MARUTI SUZUKI INDIA LIMITED: SUSTAINING PROFITABILITY

After India opened up its economy in the early 1990s, the Indian automobile industry witnessed intense

competition. Maruti Suzuki India Limited (Maruti) had been a dominant player in the Indian automobile

industry since it began operations in 1981. Maruti was so popular that in India people had long used the

word "Maruti" as a synonym for "car." Maruti had experienced a dream run for three decades, achieving

the largest market share in the passenger car industry in India. But for the first time after 28 years of

consistent growth, Maruti experienced a fall in sales volume in 2012 (see Exhibit1). Even in 2014, after

two years, it had not yet recovered. R.C. Bhargava, the chairman of Maruti, was concerned with how to

turn things around. He knew that Maruti had little control over pricing, given the fierce competition in the

sector. Despite the price of cars remaining stagnant over the last decade, Maruti and its competitors were

experiencing declining sales.2 Prices of fuel had adversely affected demand. Input costs for manufacturing

were increasing year after year. With such a dismal outlook for the automobile industry and with poor

price maneuverability, how long could Maruti sustain profits? The chairman knew he had to decrease the

costs of manufacturing and he was considering building a state-of-the-art plant in Gujarat.3 Would this

reduce costs enough to help Maruti become more profitable?

INDIAN PASSENGER CAR MARKET

The Indian passenger car market was the fastest growing in Asia, driven by India's large population of

1.28 billion and a low penetration of fewer than 12 cars per 1,000 people (see Exhibit 2). Prior to the

1990s, the Indian automobile sector was in poor shape compared to the automobile sectors in other

countries, largely because of demand-side constraints such as the low purchasing power of the average

Indian consumer. Before India's economic liberalization, the majority of India's population could not

afford to buy a car, and car penetration was less than three per 1,000 people. After liberalization, with

rising income levels of middle-class families, the demand for passenger cars went up steadily over the

next 20 years. However, car penetration was still very low compared to in Brazil, Russia, China and

developed countries (see Exhibit 2). From a supply-side perspective, the automobile industry had greatly

benefited from liberalization, as international automobile manufacturers took advantage of India's

affordable yet highly trained engineers, establishing manufacturing operations throughout the country.

Due to India's huge pool of talent and rising income levels, India's passenger car market had grown in

terms of production and sales and was expected to grow further in coming years.4

Passenger vehicles in India could be broadly divided into three segments passenger cars, utility

vehicles and multi-purpose vehicles with passenger cars contributing around 80 per cent of total sales

volumes. As of 2014, this segment was expected to grow at a compound annual rate of 15 per cent for the

next 15 to 20 years. Apart from domestic growth, automobile exports from India were predicted to grow

at 12 per cent. It may be noted here that, in a low per capita income country like India, two-wheelers

(motorcycles and scooters) constituted a major mode of transportation for the lower middle class, who

would eventually graduate to the small-car segment. In most cities and towns, due to the poor quality of

roads and excessive traffic congestion, motorcycles were the first choice for daily commutes. However, a

car was considered a prized possession for a middle-class Indian family, even though it was not used on a

daily basis. With rising income levels, this held great promise for car manufacturers, as fewer than 12

people per 1,000 owned a car in India, reflecting huge market potential.

MAJOR COMPETITORS OF MARUTI

There were many players in the passenger car segment in India. Some of these players were domestic,

such as Maruti, Tata and Mahindra. Others such as Hyundai, Honda and Toyota were from other Asian

countries. The two companies with the largest market share in India were Maruti, at 49 per cent, and

Hyundai, at 21 per cent (see Exhibit 3 for trends in the market share of Maruti and its competitors).

Although there were many players in the luxury segment of the market such as Mercedes-Benz, BMW

and Audi, there were few buyers who had the income to support such purchases. There were other

competitors for Maruti such as Ford, GM, Nissan, Renault, koda and Volkswagen that competed in

mini- and mid-segment cars. These companies had taken considerable market share from Maruti in recent

years.

MARUTI: THE COMPANY

Established in 1981, Maruti enjoyed the largest market share in the Indian passenger car segment. In

2014, Maruti, with two production facilities at Gurgaon and Manesar (both in the National Capital Region

of Delhi), had a production capacity of more than 1.4 million units per year.5 The production facilities had

more than 12, 000 employees6 and produced more than 16 automobile models,7 each with multiple

variants.8 Examples of Maruti's product offerings included small cars like the Maruti Alto, Wagon R and

A-Star. Small cars made up 41.2 per cent9 of Maruti's total sales units. In the compact car segment,

Maruti offered cars such as the Swift, Estilo, Ritz and Celerio. This segment made up 24 per cent of

Maruti's total sales. In the mid-size segment, the company offered the SX4 and Dzire, which contributed

19.1 per cent of sales. The sport utility vehicle segment made up just 5.8 per cent of sales and contributed

less to Maruti's profits than small and mid-segment cars. Finally, in the vans segment, the company was

known for the Omni and Eeco, which contributed 9.6 per cent to its overall sales. The remaining sales

came from other models of Maruti cars. From the Maruti 800 in 1983 up to the launch of the Celerio in

February 2014, Maruti had rolled out model after model and exceeded customer expectations in terms of

quality and value for money.

Maruti focused on three key strategies to generate sales. First and foremost, its pricing strategy was very

competitive. For example, in the small car segment, the Maruti Alto was priced 10-20 per cent lower than

competing models such as the Hyundai Santro, Tata Indica and Chevrolet Spark (see Exhibit4). Second,

Maruti spent a great deal on research and development to create more fuel-efficient engines. This

decreased the cost of owning a car for a consumer; Indian customers were very sensitive10 regarding the

fuel efficiency of vehicles, since fuel costs were high relative to average income levels. Third, Maruti

offered reliable after-sales service, backed by its extensive service networks.11 There were more than 15

competitors in the market and it was never easy for a company to retain more than 40 per cent of the

market share. But Maruti had done it consistently over three decades. Maruti cars enjoyed a unique

position in the Indian consumer's mind. Maruti scored higher than its competitors in terms of price, fuel

efficiency and reliability, and its sales were boosted by the promise of efficient after-sales service. The

uncertainty of getting stuck on Indian roads due to machinery failure was effectively exploited by Maruti.

As Maruti had a network of 3,053 service stations in 1,449 Indian cities, its promise of reliability

wasunmatched by any of its competitors. In terms of fuel efficiency, Maruti cars provided an average of

three kilometres more per litre of petrol/diesel compared to its competitors. The resale value of Maruti cars

was also far higher than that of any of its competitors. Maruti offered its True Value used-car business,

with more than 454 True Value outlets in 255 Indian cities, reassuring its customers that they would attain

the highest resale value from any Maruti brand. For an Indian middle-class family planning to buy a new

car, Maruti was the first and most obvious choice.

COMPETING WITH MARUTI CARS

Maruti had implemented very few price increases in its passenger car segments over the last 10-12 years.

Nonetheless, competitors had emerged in each of these segments. Out of Maruti's 16 car models, each

model had anywhere from one to seven close competitors from Hyundai, Tata Motors, Volkswagen,

Toyota, Honda or Chevrolet (see Exhibit 5). However, despite intense competition, Maruti had retained

its leadership position in most segments. In fact, it was so pervasive a brand that some of its models

competed among themselves. For example, its Alto model competed with the Maruti 800, and the Wagon

R competed with the Ritz. Maruti had maintained its "people's car" image since its inception by

strategically keeping prices low and positioning entry-level cars for first-time buyers. Mini-segment cars,

which constituted more than 80 per cent of Maruti's total sales, carried price tags that were at least 20-30

per cent lower than those of their nearest competitors.

The bestselling mini-segment models of Maruti were the Alto and the 800. The prices of these cars had

remained stagnant for a long time. In fact, in many instances, the prices of these cars had been reduced.

For example, the launch price of the Alto LX model was INR299,00012 in 2002, and the price was

subsequently reduced year after year until 2009, when the price was INR257,000, a reduction of

approximately 14 per cent after seven years. The price of the 800 model was INR281,000 in 2002, which

was reduced to INR221,000 in 2010, a drop of 21 per cent. The price of the Wagon R was reduced from

INR359,000 to INR338,000 during the same period. However, Maruti was able to increase the price

marginally for the compact and mid-size segment cars over this period, which boosted the revenue of the

company.

The passenger car market in India had witnessed intense price competition. It was so intense that not a

single price change by any of the players had gone without a reaction from rival firms. If one looked

carefully at all the models of the different brands, the intensity of the price war was evident. Specifically,

in the case of the Maruti Alto, even Maruti's close competitors Hyundai and Tata could not raise

the prices of their cars over the years; they had to reduce the prices of their models to retain market share.

For example, in April 2004, when the price of the Maruti Alto fell by around 7 to 8 per cent, the Hyundai

Santro price correspondingly fell by 4.6 per cent. Similarly, in June 2009, when the Maruti Alto price fell

by 8.8 per cent, the Hyundai Santro price fell by 7.7 per cent, while the Tata Indica price fell by 9.8 per

cent. Though it was never easy for car manufacturers to reduce prices, they were left with no choice but to

sell their products at reduced or stagnant prices. Even for the mid-size and compact segments, Maruti

could not increase price when it wished to due to price competition. Though the company had been able

to retain its leadership position, its market share had fallen over the years due to the intense price

competition.

In 2001, Maruti had total revenue of INR70.21 billion, which included other income with net sales. There

was a steady rise in Maruti's revenue even though sales volumes fell from 2011 to 2014. In 2014, Maruti

2007 150.5 107.3 2.26 10.95 15.62

2008 190.6 137.9 3.46 13.39 17.30

2009 211.7 157.6 4.63 18.08 12.18

2010 301.2 223.6 5.38 24.31 24.97

2011 375.2 285.5 7.03 35.22 22.88

2012 364.1 282.3 8.43 32.67 16.35

2013 444.1 305.7 10.69 64.99 23.92

2014 445.5 313.14 13.68 59.22 27.83

Source: Capitaline Databases, www.capitaline.com, accessed September 12, 2014; and various annual reports from Maruti,

Maruti Suzuki India Limited, "Our Financials," www.marutisuzuki.com/financial.aspx, accessed September 12, 2014.

EXHIBIT 7: TRENDS IN COMMODITY PRICES (MAJOR RAW MATERIALS), 2001-2014

Year Aluminum

US$/Tonne

Copper

US$/Tonne

Lead

US$/Tonne

Rubber

US$/Tonne

Palladium

US$/Ounce

Brent

Crude

Prices

$/Barrel

Iron,

Steel &

Ferro

Alloys

(Index)

2001 1,615.65 1,787.05 477.89 693.70 1,041.55 25.64 137

2002 1,368.59 1,503.60 512.84 647.90 409 19.48 137

2003 1,378.28 1,647.35 444.78 1,011 255.32 31.29 150

2004 1,606.49 2,423.11 758.82 1,371 216.58 31.18 201

2005 1,833.94 3,169.18 953.61 1,329.40 186.03 44.28 244

2006 2,377.45 4,733.67 1,256.62 1,932.40 274.32 63.57 237

2007 2,808.34 5,668.69 1,665.11 2,110 337.05 54.30 271

2008 2,445.08 7,060.10 2,608.47 2,705 374.20 91.45 337

2009 1,412.79 3,220.20 1,134.64 1,607 188.63 44.86 307

2010 2,234.84 7,385.67 2,370.22 3,202.40 434.10 76.37 310

2011 2,439.13 9,554.75 2,597.44 5,591.90 793.10 96.29 349

2012 2,143.82 8,042.97 2,093.74 3,856.90 659.14 110.99 386

2013 2,037.70 8,048.76 2,339.82 3,271 712.59 112.93 405

2014 1,726.20 7,299.46 2,150.20 2,365.90 734.14 107.57 412*

1. Outline the important determinants of demand for automobiles. How are cross and income elasticity of demand

relevant to Maruti's managerial decisions? (10 Marks)

2. What are economies of scale? Where do the economies of scale for Maruti come from? (10 Marks)

3. What kind of market structure prevalent in the Indian Automobile industry? What are the Maruti's

competitive advantages? How can Maruti sustain its profitability in the future? (10 Marks)

4. Explain the challenges and opportunities for car manufacturers in Indian Market? (10 Marks)