India's Maruti Faces Tough Future - Maruti Udyog Ltd - Brief Article

Automotive Industries,  Dec, 2000  by N. Narayan

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DaimlerChrysler isn't the only automaker with sales problems. India's largest carmaker, Maruti Udyog Ltd., is facing the most serious crisis in its 18-year history. A 50/50 joint venture between the Indian government and Suzuki Motor Corp., Maruti's share of the domestic car market has dropped from a predominant 80 percent in 1996 to around 60 percent today. And the fall continues.

Maruti's Suzuki Wagon R, which was a hit in Japan this year, has bombed in India. Dealers say it was priced too high for the extremely price-sensitive Indian car market. Consequently, Maruti introduced the Suzuki Alto, but the Alto's launch now gives Maruti too many models competing for the same market space.

In fiscal 1999-2000 Maruti sold 406,574 vehicles -- a big jump over the previous year's 333,881 units. But its total sales in the first five months of the current fiscal year (April to August) was only 132,315 units, some 32,000 units less than in the same period of the previous fiscal year. A mark of Maruti's uncertainty is that the price cuts announced in June, which were valid for three months, have been only partially withdrawn in October.

Maruti's troubles with market share began with the entry of Hyundai and Daewoo. Both have established large Indian manufacturing plants in recent years. The Koreans brought all-new small car models {Daewoo's Matiz and Hyundai's Santro) with direct fuel injection engines. Despite being almost 25 percent costlier, they enabled the Koreans to rapidly gain major footholds in the Indian market at the expense of the 16-year-old Maruti 800. The Koreans arrival also coincided with the financial market explosion of numerous installment payment schemes for consumer goads.

Ironically, at the time Suzuki and the Indian government were battling over several issues, including new investment to expand capacity and local manufacture of gearboxes. This pushed back the introduction of new models with modern technology that would meet the challenge from the Koreans. Maruti lost over a year in this tug-of-war and is now paying the price.

Worrying Maruti Managing Director Jagdish Khattar more than the erosion in market share is a jump in labor casts and steadily decreasing profits. Recently, the union called a partial strike, which reduced production from the normal 1,400 vehicles per day to 600 per day as of late November.

And though the company has been profitable every year since inception, profitability has been steadily decreasing the last three years. It dropped from a profit after tax of 6.5 billion rupees (about $141.3million} in fiscal 1997-98 to 3.3 billion rupees ($71.7 million) in 1999-2000. The company is also borrowing heavily to finance its capacity expansion from 250,000 to 350,000 vehicles per year. With equity remaining constant at 1.32 billion rupees, this borrowing has dramatically changed the debt-to-equity ratio from 0.7:1 in 1998 to 4:1 this year.

With a squeeze on margins due to increased competition and a stagnant Indian market, Maruti will find it difficult to make ends meet this year. In a recent memo to employees Khattar warned, "Over the past two years profit margins are under pressure and it is becoming a challenge to remain in the black. There is no getting away from the fact that the next couple of years are going to be extremely difficult."

COPYRIGHT 2000 Cahners Publishing Company
COPYRIGHT 2001 Gale Group