Maruti Suzuki Remains Confident in Face of Growing Competition

Maruti Suzuki India Ltd. is not intimidated.

Despite a multi-billion-dollar surge in new investment by several global vehicle makers that could trigger a competitive storm in India’s booming automotive market, the nation’s largest producer intends to remain firmly in first place.

“We have been running at about 130% of capacity,” Maruti Suzuki Chairman R.C. Bhargava tells Ward’s in an interview. “Our production people have been improvising, running extra shifts and doing whatever they can to increase production. It’s been tough going.”

In fiscal 2009/2010 (ended March 31), Maruti sales soared 29% to 1,018,365 units, including exports of 147,575, and net profit jumped 105% to $553 million.

But Bhargava cautions that the results were exaggerated by “postponed demand” after a relatively poor fiscal 2008/2009 and adds, “We are hoping for 10% or 11% growth in sales this year.”

India weathered the global recession better than many countries, and the Asia Development Bank estimates growth in gross domestic product will accelerate to 8.2% in 2010 and 8.7% in 2011, moving toward the 9% level held for three years preceding the worldwide downturn, including a peak of 9.7% growth in fiscal 2006/2007.

The country’s automotive industry is glowing with good health. In the last fiscal year, total sales soared 26.9% to a record 2.39 million vehicles, including exports of 446,146 units, and domestic passenger-vehicle sales jumped 25.5% to a record 1,949,776, making India the world’s second-fastest growing automotive market after China.

The Society of Indian Automobile Manufacturers is forecasting vehicle sales will increase between 10% and 14% in the current fiscal year.

“If the economy can continue to grow around 9%, auto makers can expect as much as 12% growth every year,” Bhargava says. “That means annual domestic sales could be getting to 3.6 (million) or 4 million units in around six years.”

He is confident Maruti Suzuki will be a major beneficiary of the boisterous growth. By 2012, for example, installed capacity will increase to 1.25 million units, providing 1.5 million units of actual production capacity, as part of an ambitious, 5-year, $2.3 billion expansion and improvement plan under way since 2007 to be ready for bigger and better times.

Best-selling Alto small car.

Four auto makers currently account for about 85% of all passenger vehicles sold in India. SIAM data shows Maruti in the lead with 46.1% of all domestic passenger-vehicle sales, followed by Hyundai Motor India Ltd. with 16%, Tata Motors Ltd. with 14.3% and Mahindra & Mahindra Ltd. with 8.3%.

More than seven out of 10 passenger-vehicle sales are minis, subcompacts and compacts in the A and B market segments where Maruti specializes, and Bhargava does not see much change coming in the penchant for small cars.

Maruti’s lineup of attractive models includes the 1L Alto, the nation’s best seller with annual sales of 200,000 units, and he promises the company will fight fiercely to maintain its strong hold on the market. Yet today, with more than 20 auto makers fighting for sales, industry analysts expect Maruti will continue to increase volume yet inevitably lose market share.

India’s automotive landscape is changing as major auto makers such as Ford Motor Co., General Motors Co., Toyota Motor Corp., Renault SA-Nissan Motor Co. Ltd. and Volkswagen AG begin pouring money into new production facilities – more than $3.5 billion worth so far.

Several are establishing an Indian manufacturing hub to feed export markets with small cars. All are after a piece of India’s domestic market.

“All the big global auto producers have decided they must come into India’s B segment of 1L to 1.2L cars. Some, like Ford and GM, were here in earlier years but concentrated on bigger cars then,” Bhargava says.

He remains unfazed. “There is still a big sales gap between Maruti and our nearest competitors, Hyundai and Tata, and I don’t see any real threat from foreign auto makers. They are big globally but have a long way to go in India before they can really become a threat.”

Although the scramble for sales is likely to become even fiercer as a majority of auto makers fights for a minority share of the market, Bhargava does not expect significant price cutting.

“Every company is concentrating hard on how to cut costs and I don’t see prices being reduced, although I do see limits on how much any company can raise prices,” he says.

Yet he concedes some of the foreign auto makers may try to buy market share in one manner or another.

So far, Tata’s highly-touted Nano is not a threat, either.

“The Nano has not yet become a significant player in the Indian market,” Bhargava says. “The car has not created the kind of excitement that was expected. I am told there is virtually no waiting time and no premium price.”

Come what may, he feels Maruti will continue to enjoy a distinct edge over competitors. “Our advantage is not only the brand image Maruti has created over the last 26 years but the spread of our sales, service and spare-parts network.”

The company’s 267 dealers have 802 outlets, up 121 in the last fiscal year, spread across 555 cities and towns. About 325 of these are “e-outlets,” small but fully fledged for sales and service in semi-urban areas. Another 100 outlets will be added this year, over half of them in the “e” category.

“Maruti was the first auto maker selling cars in the rural areas,” Bhargava notes. “We have been opening dealer outlets in India’s smaller cities and towns and they are selling 20 to 30 cars a month. Last year, 17% of our total domestic sales came from these small, rural outlets, double the year-before level.”

What helps, too, is an expanded role for designers and engineers at Maruti, 54.2% owned by Suzuki Motor Corp., now coordinating with their counterparts at the parent company in the development of cars with engines up to 1.2L to meet the tastes and requirements of both the domestic and export markets.

Although Maruti exports more than doubled last year, they have limited appeal for Bhargava.

“Our target is to maintain the same volume of exports this year as last, and I would like them to be no more than 15% of our total sales volume,” he says. “We should not make exports a major part of our sales.”

His reasoning? “Exports lead to excessive fluctuations in demand, and foreign-exchange volatility hits your bottom line in different ways every year. Until we have exhausted domestic growth possibilities, why sacrifice growth in India for the sake of exports?”

Boosting Maruti exports is a 5-year contract signed in 2008 to supply Nissan with fuel-efficient, compact A Star cars, re-badged Pixo, for Europe. The number, set annually, was about 51,000 in the last fiscal year.

Bhargava reports Volkswagen’s recent purchase of a 19.9% share of Suzuki will have no impact on Maruti.

“Both companies are maintaining independent sales and marketing strategies,” he says. “There will be no mixing up of Maruti and Volkswagen sales outlets. And Volkswagen has decided not to source any production from Maruti as Nissan has done.”

While electric vehicles are attracting attention elsewhere in the world, the Maruti chairman questions whether they can or should catch on in India because of two major handicaps.

“First, India is short of electricity, and the bulk of it is generated by coal plants, which is not good for the environment,” he says. “Second, most people do not have garages and have to park in the street. So how do they charge batteries? I am not a believer in electric vehicles. (Compressed natural gas) is a more practical solution to reduce emissions.”

CNG versions already are available for five Maruti models and more will be added gradually to the lineup.

Exactly what shape and size the company and India’s automotive industry will take in the years ahead is debatable and debated.

But the future of this nation of 1.15 billion people, the second most populous in the world, has never looked more promising despite such old and familiar obstacles to growth as infrastructure bottlenecks, a weak agriculture sector and an inadequate educational system.

These are being tackled.

“Improvements are visible,” Bhargava says. “The two best ministers are in charge of highways and education. And the private sector is getting more involved in the power sector.”

Citing the industry rule of thumb that demand for cars suddenly picks up in a country when per capita income reaches $2,000, he says the pick-up point could arrive earlier in lower-cost India, where per capita income is now about $1,100 and car ownership is still only 10 or 11 per 1,000 people.

“If India’s economy can grow around 9% per year, per capita income will increase around 7.5% per year and reach about $1,700 or $1,800 in eight years, when India could have an explosion in demand for cars,” Bhargava says.

Much depends on what happens outside as well as inside India. Although no one, including the Maruti Suzuki chairman, is counting on such explosive demand, the possibility is tantalizing for auto makers.