Maruti has been at the top of the list in the Indian automobile market since the 1980s, but with competition increasing in the small car segment, there are storm clouds on the horizon that the company can’t afford to ignore. What should the Indo-Japanese giant do next? by Pawan Chabra
Little is it known that Sunil Bharti Mittal, the founder of India’s largest telecom operator, Bharti Airtel (he is today the Exec. Chairman of the Board), had once almost gone out of business. In the 1980s, he was making waves in the genset market, and had become the largest importer of Suzuki generators in the country. Then fortune played the harlot. In order to protect indigenous players, the government banned imports of generators in 1983. Multi-millionaire Sunil’s track-burning vehicle had suddenly crashed into the regime wall. With great sympathy, Suzuki Japan recommended that Sunil’s license for a Maruti Suzuki (then Maruti Udyog Ltd.) dealership in Ludhiana be approved. It wasn’t. Sunil survived without Maruti Suzuki’s support and Maruti grew without Sunil’s service. Today, both are renowned case studies.
The story is not about Sunil Mittal, but about the fact that the attractiveness of owning a Maruti dealership has not waned since those times; purely because of the fact that Maruti has remained the number one car brand in India for years, even after the government sold its stake in Maruti Udyog Ltd. (which became Maruti Suzuki Ltd.). Maruti is today the largest passenger car maker in the country, with a sales network of 802 centres across 555 towns and cities, providing service support to customers at 2,740 workshops in over 1,335 locations (as on March 31, 2010). The company is in good hands and has managed to keep its head above the competitive water-level. Even a few months back, when B&E caught up with Shinzo Nakanishi, MD, Maruti Suzuki India, he meditatively explained how critical the 50% share in the Indian passenger auto market was for Maruti, and how the company was on its toes to retain its prepotency. But June 2010 saw a different dish being laid out on the breakfast table of this king of the auto ring, proving why market fragmentation can humble the boldest of adventurous warlords. For the first time in over 25 years, Maruti’s market share dipped below the 50% mark. It stood at 44%. Reason: Maruti’s strength in the country has always been the small-car category – the A2 segment. But during the past six months, there have been quite a number of attacks launched by other car makers to take advantage of the price-sensitive sentiments floating around in the Indian market. While GM launched the Chevrolet Beat, Ford introduced the Figo, Volkswagen rolled out the Polo, Hyundai brought to market the more affordable version of its i20, and Nissan puts its Micra foot forward. This burst of aggression by industry peers was sure to disturb Maruti’s smooth drive. Many experts outside the company brush aside this fascination with a 50% market share dominance. But inside the company, the figure matters like nobody’s business. Says Shashank Srivastava, CGM – Marketing, Maruti Suzuki India, “The 50% market share is psychologically very important. A 40% or even a 45% doesn’t give the boost that a 54% market share does. However, a situation where Maruti has retained a 50%-plus market share for many years is known to all. So we are all working towards getting it up back there.” Optimism is high, but one cannot ignore the wind that threatens Maruti’s house of cards.
There are a host of internal and external challenges that the auto major needs to address. The biggest internal challenge for the company in the face of rising prices of raw materials is the pressure on operating margins. And the disappointing results announced for Q1, 2010-11 is proof. Despite a 27.1% y-o-y rise in sales (which touched `80.90 billion), the automaker’s net profits fell by 20.3% y-o-y to `4.65 billion. The chief accused – higher commodity prices. At a time when the global economy is bouncing back and other car manufacturers are making merry, the results drove the investors to despair. Consequently, the Maruti stock slid by 12.31% in the very next trading session to touch a 52-week low of `1,190 on BSE. This also forced many equity analysts to downgrade the Maruti stock.
Outflow of funds in the form of royalty payments to parent Suzuki Motor Corporation, Japan, which amounted to `1.89 billion for the quarter. is also a huge liability for the Indian subsidiary. And this burden will not get lighter in the near term as Srivastava says, “Maruti certainly relies a lot on Suzuki when it comes to technology or branding. As the company grows further, the dependence is only going to get higher. Hence, there will a burden of royalty even in the times to come, the amount of which cannot be confirmed at present.”
Capacity constraints is also an issue. Today, it has the annual capacity to manufacture one million units, with a plan to increase it by another 250,000 units by 2012. But that is quite a few quarters away on the calendar. Till then, the company will have to manage with the existing capacity. Considering that the company crossed the prestigious milestone of rolling out more than one million cars in the last fiscal, it is near a stage there will be no scope for further expansion in capacity, unless it adds new assembly lines.
There are external roadblocks too. While the weakening of the euro has created a buzz in the forex market, for Maruti’s exports, it has been a killjoy. Despite a rise in y-o-y exports during Q1, June 2010 by 37.9% to touch 40,437 units, the weakening of the euro (which as on June 30, 2010, stood devalued by 29% as compared to a year back), put a damper on its chances of a praiseworthy bottomline.
The story is not about Sunil Mittal, but about the fact that the attractiveness of owning a Maruti dealership has not waned since those times; purely because of the fact that Maruti has remained the number one car brand in India for years, even after the government sold its stake in Maruti Udyog Ltd. (which became Maruti Suzuki Ltd.). Maruti is today the largest passenger car maker in the country, with a sales network of 802 centres across 555 towns and cities, providing service support to customers at 2,740 workshops in over 1,335 locations (as on March 31, 2010). The company is in good hands and has managed to keep its head above the competitive water-level. Even a few months back, when B&E caught up with Shinzo Nakanishi, MD, Maruti Suzuki India, he meditatively explained how critical the 50% share in the Indian passenger auto market was for Maruti, and how the company was on its toes to retain its prepotency. But June 2010 saw a different dish being laid out on the breakfast table of this king of the auto ring, proving why market fragmentation can humble the boldest of adventurous warlords. For the first time in over 25 years, Maruti’s market share dipped below the 50% mark. It stood at 44%. Reason: Maruti’s strength in the country has always been the small-car category – the A2 segment. But during the past six months, there have been quite a number of attacks launched by other car makers to take advantage of the price-sensitive sentiments floating around in the Indian market. While GM launched the Chevrolet Beat, Ford introduced the Figo, Volkswagen rolled out the Polo, Hyundai brought to market the more affordable version of its i20, and Nissan puts its Micra foot forward. This burst of aggression by industry peers was sure to disturb Maruti’s smooth drive. Many experts outside the company brush aside this fascination with a 50% market share dominance. But inside the company, the figure matters like nobody’s business. Says Shashank Srivastava, CGM – Marketing, Maruti Suzuki India, “The 50% market share is psychologically very important. A 40% or even a 45% doesn’t give the boost that a 54% market share does. However, a situation where Maruti has retained a 50%-plus market share for many years is known to all. So we are all working towards getting it up back there.” Optimism is high, but one cannot ignore the wind that threatens Maruti’s house of cards.
There are a host of internal and external challenges that the auto major needs to address. The biggest internal challenge for the company in the face of rising prices of raw materials is the pressure on operating margins. And the disappointing results announced for Q1, 2010-11 is proof. Despite a 27.1% y-o-y rise in sales (which touched `80.90 billion), the automaker’s net profits fell by 20.3% y-o-y to `4.65 billion. The chief accused – higher commodity prices. At a time when the global economy is bouncing back and other car manufacturers are making merry, the results drove the investors to despair. Consequently, the Maruti stock slid by 12.31% in the very next trading session to touch a 52-week low of `1,190 on BSE. This also forced many equity analysts to downgrade the Maruti stock.
Outflow of funds in the form of royalty payments to parent Suzuki Motor Corporation, Japan, which amounted to `1.89 billion for the quarter. is also a huge liability for the Indian subsidiary. And this burden will not get lighter in the near term as Srivastava says, “Maruti certainly relies a lot on Suzuki when it comes to technology or branding. As the company grows further, the dependence is only going to get higher. Hence, there will a burden of royalty even in the times to come, the amount of which cannot be confirmed at present.”
Capacity constraints is also an issue. Today, it has the annual capacity to manufacture one million units, with a plan to increase it by another 250,000 units by 2012. But that is quite a few quarters away on the calendar. Till then, the company will have to manage with the existing capacity. Considering that the company crossed the prestigious milestone of rolling out more than one million cars in the last fiscal, it is near a stage there will be no scope for further expansion in capacity, unless it adds new assembly lines.
There are external roadblocks too. While the weakening of the euro has created a buzz in the forex market, for Maruti’s exports, it has been a killjoy. Despite a rise in y-o-y exports during Q1, June 2010 by 37.9% to touch 40,437 units, the weakening of the euro (which as on June 30, 2010, stood devalued by 29% as compared to a year back), put a damper on its chances of a praiseworthy bottomline.
Source : IIPM Editorial, 2012.
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