In mid-March, Maruti Suzuki — India’s largest automobile manufacturer — rolled its 10 millionth car off the assembly line. It was a strange choice — a metallic breeze blue WagonR Vxi. The WagonR is essentially a kei car, a vehicle born out of Japanese government incentives to promote upgradation from two-wheelers after World War II. That positioning in India has been the domain of Tata Motors’ Nano, although not deliberately.
In April, Maruti, a Suzuki Motor Corporation subsidiary, issued a news release saying “the best-selling small car of India, the Alto, has beaten all cars in the world to become the No. 1 best-selling car in the world.” The media gave the story a lot of mileage, only to discover it wasn’t true: The Alto was the top-seller only in the compact segment. But the announcement gave a sense that Maruti sees the world as small.
The Alto is the leader in India. According to the Society of Indian Automobile Manufacturers (SIAM) and company figures, in 2010-2011, Maruti sold 346,840 units, a 47.5% jump over the previous year. WagonR was next with 162,019 units (a 12.5% increase) followed by the Hyundai i10 with 161,860 (8.5%). Maruti has two other entries in the Top five — the Swift and the Dzire — which shows its domination of the Indian market.
A Letdown in Results
Some clouds were evident, however, when the company declared its 2010-2011 results. While total income (net of excise) was up 24.6% at US$8.44 billion, net profit was down 8.4% at US$515 million. Fourth-quarter unit sales grew 27% from the year-earlier period, while profit was up 0.5%. “There is short-term uncertainty in the Indian market, but we are confident for the medium to long term,” says managing director and CEO Shinzo Nakanishi. “Through increased localization and efficiency, we will aim to increase our profit margins from the current levels.”
The decline in profit was expected. Raw material prices are up, adverse currency movements have eroded exports, and expenses have accompanied the launch of new models. The problems are expected to spill into the new financial year, which explains Nakanishi’s caution. But analysts are optimistic. “We believe that profits for Maruti Suzuki are near a trough and will improve,” says a report by Enam Securities. “It is an outperformer in its sector.”
It isn’t the bottom line, however, that worries some analysts. Rather, it’s the company’s identity. Maruti has been clear all along that it is a manufacturer of compact cars. Two years ago, Chairman R.C. Bhargava told Knowledge at Wharton that India was clearly a small-car country. India “is an acutely cost-conscious market,” he said. Small was looking beautiful in other countries, too. “A greater awareness that large cars are a needless luxury is dawning upon the Europeans,” Bhargava added then.
Nakanishi’s 2009-2010 year-end report indicated a slightly different trend. “While our market share in the compact A2 segment marginally declined from 57.9% to 56.1%, we strengthened our leadership further in the big cars, or A3, segment by expanding our market share from 31.2% to 35.9%,” he told analysts in April 2010. This year, the A2 share further declined to 55.8%, while A3 remained flat at 35.9%. Luckily for Maruti, competitors’ plans have been delayed. Sales in India of the Toyota Liva and the Honda Brio — expected this year — will be delayed because component supplies from Japan have been disrupted by the massive earthquake there. Maruti sources most of its supplies locally.
This doesn’t mean the Alto will be knocked off its perch when the rivals get going. Maruti expects to sell 400,000 Altos this year. But Maruti’s attention isn’t only on small cars. Early in March, Maruti entered the luxury sedan segment with the US$38,000 Kizashi. (The Alto costs around US$7,000.)
An ‘Omen’ from Japan
Is the Kizashi (which means “omen” in Japanese) a diversion? More important, can Maruti make a compact car — with a design rooted in “frugal engineering” — and a luxury car at the same time? Do these not require different corporate cultures? Maruti clarifies that the Kizashi is being imported as a completely built unit, so the question of a clash in manufacturing styles is avoided. “In our view, frugal engineering does not mean lack of attention to detail,” says Mayank Pareek, Maruti’s managing executive officer (marketing and sales). “All our products across the full range — from the low-end compact Maruti 800 to the premium sedan SX4 — remain the best value for money in India.”
Pareek agrees that a sort of image change is under way. “Maruti essentially remains the leading compact-car maker in India,” he says. “There are seven compact car models from Maruti Suzuki on offer. However, in keeping with the leadership position, Maruti Suzuki finds it necessary to offer products across segments. Thus the Kizashi has been introduced in India. Kizashi — a world strategic model of Suzuki — is a step toward the transition of Suzuki Motor Corporation from a small-car maker to a complete carmaker.”
Where Suzuki goes, Maruti must follow. The Japanese company has a 54.2% stake in its Indian subsidiary. Says auto analyst Murad Ali Baig: “Maruti is totally under the thumb of Suzuki. They cannot change a button on a worker’s uniform without permission.” A visit to a Maruti factory would show employees engaged in morning calisthenics and a gung-ho salaryman spirit — all very alien to Indian culture.
Gautam Sen, editor of Auto India, points out that Maruti is the “jewel in the Suzuki crown.” It accounts for more than 50% of Suzuki Motor’s turnover and profit. And the future is clearly in India, where GDP growth rates of 9%-plus are expected for the next few years. Neither Baig nor Sen feels that Maruti has lost the thread. “I wouldn’t say that Maruti is losing its identity,” Baig says. “It is deliberately seeking a new identity. It is no longer willing to be seen as a small-car manufacturer. It wants to be a complete car manufacturer.”
The transition won’t be easy. The Maruti image has been established over 28 years. And while a progression to bigger and more expensive vehicles has been accepted, the very top end needs an image of class, not mass. “The world is not prepared to accept a prestige brand from Maruti,” Baig says. He notes that the Grand Vitara — a sport-utility vehicle known in other countries as the Escudo — is more expensive than the Kizashi. But it hardly sells in India.
Sen suspects that the Grand Vitara and the Kizashi are intended more for image than for business. Tata Motors has discovered that the Nano doesn’t move from its showrooms because people feel intimidated to enter them; salesmen concentrate on pricier products with higher margins. At Maruti showrooms — the Kizashi will be available only in a select few — the upmarket vehicle is likely to adorn a corner while salesmen concentrate on more basic wares. “I don’t think they will sell many Kizashis,” Sen says.
But Maruti may need to upgrade alongside India. The super-premium luxury Aston Martin was launched in April, joining BMW and Audi. Maserati will open its first showroom soon. If Maruti doesn’t have an upper-end presence it risks being labeled the automobile market’s eau de cologne. Such comparisons have been made before when Indian companies took on MNCs, most controversially in steel.
Suzuki in Charge
But is Maruti an Indian company? Is it prioritizing local shareholders or Suzuki? The question arises because the company began as a 50:50 joint venture of the government of India and Suzuki. The government called the shots until privatization a few years ago.
Baig doesn’t believe it’s a big issue. But he is clear that headquarters will take precedence no matter what. In exports, for instance, everything is ordained by Suzuki. In 2009-2010, Maruti exported 147,575 units, a growth of 28.5%. A 6% decline followed in 2010-2011. It all depended on a Suzuki deal with Nissan. Suzuki “has a contract manufacturing tie-up with Nissan Motor Corporation,” Pareek says. “India manufactures the Pixo model compact car for Nissan for sales in Europe.” In December 2009, Volkswagen picked up a 20% stake in Suzuki for US$2.5 billion. Now Maruti could emerge as an original equipment manufacturer for the German company too. “The scope of the tie-up with Volkswagen is under discussion between Suzuki and Volkswagen,” Pareek notes.
The move into Kizashi territory is understandable. But is the range of complementary activities, such as selling used cars and running driving schools? Maruti’s first school started in Bangalore in 2005; in 2010-11, the number of schools was nearly doubled from 83 to 164. Growth in sales outlets and service stations and coverage in terms of cities has been slower. “That’s a little more difficult to understand,” Sen says. “But they have the money. They can afford it. It’s something like their CNG [compressed natural gas] vehicles. It helps their green image.” At Maruti, however, driving schools are seen as an important part of corporate social responsibility efforts.
The words of critics don’t worry Maruti much. The market, they realize, is fickle. A few months ago, it was booming. As Nakanishi told India Knowledge at Wharton then: “Nobody thought this kind of growth would happen. We are now revving up for the big growth.” Today, hit by high commodity and oil prices, the industry is more circumspect. According to SIAM, the passenger vehicle segment grew 29.16% in April-March 2011 compared with the same period a year earlier. Passenger cars grew by 29.73%, sport-utility vehicles by 18.87% and multi-purpose vehicles by 42.10%. SIAM believes the growth rates will halve this year.
Planning for the Long Term
But Maruti is looking at broader trends and preparing for the next few years, not the next few months. Some shifts are already having an impact. For instance, the average age of a car buyer has come down by 10 years from 45 to 35. Rural India has become a big market; it now accounts for more than 20% of Maruti’s sales, compared with 3.5% two years ago.
India is also becoming an important market in the global context. At the beginning of the last decade, India accounted for 1.4% of the global auto market; today it accounts for 5%. “India has broken into the top 10 auto-producing countries, standing at seventh in 2010 against 15th in 2000,” says SIAM director general Vishnu Mathur. Adds Kapil Arora, partner in the automotive practice at Ernst & Young India: “With strong growth expected till 2020, India is expected to become one of the top five vehicle-producing countries in the world.”
What is Maruti doing at home to cater to changing trends? According to the company and industry observers, many things in many areas.
The young audience: With a focus on the youth buyer category, which contributes to about 60% of sales, the company is shortening product life cycles. It is also improving the shopping experience. Pareek argues that if US$20 shirts can be bought from the ambience of a good mall, then surely buying a US$10,000 car would need an equally good environment. Apart from increasing the dealer network from the current 840 to 953, Maruti has embarked on a project to redesign customer formats and focus on dealer business viability. Dealers will offer vehicle servicing, insurance, financing, spare parts and customization with genuine accessories.
Company research has found that customers are Internet-savvy, with about 70% doing some homework online before buying. Therefore, Maruti is honing its social media profile. Pareek gets a daily report on all that has been said about the company on the web. It is responding faster.
Rural markets: Maruti became a true believer two years back during the recession. While the big cities were coupled with the global economy, a large segment of the Indian economy and population weren’t. In recent months, the Eeco model has done well in rural areas.
Pareek recalls the days when he did field visits near Dhanbad in Bihar, where Maruti sales were growing at a healthy 41% while sales growth in many urban markets was declining. That got the company thinking. Its regular retail outlets had high overhead. So it started a program for the “sons of soil” by recruiting rural resident sales officers. Today, it has 5,239 of them throughout the country. Says Pinaki Dasgupta, a professor at the Indian Institute of Foreign Trade who specializes in auto industry marketing: “Maruti’s strengths are the low maintenance of its products and strong after-sales. It is also very strong in B- and C-class towns.”
Reformatting production: Maruti is adding a third plant to those it has in Gurgaon and Manesar to take annual production capacity in 2013-2014 to 1.75 million. It is also trying to squeeze more from existing facilities. “Through these steps we hope that we will be able to deliver the new needs of the market,” says M.M. Singh, managing executive officer (production). The company is also working with local industrial training institutes; it has 8,600 employees today and will need 5,400 more over the next five years. “One area that I focus on is to walk hand in hand with the workers so that their needs are met, while stretching them to the maximum extent possible,” Singh says.
Other initiatives are in the areas of logistics and vendor management. Sudam Maitra, managing executive officer (supply chain) says Maruti is even arranging bank financing for its vendors. The vendor base was trimmed from 385 to 225 five years ago. The numbers are being stepped up again. Some 15 global suppliers — who are also suppliers to Suzuki — have been added to the network.
Focus on R&D: Maruti is working closely with Suzuki on research and development. The Indian market will no longer accept products designed for foreign conditions. As it grows more important, Maruti must have indigenous research capacity. “This is one more step in bringing Maruti closer to the Suzuki platforms worldwide,” says I.V. Rao, managing executive officer (engineering).
Nakanishi sums it up. “Our vision is clear: to remain the leader in the industry, maintain market share and contribute to the Indian economy. There are a number of challenges. But we hope that, through our multiple plans, we will be able to achieve our vision.”
“We believe the Indian market will double in the next five years from two million cars to four million-plus,” Pareek says. “We hope half of that will continue to come from Maruti. After 28 years of growth, we reached sales of one million cars last year. In the next five years, we are faced with the challenge and the opportunity to double it. What that means is that we have to do everything faster in a shorter period of time.”