Strategy: Maruti In A Midnight Alley

A bevy of cool new models notwithstanding, India's largest car-maker will slip into the red for the first time in its history this fiscal. Here's why.

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Jagdish Khattar, the 57-year-old CEO of Maruti Udyog Ltd, appears to have grown younger overnight. Some of the silver in his hair and the wrinkles on his face seem to be missing as he prances about in the corporate office of India's largest car-maker. The spring in his step is understandable-the 88-day strike by Maruti's unions has just ended. There's a buzz in the rest of the office too, as executives discuss in hushed tones (they wouldn't want to be seen as brash) the positive fallout of the strike. Even as the strike tested Maruti's systems to the limit (See Riding the Storm, BT, January 6, 2001), its engineers are confident that the daily production can now be pushed up to 1,600 a day from no more than 1,450 earlier.

But outside Maruti's upbeat New Delhi corporate office, a debate has already started on how long it will be before Khattar loses that spring in his step and the grey hairs reappear. Analysts are predicting a loss of about Rs 150 crore when Maruti declares its results for 2000-01. The amount is big enough in isolation, but gargantuan when viewed against the profit of Rs 330 crore in the last financial year and Rs 522 crore in the year before.

Young-Chang Kim, CEO, Daewoo India

"The days of high other income are over for Maruti."
Young-Chang Kim
CEO, Daewoo India

Khattar, though, remains unfazed, even as he carefully avoids using the dreaded L-word. In fact, the Maruti board had been told nearly two years ago that the 2000-01 bottomline will look none-too-impressive even if the overall car market expanded 10 per cent. What happened instead was that the market has actually shrunk 10 per cent so far, and Maruti's sales have declined to about 228,000 in April-December 2000, compared to about 281,000 in the same period of 1999. Worse, sales of its most profitable A class models, Maruti 800 and Omni, have fallen 54,000, while B class vehicles, Zen, Wagon R, and the two Alto models-Maruti actually makes losses on the sale price of the last three-have gone up by 11,000.

The lull in Maruti's activities between 1994 and 1998, when equal shareholders, the Indian government and Suzuki Motor Co of Japan, fought for control, was followed by a frenzy of activity. Five models-Baleno, Wagon R, Baleno Altura, and the Alto twins-were launched between November 1999 and September 2000. The total capital expenditure in the last three years thus touched Rs 3,000 crore. As a result, depreciation this fiscal is likely to stand at Rs 330 crore. The fall of the Japanese currency against the greenback last year hasn't helped matters. The low local content of the new models-Baleno's was 27 per cent at the time of its launch, while Wagon R had 65 per cent and the Alto models 71 per cent-means increase in Maruti's imports. If the yen falls, these imports take the hit twice as the payments are first converted from rupee into dollar and then into yen.

B.V.R. Subbu, Director, Hyundai

"The 800's benchmark status will affect Maruti in the high-tech segment."
B.V.R. Subbu
Director, Hyundai

Maruti's bottomline suffers another hit because of the disappearance of 'other income'. ''If you look at Maruti's balancesheet in earlier years, it had a very high other income. That is not coming any more,'' points out Daewoo Motors India CEO Young-Chang Kim. The other income was the result of investments made with the cash accumulated in the car-maker's high profit years as well as the interest it earned on the booking amounts that customers deposited with dealers during the period that Maruti models enjoyed a waiting period. With the onset of competition, those queues of buyers have disappeared. Besides, a tough market has made sure that prices cannot be increased to even fully absorb the cost of last year's engine upgrades for the 800, Zen, and Esteem.

In short, the road ahead is full of potholes for Maruti. Says Hyundai Motors India's Director (Marketing & Sales), B.V.R. Subbu: ''Maruti 800 is now seen in most urban areas as the minimum acceptable benchmark. This could have serious implications for Maruti's bottomline and its ability to compete aggressively in the high technology section.''

But things could turn out better than they may seem. After all, the current fiscal's losses will be primarily the result of the high depreciation. ''The huge depreciation is due to the capital expenditure. But Maruti will make cash profits,'' says Anupam Majumdar, who tracks the automotive sector for rating agency ICRA. Second, the capital expenditure next fiscal will be much lower as upgrades have already happened and Maruti does not intend to launch more than one model in a year in the future. Third, the yen has already improved against the dollar and, although this may have no impact on this fiscal's finances because the inputs now being used were actually imported in August last year, it will show an impact in the coming financial year.

Khattar has undertaken a host of cost-cutting measures, the impact of some of which will be visible this fiscal itself. These include sending a team of Tier I vendors to Suzuki's establishment in Japan for cost-reduction training. In engineering alone, savings for the fiscal are pegged at Rs 50 crore. Costs will also decline as the indigenous content in the new models goes up, which has been happening.

Aware of the 800's declining appeal in urban centres, Maruti is pushing the car in rural and semi-urban centres. To increase penetration, select dealers in cities like Aligarh, Ludhiana, Patiala, Pathankot, etc., will be allowed to set up another showroom/workshop within 100 km. Plus, about 70 authorised service stations in dealer-less centres have been allowed to identify customers and book orders on behalf of dealers and get a commission.

But by far the most significant move could be Maruti's attempt to increase its share in the entire cost incurred during the life of a car, which can be divided into three equal parts. The first is the price at the point of purchase, the second the fuel used during its life, and the third consists of insurance, finance, service, and re-sale. To increase its earnings, Maruti is focusing on the third part with a vengeance. It is entering non-life insurance brokerage and the second-hand car market, while spares and the engine oil bearing the Maruti brand are already in the market.

''Next year will be a year of consolidation when this year's labour will bear fruit,'' says Khattar, smug in the knowledge that Maruti's marketshare touched 70 per cent in December 2000 after a gap of over a year. Yet, he would need to watch out for the unknowns. The policy adopted by the government on import of used cars after quantitative restrictions are abolished on April 1 this year will have a most significant bearing on the fortunes of the car market. If the General Motors-Fiat combine takes over Daewoo Motors-and talks in this respect are on-it could mean stiffer competition. So will a possible tie-up of Peugeot Citroen, Europe's second-largest car maker, with Tata Engineering. However, if the administrative price mechanism for the oil sector is dismantled, diesel prices would rise to the level of petrol prices. While that could spell disaster for diesel vehicle manufacturers like Tata Engineering, Toyota, and Mahindra & Mahindra, it would be a bonanza for Maruti, which with its petrol-driven Gypsy, could move in for the kill in the multi-utility segment, currently dominated by diesel vehicles. A mixed bag, did someone say?