Speed Breakers Galore - Maruti: Empire Under Siege

Jagdish Khattar was a man in trouble. Owner of an empire under siege, Khattar, MD, Maruti

Udyog Ltd. (MUL) was facing what was the biggest setback ever for the company. With all

strategies backfiring, Khattar seemed to be fighting a losing battle. Problems were a plenty - the

Maruti 800 segment was facing demand-erosion, Zen and its arch-rival Santro were very close in

terms of volumes, the Esteem was losing ground, Baleno, Wagon R and Alto were yet to prove

themselves, while the Gypsy1 was snugly ensconced in its niche.

Despite the fact that MUL had the biggest range of products, the cheapest cars in the market and

a service network and cost structures that were better than anyone else, it had steadily lost market

share - down from 82.62% in 1998 to 52% in 2000. With the disinvestment impending, Khattar

was facing flak from the Government as well. With market share declining, MUL's valuation had

also come down drastically. While it was valued at Rs 8,000 crore in 1996, by December 2000,

the figure had touched an abysmal Rs 4,000 crore.

The Building Blocks

MUL was the largest car manufacturer in India with a market share of over 55%. It was a joint

sector corporation set up by the Government of India and Suzuki Motor Corporation, Japan.

MUL was incorporated in 1981 to take over the assets of the erstwhile Maruti Ltd. set up in June

1971 and wound up by a High Court order in 1978. The assets of Maruti Ltd. were then acquired

by the Government under the Maruti Ltd. (Acquisition And Transfer of Undertakings Act, 1980).

In 1982, the government signed a joint venture agreement with Suzuki Motor Corporation of

Japan.

Suzuki's stake increased from 26% to 40% in 1987, and to 50.25% in 1992. The company was a

significant exporter with exports to over 50 countries. The company manufactured passenger

cars at its factory in Gurgaon, Haryana with an installed capacity of 350,000 vehicles. The first

product, Maruti 800 was launched in 1984, followed by the all-terrain vehicle Gypsy in 1985.

Over the years, MUL expanded its portfolio with the launch of the Maruti 1000 (1990); the Zen

and the Esteem (1993); Zen Diesel (1998); Baleno, Wagon R and the Alto (2000).

The Building Blocks Contd...

MUL was known for its 'value-for-money pricing' strategy, which had been made possible due to

the high levels of indigenization of its vehicles. While the Maruti 800, Zen, Esteem and Omni

were indigenized to the extent of over 90%, the Gypsy was indigenised to the extent of 82% and

the Alto to the extent of 76%. The company had a network of about 375 vendors and had several

joint ventures with some of them to source its raw material requirements.

Its sales (comprising 112 dealers and sales outlets in 86 locations) and service (comprising 1,010

service workshops covering 412 locations) network was one of the largest in the country.

The Stumbling Blocks

Till October 1998, MUL enjoyed a market share of 83.6%. Reacting to the increasing number of

players, Khattar commented, "Obviously, our market share will decline with the entry of new

manufacturers and models in percentage terms, but not in actual volumes." With cars ranging

from Rs 2.09 lakh to Rs 6.74 lakh, problems associated with an ever-expanding product portfolio

constantly plagued MUL.

Besides the declining market share, cannibalization was another issue the company could ill-

afford to ignore. Forced to take stock of what went wrong, MUL realized that it was dependent

to a large extent on a single product - the Maruti 800.

The 800, along with the Omni (built on the same platform) accounted for 75% of unit sales in the

car market in 1998, it had always been the 'breadwinner' for MUL. One of the biggest success

sagas in Indian automobile history, the 800 started losing its sheen in the 1990s as newer players

emerged in the market. The entry-level segment ceased to be the center of action as easy car

finance availability and the lure of new cars made the Rs 3 lakh-4 lakh segment the most

attractive one.

The fact that MUL made only minor changes in the models over the years led to the perception

that MUL was selling old models. To tackle these problems, MUL adopted a two-pronged

strategy. One, to introduce new models; two, it decided to increase the number of variants

rapidly, offering a new model with every increase of Rs 25,000. MUL also revamped its engines

and took the 800 to semi-urban and rural areas, to compensate for the declining urban sales.

The company was aiming to move entry-level prices up without losing out on volumes by

launching cars in the segment just above the 800. As part of this, Baleno, Wagon-R and Alto3

were launched in quick succession. However, despite favorable reviews, these cars did not go on

to become the saviors MUL was hoping for.

The engine-revamp exercise for the 800 had pushed its price close to the base-model of rival

Daewoo's Matiz, eroding the price advantage on which the model survived. As a final resort,

MUL decided to play what it thought was its trump card - price reduction. The move was also

justified on the grounds that the company was following the Product Pyramid profit

MUL reduced the prices of Maruti 800 and Zen by about Rs 24,000 and Rs 51,000 respectively

in December 1998. This resulted in a drop of Rs 300 crore in net profit for the year 1998-99.

Khattar justified the price-cuts, saying that MUL wanted to make up for the increase in the 800's

price due to higher sales tax figures for the period. The move was described as an attempt to

'redefine the price-value equation.'

MUL sources claimed that they expected lower prices to bring an incremental growth of 25%

over the next 12 months. However, despite the price cuts, by March 1999, the company's market

share decreased to 54.57%. In early 2000, MUL announced that it would pass on the cost of

installing new Euro-II compliant engines with Multi-Point Fuel Injection (MPFI) to its

customers.

There was a rush in the market for the 800, as many first-time consumers who did not want to

bear the hike, hastened their purchase. MUL had to increase the price of the 800 from Rs

1,84,000 to Rs 2,20,000.

Around the same time, MUL decided to meet the competition head-on by having a model or

variant with every increase of Rs 25,000. The idea was to give the customer the widest choice

available. By mid-2000, the company offered 43 models in a market, which had only 127

variants. In June 2000, sales of the 800 stood at 5296 cars compared to the 11,000 plus cars it

had been selling per month for the previous few years.

MUL had no option but to again slash prices of various models by Rs 25,000 to Rs 30,000 to

bring back the sales to normal levels. Other changes initiated by the company included a

transformation in its customer-interface and a revamped branding strategy with the new cars

(Wagon-R and Baleno) coming with the Suzuki prefix. The price cuts however, only added to

the declining bottomline problem. MUL reported a loss of Rs 6792.11 on every car sold between

April and October 2000.

MUL sources however attributed this to the fact that MUL had not passed on the cost of

upgradation to meet the Euro I and II emission norms to its customers. Towards the end of 2000,

MUL again effected a price increase of between 0.3 to 2.5% on its various models due to

increase in the cost of production, raw material and other inputs. The company however, decided

to pass on only a part of the increase in cost to the customer.

The Industry Strikes Back

The Indian car market of the early 21st century was a burgeoning one with over 127 models on

the roads, and many more in the pipeline. Increased competition had radically transformed the

market, manifested clearly in carmakers' pricing strategy overhaul. Manufacturers were breaking

the conventional rules of auto pricing by moving from cost-based to value-based pricing and the

market soon became a buyer's market.

When the new players entered the market, there were no doubts that the main artillery for the

companies in the car-wars would be the pricing strategies. It was not just a case of competition

forcing a downward revision, the players were even ready to forego profits in the short run.

Brand-building and technology/feature driven campaigns were to be add-ons to the above plan.

Industry observers were quick to point out that MUL would have to get entangled in the price

eduction game.

The Industry Strikes Back Contd...

A Business India report pointed, "No one is better equipped to fight a price war than Maruti. Its

phenomenal profitability, cash reserves, and efficiency in manufacturing will allow it to slash

prices on all its models without feeling the pinch as much as the others." However, Hyundai was

the first company to introduce what came to be known as, pricing based on customer's value

perceptions. It introduced the base model of Santro at Rs 2.89 lakh, while two other versions

were priced at Rs 3.49 and Rs 3.69 lakh. The basic version was targeted at buyers of the 800, and

the other at the Zen.

Thereafter, launches in the Rs 2 lakh-Rs 6 lakh segment by Ford and Hyundai showed highly

innovative pricing strategies being adopted. Soon after, Ind Auto dropped the price of the Fiat

Uno Diesel by Rs 64,867 and Premier Automobiles Ltd. (PAL) lowered the prices of the 4

versions of the Premier Padmini by Rs 5,000 - Rs 53,000.

MUL had adopted a skimming strategy for the Esteem. Launched in 1993, it was positioned as a

luxury car. This continued till the arrival of Daewoo's Cielo in 1996, which started eating into

Esteem's share. In 1999, the segment saw the arrival of Fiat Siena, Opel Corsa, Ford Ikon and the

Hyundai Accent.

MUL resorted to price slashing and brought the prices down. While the top-end version's price

was reduced to Rs 5.25 lakh from Rs 5.91 lakh, the base version was brought down to Rs 4.42

lakh from Rs 4.67 lakh. However, this was possible only because it enjoyed substantial margins

over costs, being the first-mover in the market.

MUL also followed the same modus operandi for Zen, albeit in a different manner. The company

increased the number of Zen variants to 10, with prices ranging from Rs 3.00 lakh to Rs 4.30

lakh. The price stood reduced for the Rs 3.00 lakh variant in terms of stripping down the model's

features.

The competition responded with similar moves. Daewoo offered price-variants for Matiz, Ind

Auto offered 7 variants of Fiat Uno, ranging from Rs 2.77 lakh to Rs 4.17 lakh; Hyundai's Santro

offered 6 variants between Rs 2.99 lakh and Rs 3.74 lakh; Telco's Indica came in the range of Rs

2.56 lakh to Rs 3.88 lakh with 4 models.

N.K.Goila, VP, Honda- Siel Cars', aptly summed up the situation, "It is important to be present

with grade-variation and a range to cover the range of potential customers being targeted." The

price-points in the car market were replaced by price-bands. The width of a price-band was a

function of the size of the segment being targeted besides the intensity of competition. The

thumb rule being 'the higher the intensity, the wider the price-band.'

Ford's research, before the launch of the Ikon, a car made for the Indian market, revealed that

over the previous two-three years, the 800 segment had graduated to the next level of the Zen,

Santro, Matiz, Uno and Indica. Ford's research on the existing market segments and the

consumer response to new cars revealed that beyond the Zen segment, the choice for the

consumer was limited.

The Industry Strikes Back Contd...

Models like the Esteem and Cielo had had a long innings outside the country and were not

exactly contemporary. The other options were the Escort, Lancer and Honda, which were priced

above Rs 7 lakh, between them and the Rs 4.5-5-lakh range of the Esteem and Cielo, there was a

vacuum. The gap was identified by General Motors' Corsa and Fiat's Siena as well. All three

competitors plugged the gap by offering several versions at various price points. Ford first

launched Ikon 1.6 but later came up with a lower engine capacity Ikon 1.3

CLXI at a lesser price. GM and Fiat also followed the same approach.

Such strategies worked best for companies with offerings in several segments of the market.

Higher volumes from the combined sales of products across segments enabled them to drive

harder bargains with their suppliers; unit marketing and distribution costs decreased; and the

higher margins on products positioned near the top compensated for the pared margins on the

basic product.

The players who chose to stay out of the race to cut prices had to convince their customers that

the higher prices they charged justified by the greater value they offered. A product-and-

promotional mix has to be specifically designed to convey the above message. Most

manufacturers of mid-size cars, including General Motors, Ford, Honda-Siel, adopted this

strategy rather than cut costs to increase sales.They argued with the 'snob-value' Arguably,

buyers in this segment were not that susceptible to be swayed by price-cuts - the 'snob-value' of a

costlier car playing a major role in their decisions, buyers in this segment would not be easily

swayed by price cuts. They cited the Cielo price reduction fiasco as an example.

When sales of Daewoo's Cielo went down from a peak of 2,260 cars in September 1996 to 314 in

December 1997, the company slashed the price of its base model by Rs 1.30 lakh in January

1998. Daewoo also introduced zero-interest finance schemes and its dealers gave 'unofficial'

discounts ranging from Rs 0.8 lakh to Rs 1 lakh. Sales increased by 300% to 906 and 1102 by

March 1998. However, this was far below the company's capacity of 6000 cars per month.

About Price Reduction Contd...

Daewoo launched an upper-end version, Cielo Executive and an upgraded version, Nexia at

higher price-points. However, the market had discounted Daewoo by then, and sales did not pick

up further, falling to a low of 148 by February 1999. Companies realized that only when

competing brands perceived to be equal in all other aspects, would price be a deciding issue. As

the target segment became more affluent, upgraders as well as first-time buyers did not

necessarily start at the lowest price-level. Applied as a brand-level strategy, price helped the

auto-marketers win over only the entry-level customer.

The biggest price a manufacturer would have to pay for playing the price-game continuously

was undoubtedly the loss of customer loyalty. The world over, automobile brands succeed on the

basis of their relationships with fiercely loyal customer communities, built around sharp brand

images and unique value propositions.

By choosing to shift the focus to price, MUL risked the loss of damaging its customer relations

and brand valuation, as it ended up antagonizing the buyers who had bought MUL cars just

before the reduction. This led to a feeling of betrayal among MUL loyalists. When these

customers replaced their cars, it was doubtful whether they would turn back to MUL or go in for

a rival car with a vengeance.

Much Ado About Nothing?

As the Indian automobile market moved from monopoly to free competition, marketshare

comparisons from the old era seemed to have lost relevance.

The alarm over MUL's declining market share somehow did not seem fully justified. In its hey-

days, huge waiting lists for its products ensured that Maruti's market share was directly linked to

the supply side of the equation. In other words, if MUL had an 80% shares of the market that

was also its share of the total industry capacity.

By the late 1990s, things changed radically with over 12 car manufacturers having a presence in

the country, with a total capacity of about 1,250,000 cars, of which MUL produced about

400,000 (33%). Khattar commented, "Tell me, if we have a marketshare of 50% out of a capacity

that is 33% (of the industry), are we doing badly? Why don't you ask the others who together

have a capacity of 800,000, but cannot match our sales?"

All said and done, MUL was still the leader in early 2001. It still had its early mover advantages.

Provided Khattar played his cards right, MUL could still rule the roost for years to come.

Whether this would happen for real, was a question too early to be answered.

Q.1 what made maruti successful in the market?

Q.2 Do you feel that the price cut strategy of Maruti had created the today’s complexity in

market? Justify

Q.3 what steps should maruti take in the present competitive scenario to keep the market

share ahead of all players?