Corporate: In Search of Another Cash Cow

CORPORATE: COMPETITION
In Search of Another Cash Cow

It has been a smooth ride for Maruti till now, but in the new car bazaar MUL needs more than the number 800's magic to continue its dream run.

By Naagesh Ayyagary

The mood at Maruti Udyog Ltd's (MUL) corporate office on the 11th floor of the Jeevan Prakash building in the capital's Connaught Place area is distinctly upbeat. On a softboard in the reception area is a hand-written message in Hindi from the Managing Director, Jagdish Khattar, congratulating the employees for achieving higher sales-the company sold 406,290 cars in 1999-2000, a jump of 24 per cent over 1998-99-and exhorting them to do better. The CEO has reason to be pleased. Although MUL's marketshare dipped from 78.9 per cent in 1998-99 to 62 per cent in 1999-2000, its performance in absolute terms was above-par. Avers the 57-year-old Khattar: ''Even last year, our growth (the incremental number of cars sold) was equal to the total number of units sold by the second-biggest player in the industry, Hyundai.'' That apart, MUL's growth is also constrained by capacities. Even a 100 per cent utilisation of its installed capacity (upgraded as recently as December, 1999) is expected to see the company producing 350,000 cars a year. In a rapidly expanding market-638,815 cars were sold in 1999-2000 against 409,951 in 1998-99- MUL's marketshare is certain to slip further.

But there is a barely detectable antsiness to company executives' answers about performance. It has little to do with falling marketshares: even Khattar terms the over 75 per cent marketshare MUL enjoyed till recently as unusual. Nor does it have to do with a thinning product portfolio: the company's range comprises seven models and more than 35 variants; and proposes to launch three models by April, 2001, and one new model every year thereafter. Instead, MUL's problems have to do with all the problems associated with a swelling portfolio.

The problems of plenty

Today, with its cars spanning price-points from Rs 2.09 lakh to Rs 6.74 lakh, MUL is to cars what Hindustan Lever is to detergents. Only, managing a portfolio this wide is tougher in the case of consumer durables than FMCGs. At one level, MUL needs to ensure that there isn't too much cannibalisation. For instance, if close to 90 per cent of a new product's sales are going to come from people who would have otherwise bought another of its products, it does not make sense to launch the new product at all. At another, it needs to achieve a sales-mix that optimises capacity utilisation, minimises costs, and maximises profits.

And, sooner than later, MUL will have to make what will, perhaps, be its most difficult decision: the future of the Maruti 800, which accounted for 189,061 units, or 49 per cent of the company's sales (excluding exports) in 1999-2000. The company launched its EX and DX Multi-Point Fuel Injection (MPFI) versions of the old favourite in January, 2000, and another version, 800std, in April, 2000, but analysts are sceptical about the acceptance of these models in the marketplace. Agrees Hormazd Sorabjee, 37, Editor, Autocar India: ''There is a demand for the MPFI version. It will bridge the gap between the old 800 and the Zen. But the biggest advantage of the 800, the price, will be eroded.'' But MUL itself is still non-commital about phasing out the 800. Generalises Khattar: ''If we have around six models, and if each of them has a life-cycle of seven to eight years, one has to be replaced every year.''

The business perspective

Phasing out the 800 will not be an easy decision for the company. Typically, low-end product offerings like the 800 make up through volumes what they cannot through value. Thus, although MUL's margins on the 800 are not big, the product is central to its continued financial health. For, it ensures that the company's capacity utilisation is up there. This is critical from two perspectives: one, it ensures that the company has enough volumes to strike better bargains with its vendors; and two, it apportions fixed costs over a larger number of units. In the auto-parts business, volumes mean power and MUL, thanks to its huge volumes, gets the best deals.

If it does wish to phase out the 800, it is imperative that MUL finds a replacement. The Zen is an ideal candidate. Rohtash Mal, 46, Chief General Manager (Marketing & Sales), MUL, demurs: ''The Zen is a volume player at 80,000 units a year. And why should an existing model replace another existing model?'' By that logic, the 800's replacement need not be the WagonR-which sold 8,221 units till April, 2000-either. It could be a new small car. Or a combination of the Zen, WagonR, and the new car could, together, sell as many units as the 800 did.

The 800 is critical to MUL's profit-model too. The volumes it generates lowers costs, not just for itself, but across the board, for the company's other models. And models in higher price-points-like the Esteem and, now, the Baleno-generate more margins than the low-priced 800. Indeed, unit contributions to the bottomline show a linear rise, from the Maruti 800 and the Omni at the low-end, through the Zen and the WagonR, to the Esteem and the Baleno. Confirms Khattar: ''Our margins from the sales of products like Esteem and Baleno are higher. Besides, high-end models also contribute to our brand image.''

To ensure that it does not lose out on this profit-model which has worked well for it, MUL may either launch another small car-the company announced the launch of two Alto variants in early May, 2000-or, as it has already indicated, complement the WagonR and the Zen with a few more models in the same range. The dual-benefits of doing so? The company manages to move entry-level prices up by a few tens of thousands without losing out on volumes. That does leave the field open for a competitor to take up the spot vacated by the 800, but since none of the other players in the market has been able to launch a product at that price until now, it is unlikely someone will do so in the future. Says Sorabjee: ''The 800 is unique. It can't be done again, and, for a company to offer a product like the 800 at that price is impossible. The 800 is the best in the world in the price-versus-features and price-versus-quality equations.''

However, the key to the continued relevance of this profit-model is the quantum of sales that is generated by the company's high-end models. In the first six months after its launch, the company sold 1,947 units of the Baleno, accounting for a 1 per cent share of the high-end market. The higher these numbers, the more the company's profits.

The road ahead

Even as it mulls the changes in its portfolio, MUL has initiated a transformation in its customer-interface. Some competitors like J.H. Kim, 49, Executive Director (Marketing), Hyundai Motor India, believe the market-leader is merely emulating what they have already done: ''We were the first automobile company to adopt a customer-driven strategy. MUL is just following us.'' Irrespective of the motivation, though, MUL is in the process of upgrading the quantity and quality of its distribution and service network. The details: a 50 per cent increase in its service network of 201 sales outlets and 1,455 service outlets across 576 locations; a proposal to set up service outlets across the country's 30 arterial highways in the next three years; a Gallup poll of customer satisfaction with dealers; and a Balanced Scorecard-a measurement template that takes into account financial and non-financial parameters-on dealer-operations being developed by Andersen Consulting.

MUL's brand-strategy too seems to have morphed a little. Both its new models, the WagonR, and the Baleno, come with the Suzuki prefix. Mal downplays the significance of this: ''These are successful international models, and the Indian customer is buying into the assurance that these products have proved themselves globally.'' But the jury is still out on whether a slew of new models and a born-again customer focus can make MUL the leader in every market segment it enters. Avers Sorabjee: ''The WagonR is a great product, but it is too narrow for Indian conditions. What Suzuki needs is more India-specific models. The 800 has seen better days. (They should) use the same platform and make a three-box car.''

Picture this: the 800 is the leader in its segment; but the Zen and the Santro aren't far apart in terms of volumes; the Esteem is ahead in its segment but losing ground; and the WagonR and the Baleno are yet to prove themselves. Ultimately, it is its ability to deal with a market with more segments than the potholes on Delhi roads that will decide MUL's future.

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