Coverstory pg[2]: A Tricky Ride

A Tricky Ride
(Contn.)

The P&L and Maruti

Competition (and declining market shares) have taken their toll on MUL. The company's net profit margin in 1999-2000 was 3.4 per cent, as compared to 6.3 percent the previous year. Historically, 'other income' has accounted for a significant proportion of the company's total income: most of this came from interest income on booking amounts (what customers paid when they booked the car) the average waiting time used to be around three months. That is history.

Ironically, increased activity is one reason for MUL's declining bottomline. The company's P&L has never shown a depreciation higher than Rs 100 crore. But with investments touching Rs 2,000 crore in 1998-99 and 1999-2000 (surely, all those new models didn't come for free), depreciation touched Rs 255 crore in 1999-2000, and is projected to cross Rs 400 crore in 2000-01-the company plans fresh investments for two Alto variants and a station wagon version of the Baleno.

The appreciation in the value of the yen against the dollar (more than 12 per cent in 1999-2000) also contributed to the fall in profitability as this was the time when MUL was pumping in investments. The low local content of new models (27 per cent for the Baleno) didn't help. Admits Khattar: ''If you take into account everything, the impact of the rising yen was as much as Rs 200 crore.'' Still, MUL's profitability is comparable to that of companies in mature or maturing markets. Honda's net profit margin in Japan is 5 per cent; Ford's (for its global operations), 4.5 per cent, and General Motors (global), 3.2 per cent. Maruti's own 3.4 per cent doesn't look bad when compared to these. Says Awasthi: ''As competition increases, a manufacturer has to learn to live with thin margins and absorb costs.''

Thanks to its thinning bottomline, MUL is about to lose the enviable status of being a debt-free company. It is raising Rs 200 crore at an interest rate of 11.2 per cent. It is strange that the shareholders have chosen not to bring in funds through the equity route. As one analyst points out, the entire Rs 900 crore that Toyota has invested in India has come in as equity. In contrast, Maruti's equity is a mere Rs 134 crore.

The Strategic-Imperative and Maruti

In hindsight, Maruti could be reaping what it has (or hasn't) sown. Explains a senior executive in a transnational automobile company: ''Maruti 800 could have been upgraded profitably after touching 250,000 units (in sales). But the company chose to extract as much as possible out of it. Had Maruti been prompt in upgrading its models and introducing new ones, none of us would have been able to enter the market.'' A Maruti insider agrees: ''Had Wagon R come to India in 1998, which it could well have, there would be no Santro here.'' However, let's not forget that MUL was in strategic limbo for two full years as the GOI and Suzuki jockeyed for control.

Then, there's the issue of price. Maruti, say some of its competitors, is too price-oriented. Says Awasthi: ''Price is no longer the primary factor. The price-value equation has become more important.'' Seconds Spender: ''Indian consumers have an innate sense of value. Their buying is based not just on the lowest price.'' Expectedly, Khattar disagrees with this perspective: ''Price is critical. The market is stagnating. Supply is more than demand.'' Richard Swando, the 51-year-old CEO of General Motors India agrees with Khattar: ''A group of people say they are not bothered about features so long as the basic needs are taken care of. Why, people don't even want rear seat-belts.'' Indeed, according to some analysts, only the top 10 per cent (in terms of income) of the car-buying population is worried about features. And that's why what MUL does with the Maruti 800 is critical to its future.

The 800 and the Omni account for close to 50 per cent of MUL's sales. It is these bread-and-butter entry models that keep the company's capacity utilisation high, and ensure that it can leverage scale economies to strike better bargains with its vendors. Detractors cite everything from rising customer expectations to obsolete technology as reasons why MUL should phase out its largest selling product. Says Spender: ''Manufacturers dumping very old models and technologies are not going to get away with it.'' But Khattar defends the product stoutly: ''Every product has a life-cycle. But we will not initiate a phase-out of the 800 as long as it has a market.''

That, though, hasn't stopped Maruti from tweaking its portfolio. BT learns that MUL will launch an 800-cc version of the Alto targeting entry-level customers in the metros, and retain the 800 (and launch an intensive promo-blitz for it) in semi-urban and rural areas. That approach could work: the sales of the 800 and the Omni in smaller cities (See Small town wonder) have been on the rise. Admits Bhattacharya of Kearney: ''The Maruti 800 is a great product. No other car in the world can match its functionality and price even with the high duty-incidence of 60 per cent in India. There is need for such a car, which competes not with other cars, but two-wheelers.''

The Future and Maruti

Call it Maruti 2000: a now-awake MUL has launched a rash of initiatives with the assistance of A.T. Kearney, Andersen Consulting, and management guru Mritunjay Athreya. The first of these is based on a report prepared for the company by Kearney that the cost incurred by a customer on a car over its entire life-cycle can be divided into three equal parts: the price at the point of purchase; the cost of the fuel used throughout the life of the car; and the cost of insurance, finance, service, and re-sale. To increase its revenues, MUL-which already operates in the first of the three-is now aggressively looking at the third. Already, a team of employees are busy working out a business plan for a possible entry into the non-life insurance business. Says Khattar: ''It will be not only a source of earning, but we can also build a relationship with our customers much after the sale.'' Other initiatives include a re-look at its existing auto-finance businesses (in partnership with Countrywide and Citibank right now), a foray into leasing for its corporate customers, and an entry into the second-hand car business. Next step: new efforts in the area of service, spares, and accessories (the company plans on launching its own brand). MUL expects that non-manufacturing activities such as these will account for 2.5 per cent of its turnover by 2002-03.

MUL's effort to re-invent itself includes a chapter on its channel network. The company has commissioned Andersen Consulting to rate its dealers every six months. It is also in the process of replacing its existing two-tier, 593 city, 206 dealer outlet, 1,228 service station network with a third tier: Maruti Service Master outlets that will be franchisee operations. Costs are another focus area. As Khattar admits: ''The market determines the price. But the cost is in our hands.'' Apart from working with its vendors to cut component costs, Maruti is moving to a shared-component product platform manufacturing system. The Alto, for instance, is to share a platform with the Wagon R. Internationally, product platforms are gaining currency in the auto industry. They not only enable companies to cut costs; they also make it possible for them to get new products to the market sooner than they otherwise would have. Avers Bhattacharya: ''Sharing offers the manufacturer a chance to offer variety while keeping the cost down.''

So, will all these help MUL? In the short-term, Khattar's comment about making a come-back in July seems to be coming true: the company sold about 27,000 vehicles in the month of July (giving it around a 60 per cent share of the market). In the medium-term, he is counting on the fact that MUL still has two new products (the 800 cc and the 1,000-cc Altos) up its sleeve unlike its competitors who do not have any launches planned in the high volume segment of cars priced below Rs 350,000. And in the long-term, he expects the strength of the company's channel network and its manufacturing expertise to see it through. But channel networks-as MUL demonstrated against established rivals like Hindustan Motors and Premier Automobiles-are easily built. And the Ford-Daewoo combine will not be an easy competitor to best. Still, its dismal performance in the first three months of the year may have finally stirred MUL into acting like the market leader it is. The King is dead. Long live the King.

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