The killing shook Maruti Suzuki—and India. On July 18, 2012, a group of workers at the automaker’s Manesar plant in Haryana armed themselves with rods and door beams of cars and fanned out across the facility. They hunted down and attacked the management staff violently. Awanish Kumar Dev, head of human resources was burnt to death and scores of management staff, including two Japanese executives, were injured, many seriously. Disciplinary action by a supervisor on an errant worker was the trigger for this gory attack. Maruti’s labour relations hit a new low. There were fears of virulent labour militancy.
For the auto major’s top management, this incident seemed to shatter the hope of sustaining a revival it had painstakingly effected towards the end of the 2000-2010 decade.
The worm of discontent had been crawling upward.
During the fiscal year 2009-10, Maruti’s net sales had grown by 42 percent (against the industry’s 26 percent) to Rs 28,958.5 crore and, more significantly, net profit more than doubled to Rs 2,497.60 crore (see ‘Road to Recovery’). Boosted by the launch of successful new products such as Swift and Dzire, Maruti protected its 45 percent market share that year. Operating- and net profit margins at 13.5 percent and 8.6 percent respectively were inching to levels that were among the highest in 10 years. It appeared that the company had finally weathered the storms it had faced over most of the decade—from the entry of global car majors into India to the tussle between its two joint venture partners, Suzuki Motor Corporation and the Government of India, which culminated in the former taking a controlling 56 percent stake in the company. This tumultuous period saw Maruti’s market share dropping from a heady 80 percent prior to 1998 to below 45 percent by 2000. “We thought in 2009-10 that the worst was behind us,” recalls 81-year-old RC Bhargava, chairman of Maruti Suzuki India Limited. He could not have been more wrong.
Maruti took a beating for this. “At its peak, the margin erosion on account of the stronger yen was in the order of 7 to 8 percent,” says Ajay Seth, executive director and chief financial officer of Maruti Suzuki. It forced the company to revisit the issue of localisation to reduce yen-denominated imports, and work with vendors to cut import content to 15 percent. “This crisis opened our eyes. We realised that inner components for critical parts that need to be imported can be procured here. For decades we had been importing them, too,” says Bhargava.
These efforts have boosted Maruti’s margins. “Even if the yen appreciates to the levels it did in 2011-12, the margin erosion will be only 4 percent,” says Seth. (The yen currently trades at Rs 0.52 levels.)
Once it reduced its dependence on Japanese imports, Maruti began to focus on exports, which had traditionally been 10 percent of overall sales. “Higher exports will enhance our natural hedge against a volatile US dollar, and so we began exploring new markets,” says Seth. In 2014-15, three years after it refocussed its strategy, the automaker announced that its exports had grown by 20 percent in 2014-15 over the previous year (see ‘Back with a Bang’).
Maruti was also caught on the wrong foot by the shift towards a preference for diesel cars in India, triggered by the widening difference between petrol and diesel prices after the government de-regulated the price of petrol in 2010 while continuing to regulate that of diesel. The gap, which was around Rs 15 per litre before the policy change, widened to about Rs 29.8 in September 2012. Diesel cars became more attractive, but manufacturing them was not Maruti’s forte. Only 17 percent of its cars till then had diesel engines. To complicate matters, parent Suzuki was not a diesel player either. Between 2011 and 2013, the petrol-diesel ratio of cars sold in India changed from 64:36 to 42:58. While competitors such as Hyundai Motor Company, Tata Motors and Ford Motor Company sold diesel cars at a premium, Maruti struggled to sell its petrol models despite discounts that, on an average, exceeded 7 percent. In 2011-12, its market share hit 38.3 percent, the lowest ever. “What made things difficult for us was a lack of clear government policy on petrol-diesel pricing,” says Bhargava.
To fix this, Maruti reached out to Fiat and ramped up its diesel engine capacity. (It was already procuring diesel engines for Swift from the Italian automaker.) This move, to an extent, helped it ride out the crisis, which began to ease after the deregulation of diesel prices last year.
In 2014-15, the price difference between the fuels was about Rs 8 per litre, and the petrol-diesel ratio of cars sold retracted to 52:48. While this has helped Maruti, it has birthed another problem: Using its expanded diesel engine capacity optimally. And, more importantly, adapting quickly to sudden shifts in future demand.
Over the last couple of years, Maruti has introduced a good amount of flexibility in its operations. The lessons learned are now ingrained across rank and file. “Flexibility is critical at times when the market shifts dramatically, both in terms of product segments and engine type. In the future, we are looking at producing both petrol and diesel engines in the same line,” says Rajiv Gandhi, executive director (manufacturing).
Predicting demand is another area that Maruti is fine-tuning. “Government policies will continue to impact the business. Foreseeing them and creating scenarios is critical. We are strengthening that capability,” adds CV Raman, executive director (engineering).
But before Maruti could become as nimble as its rivals, it had to innovate.
Lesson No. 2: Invest in technology
Other changes in the market (around 2010-11) were also affecting Maruti’s sales. For one, the entry of international heavyweights like Ford, Nissan and Renault into the compact segment saw competition increase in its core market. Customers, spoilt for choice, were becoming harder to please. “Technology and new product development will be key differentiators in the Indian auto market,” concedes Raman.
Historically, Maruti was not known for either. “For the first 10 years of its existence, there was no competition. There was neither the motivation nor the pressure to be agile. In those days, it was also difficult to bring technology into India on account of foreign exchange issues,” admits Bhargava. “Later, ownership issues surfaced. Companies do not share latest technologies with each other unless they have management control.”
These developments saw Hyundai’s Santro (launched in 1998) grab a large chunk of Maruti’s market share by introducing technologies such as power steering and multi-point fuel injection. In mid-1999, Maruti suffered the ignominy of not being able to sell a single car in New Delhi (India’s largest car market) as its models were not Euro II compliant.
If there was one area where Maruti had failed as a market leader, it was in introducing industry-leading technologies. That had to change, but to do so, it had to break from a tradition which dictated that innovations could only be offered in premium cars. The logic was that while buyers of compact cars may not have deep pockets, buyers of higher-end models would pay more for new technologies. But with most of its sales in the former segment, Maruti had to go the Hyundai Santro way: Innovate without increasing costs. “We set a goal of developing products that have good design, introducing technology where the cost of acquisition is low, and maintaining an operating cost that is best in class,” says Raman.
Maruti’s first successful innovation was the introduction of its auto gear shift technology earlier this year. It offered the convenience of automatic transmission, but at a lower cost (Rs 40,000 as opposed to Rs 1 lakh) and without compromising on fuel efficiency. (Suzuki began working with its Italian supplier, Magneti Marelli, to develop this technology.) “The reason why the share of vehicles with automatic transmission in India is less than 1 percent compared to 99 percent in Japan and the US is the high cost of acquisition of the technology and the resulting 5 to 10 percent reduction in fuel efficiency,” says Raman. But Maruti was able to find a way around this, and use this technology in the Celerio and Alto K10, both compact models. The cars have been well received, so much so that a new auto gear shift line is being added at the Maruti-Magneti Marelli joint venture facility in Manesar. CEO Ayukawa expects 30 to 40 percent of small car models to sport auto gear shift technology in the near future. And for the first time in its recent history, Maruti has taken the technology lead.
The other area of focus has been fuel efficiency. The new Dzire, launched earlier this year, has the highest fuel efficiency in the automobile industry (Rs 26 kmpl for diesel and 20 kmpl for petrol). Maruti is also looking to adapt some of the recent technological successes that Suzuki has achieved, like a 660 cc petrol engine with a fuel efficiency of 37 kmpl, booster-jet technology that makes smaller engines more powerful, and a hybrid vehicle system. “The challenge is to bring these technologies into India at the right cost,” says Raman.
Lesson No. 3: Refresh and update products regularly
The automaker is gearing up to introduce three new cars over the next 12 months. It has mapped an active product line, with 14 new models over five years. “The lifecycle of a model has shrunk from 10 or 15 years to five years. There is an urgent need to keep excitement levels high through frequent product launches and refreshes,” says Raman.
But Bhargava is unfazed by these setbacks. “Percentages are deceptive. Yes, as people become prosperous they will expect more features in a compact car. We are ready for that, but I am still not convinced that India will become a large market for bigger cars,” he says. Ayukawa agrees: “Maruti was started 30 years ago to produce affordable cars. We will stay true to that focus.”
Nevertheless, the company is expanding its product portfolio to have a larger footprint: It recently launched a premium sedan Ciaz (Rs 9 lakh to Rs 10.5 lakh), which has been well received in the market, and is selling 5,000 units a month; it will be launching a compact SUV and a crossover in the next one year. “Maruti [post Ciaz’s launch] has a strong presence in 84 percent of the passenger vehicle market. If the upcoming SUVs get a good response, this will rise to 92 percent by 2016-17,” says Abhijeet Naik of CLSA in his report.
Will Maruti now launch products that straddle the Rs 10 lakh to Rs 15 lakh segment? Ayukawa is circumspect. “First we need to build volumes of Ciaz from the current level of 5,000 to 10,000. We will consider bigger cars after that,” he says. But RS Kalsi, executive director (marketing and sales) is more forthcoming: “We will be going into the Rs 10 lakh to Rs 15 lakh segment with our SUVs and premium sedans.” These launches will ensure that Maruti does not lose loyal customers, which it did till recently for want of options to upgrade.
Check out our Festive offers upto Rs.1000/- off website prices on subscriptions + Gift card worth Rs 500/- from Eatbetterco.com. Click here to know more.
(This story appears in the 01 May, 2015 issue of Forbes India. To visit our Archives, click here.)