The tipping point? Maruti's Khattar (L) and Saito with the new Swift

Maruti Udyog's corporate headquarters in downtown New Delhi might still look like a bad throwback to the company's erstwhile government-owned heritage, but there's a buzz there nowadays. It has nothing to do with the Rs 853.63-crore profit (a 57 per cent growth over last year) that India's largest carmaker has just announced. Nor is it because Managing Director Jagdish Khattar, 62, is getting a three-year extension as its top boss. Instead the flutter is about Maruti's launch of a new car, the Suzuki Swift, which the Maruti brass says will be the cornerstone of the company's future.

The Swift, a hatchback that the company expects to launch later this month, will be unique in many ways for Maruti. It will be the first new car that the company will manufacture after the government divested 27.5 per cent stake in Maruti in 2003 through an IPO (initial public offering). The government still has a residual shareholding of 18.5 per cent in the company but it is Suzuki that is in the driver's seat. And the Swift will, incidentally, be the first 'new' Suzuki car to be launched in India within a few months of its global launch. The Swift was launched in Japan only three months ago and in Europe last month.

More important, 21 engineers from India worked on the development of the new car, incorporating subtle changes to the suspension, engine, fuel system and air-conditioning required for India at the inception phase and not hastily added on as a postscript when the car had already been developed, as has been the case with every Maruti car (and for that matter, almost every vehicle made in India today) before.

Maruti kept its Indian vendors clued in to all project developments from the beginning and the car is being launched with the highest level of localisation of any Maruti car yet, at 85 per cent. Maruti's vendors have spent Rs 190 crore towards this project. Coupled with its own investment of Rs 250 crore, the development cost put in by Indian firms towards the Swift is close to Rs 450 crore. In addition, Suzuki Motor Corporation has pumped in excess of an estimated $2 billion (Rs 8,800 crore).

Sanjay Labroo, MD, Asahi India Glass, one of Maruti's biggest vendors, points out that the Swift project is an indication of how trends in vehicle development are changing. "Instead of being handed the drawings after development was done and dusted, we were kept in the loop for over a year now."

A Turning Point

The Swift could be the all-important tipping point for Maruti. Since early 2002, when Maruti launched the Grand Vitara, an SUV that it imports and sells in India, the company has not launched any new models. It has re-launched what are essentially aesthetically modified versions of its existing range-Zen, WagonR, Esteem, 800 and Omni. None of these cars can be called 'new'-with the exception of the WagonR-they are 15-20 years old. Yet, these makeovers, coupled in some cases with sizeable price cuts, have boosted their sales. Sales of the Esteem, for instance, after the recent modifications and a Rs 30,000 price cut, doubled from 800-1,000 to 2,000-2,200 cars a month.

The last few cars that Maruti launched in the Indian market have seen mixed results. The Versa van, launched in late 2001 to ostensibly replace the Omni, failed to shake the ground despite heavy price cuts. Earlier, in 1999, Maruti launched its first new cars in decades-WagonR and Baleno followed by the Alto in 2000. None of them were 'new' and had been around in Suzuki's stable for a while. The WagonR and the Baleno initially met with lukewarm response from customers, mainly because of uncompetitive pricing due to high import content. The Alto too had a few initial hiccups because of its high launch pricing and absence of power steering.

Maruti addressed these problems in the last 18 months by dropping prices across its range of cars besides aesthetic upgrades of its models. The outcome: dramatic increase in sales in some segments. Although Maruti actually lost market share last year to 50.88 per cent of the market from 51.40 per cent a year ago (the company saw sales grow 17 per cent while the market grew 18 per cent), the fall was entirely because of reduced sales of its 20-year-old warhorse Maruti 800, which saw sales decline 30 per cent to 116,262 units. In fact, last year Maruti saw sales of Alto overtake the 800. Rejuvenated by a price cut (the base model now sells at Rs 2.37 lakh), the entry-level Alto is just Rs 20,000 more expensive than the base model 800. Yet, Khattar is in no hurry to kill the 800. For one, Maruti earns hefty margins (nearly 10 per cent) on the 800 and, while Khattar says he will "de-emphasise" the 800 by selling fewer of them, there is still a market for it.

"Maruti's assets are the three models below Rs 3 lakh. The 800, Omni and Alto sell over 25,000 units per month" Rajiv Dube Vice President (Passenger Cars)/Tata Motors

Like the 800, Maruti's other 'old' cars continue to sell well. The Zen, a hatchback, holds a 13 per cent market share in the B-segment, while the WagonR, which last year overtook the Zen in sales, has a 16 per cent share. The Esteem in the mid-size segment was just behind Hyundai's Accent in sales last year. Together, the Esteem and Baleno (its base model is now priced at Rs 5.65 lakh) give Maruti a 16.6 per cent share of the mid-size segment behind Tata Motors and Honda.

Competitors acknowledge Maruti's strengths. Says Tata Motors' Vice President (Passenger Cars) Rajiv Dube: "(Maruti's strongest assets are) the three models below Rs 3 lakh. Between them, the 800, Omni and Alto sell over 25,000 units every month."

But none of those three nor the Zen or the WagonR are the cars of the future for Maruti. And both Khattar and Kinji Saito, Maruti's Director, Marketing & Sales, are quite clear about that. For what Maruti's future would look like, they point to the Swift. Designed in line with contemporary European styles, the Swift currently has a 1.3-litre petrol engine under the bonnet but by 2006 Maruti will have a diesel version out in the market too, challenging the Tata Indica.

Capacity Constraints

The Swift is expected to be aggressively priced at around Rs 4-4.75 lakh, which could make it compete not only with Tata's Indica, Fiat's Palio and Hyundai's Getz but also with Maruti's own WagonR (base price: Rs 3.4 lakh) and Esteem (base price: Rs 4.4 lakh). But Maruti isn't worried about that. Says Saito: "We have a lot of good cars, but they are family cars. The Swift is an individualistic product. It will say something about the person who drives one." Adds Anish Damania of Reco-Sify Securities, a Mumbai stockbroking firm: "There is a gap between the WagonR and the Esteem and Maruti is trying to plug that."

But pricing and cannibalisation aren't Maruti's main problems with the new car; production constraints are. Maruti produced nearly 550,000 units last year at its Gurgaon plant. The plant is running at full steam and though it is churning out over 2,100-2,200 cars a day, the company will hit a production bottleneck with a maximum capacity of 600,000. "We should be able to work around that, and work at the new Suzuki facility at Manesar is going ahead at full steam and that should come online by mid to late 2006," says Khattar. The Manesar facility will add a capacity of 250,000 cars.

Clearly, the Swift will mark a sharp shift in Maruti's product line from the tried and tested (but also tired) existing range to a future generation of new cars. There are whispers already that a new midsized car may be in the works. For now, however, the future of India's largest carmaker depends on whether the Swift will be a hit with the increasingly fickle Indian consumer.