeh sari chut putiya baj jaane do hum wait kar rahe hai jab yeh kam hojayenga phir hum aatishbaazi karenge (let others burst their small crackers, then we will begin the real fireworks),” he says.

Though Kia’s officials have said in the past that they will be launching one model every six months, there has been no movement in that direction beyond an upgraded version of the Seltos. Given the supply chain issues plaguing the auto industry, industry observers feel the company will delay any potential launch.

Ghosh of IHS Markit says that, for Kia to sustain the hype around it, it should have at least few more models in its line-up. “They have to bring in at least three to four more new models,” he says.

Though Kia has a global portfolio similar to Hyundai, it is not looking at launching the same in India. Song was quoted as saying that Kia doesn’t have any plans for hatchbacks and sedans for the India market. “Some of our other global plants, such as the ones in Mexico, will produce small, compact and medium-size hatchbacks and sedans, but India will be used for compact and medium-size SUVs. We don’t want duplication of process. Our priority in India is the future trend of vehicles,” Song has been quoted as saying.

That being the case, it’s unlikely that Kia is considering electric vehicles (EVs). It has, as part of an agreement with the Andhra Pradesh government, showcased three of its global eco cars a Niro Hybrid, Niro Plug-in Hybrid and a Niro EV. However, this could be just optics with no real plan visible to add to their numbers in India.

If Kia indeed wants to live up to its tagline, then it has to demonstrate once again in one of the world’s most competitive markets that it has the “Power to Surprise.”