With sales of Maruti 800 falling, and the fast growth of the mid size car segment where it lags behind others, Maruti is banking on its productivity drive to stay ahead of competitors. Domain-b talks to Jagdish Khattar, MD Maruti Udyog on the future course of the company
It was inevitable. The fastest growing segment in the domestic passenger car mart is no longer the compact car category, which includes cars like Santro, Wagon R, Indica and Palio among others. The D or premium car segment is actually growing the fastest while the C segment is just marginally behind. In percentage terms as well in absolute numbers the C segment or the mid size car segment is now the focus of attention.
While this is potentially good news for carmakers like Ford India, Honda Siel and Toyota Kirloskar Motor who do not have a presence in the small car market, for companies like Maruti Udyog Ltd (MUL), which derives a large part of its revenues from the entry level and A2 segment, this could cause concern later.
In 2003-04 the entry-level D segment, which includes cars like the Toyota Corolla, Skoda Octavia and the Mercedes Benz C Class, grew nearly seven-fold with sales of about 14,337 units.
The second highest growth rate was in the mid size car segment, which includes the Hyundai Accent, GM Corsa, Maruti Esteem, Tata Indigo and Ford Ikon. For the first time ever, sales of mid-size cars crossed the one-lakh mark at 1.38 lakh units, a growth rate of nearly 50 per cent over the previous year. In 2003-04 mid size car sales actually grew faster in percentage terms than those of compact cars.
In absolute numbers, however, smaller compact cars sold three times as many as mid size cars.
Nevertheless, the mid size category's performance is a clear indication of the potential this segment holds as the economy grows, since nearly all small or compact car owners are likely to upgrade to a bigger car in the future - and the size of the compact car market in India is huge by any standards.
Notable successes in the mid-size car category last fiscal year were Honda Siel's new Honda City and Tata Motor's Indigo. The ones which failed to hit the mark were Fiat India's Siena, Hindustan Motors's Mitsubishi Lancer and the Maruti's Esteem, which had managed a slight increase in demand during 2003-04.
MUL's expertise in the small car segment. The company is a leader in the small car category in India. However, in recent times sales of its bread and butter M800 model have been falling in the first quarter of 2004-05, sales were down by 22 per cent to 31,874 units against 40,774 units in the same period last year.
It does seem as though the slowly-changing equations in the domestic car market have caught MUL off guar the 1,60,000 mid size cars sold in India last year, the Esteem had a share of just seven per cent.
Admitting that the company had lost market share in the mid size category in 2003-04, Jagdish Khattar, managing director, MUL said, "Last year we sold 11,000 Esteems. We could not take advantage of the growth the segment registered so while volumes more or less remained the same, market share slipped."
Earlier this month the company had announced the launch of the new look Esteem with much fanfare. The 'new look' pertains to minor modifications in the grill, dashboard and taillights. The most striking aspect of the newness is in it price which is a good Rs40,000-Rs50,000 lower than the 'old' Esteem across all variants.
Speaking on the reasons behind the relaunch of the Esteem, Khattar said, "The model has a strong brand equity and a good top of the mind recall in any brand survey. The weakness lies is its familiarity. And people like something new. So it was imperative for us to change the style."
According to Khattar the reasons behind the relaunch of the Esteem were to "Modernise the car and turn Esteem into a more spacious car without making any radical change. The result is the new Esteem more attractive now," he added. The refurbishment cost MUL around Rs20 crore.
MUL has been aggressively cutting prices of its models since the beginning of the year. It began the year by slashing the price of Esteem's diesel version by Rs38,000 followed by a by Rs25,000 reduction on the premium segment Baleno. Then the mid sized Versa's price was slashed to Rs3.74 (putting it on par with top end versions of Hyundai Santro, Wagon R and Zen). Alto's price tag was then pruned to around Rs2.3 lakh put its base variant at par with the AC version of M800. Also in January this year Maruti launched Baleno LXi, at Rs5.6 lakh.
Explaining the rationale behind the price cuts Khattar says, "The focus is on offering new upgraded vehicles at a low price. We are now planning to upgrade Maruti 800 to Euro3. We believe in following the laws of the land."
Cutting costs through higher productivity
Product price cuts are generally seen as the final desperate measure to revive flagging sales or regain market share when everything else has failed. In Maruti's case, however, as Khattar says, price-cuts have become possible due to its concerted cost reduction programme, 'Challenge 50', launched by the company in 2002.
Explains Khattar, "Maruti is working on a three-year cost reduction programme 'Challenge 50,' which includes increasing the all round productivity and quality of our products. The strengths of Maruti cost and quality have converged across the models. We have 19 models. The cost saving is done in all the activities and across the models. The corporate target is to increase the productivity by 50 per cent. The resultant reduction in costs is passed on to the customers. Productivity has improved all round. Man-power has gone down while production has gone up to 1,700 cars per day," he adds.
The aims of Challenge 50, by raising productivity by 50 per cent and bringing down the cost per vehicle by 30 per cent by 2004-05, is to bring MUL on par with some of the best car companies worldwide. According to officials, Maruti has decided to benchmark itself against Suzuki's Kosai plant in Japan in terms of productivity, cost and quality for this initiative.
The Kosai Plant, which had earlier benchmarked itself with other global plants, found that it needed to improve productivity by 30 per cent in three years to maintain its global standard. When Maruti benchmarked its productivity against Kosai, it found it was 20 per cent behind Kosai. To catch up with the Kosai plant Maruti devised the Challenge 50 (30 plus 20) programme.
MUL also decided to adopt Suzuki's global customer audit index to enhance customer focus. MUL officials say that car companies, which have entered the Indian market are regularly benchmarking against Maruti products, costs and quality. In this situation, Maruti has decided that rather than confining itself to the standards and parameters of the Indian industry, it would benchmark itself against the best in the global car industry. This exercise of benchmarking against the global best is internally referred to as Challenge 50.
The company has identified certain macro parameters for productivity and cost. For instance, the key parameter in measuring productivity is 'hours per vehicle', the globally accepted parameter for measuring productivity. Maruti plans to reduce this by 50 per cent over three years. And one of the main strategies to enhance productivity is to reduce wastage. Similarly, innovations by employees in the manufacturing process are making it possible to reduce the cost of material. Since quality is also a major pillar of both productivity and cost, the emphasis is on getting quality right the first time to minimise repairs, rejections and inspections. A company-wide effort, it includes even the component suppliers, who together provide about 80 percent of a car.
Attaining economies of scale is also among MUL's cost reduction strategies. As Khattar says, "Part of the cost reduction strategy is to have common parts. For instance Alto and Wagon R has several common parts. Having common parts has the advantage of economies of scale," he adds
The cost reduction strategy of the company has also been successful partly because of a reduction in the number of vendors. Says Khattar, "We work with our vendors to cut down the costs. We have also set up a centre of excellence to address the issues of cost and quality."
To increase its supply chain efficiency, MUL slashed the number of its vendors to 220 by the end of 2003-04 from 350 two years ago. As officials say, "By lowering the time and cost involved in dealing with more vendors, we have increased our supply chain efficiencies."
In future it plans to have a technically and financially capable set of vendors who can match up to MUL's standards on a priority basis. The average supplier standards have improved significantly in the last two years, though variability remains. Besides rationalising its vendor base, workshop level cost reduction, lean management systems and strict maintenance of delivery schedules has improved overall efficiency or total man-hours spent per car by nearly 54 per cent in the last three years.
In addition, the company reduced its inventory holding period, from 30 days in 2002-03 to 19 days last year. As a result of all these efforts, in 2003-04, production went up by 31.4 per cent in 2003-04 to 472,908 units from 359,960 units at Maruti's three fully integrated production facilities with a combined capacity of 500,000 cars. The production in the A1 category grew by 20.4 per cent, A2 by 47.7 per cent and A3 by 33.8 per cent.
Last year MUL produced a total of about 4 lakh vehicles. The company is targeting to manufacture up to 6 lakh units per annum and is looking at the possibility of setting up a new plant in Haryana. It is also actively looking into getting into manufacture of diesel engines, which it sources from Peugeot of France at present. Says Khattar, "We are looking at the feasiblity of setting up a new plant in Haryana. Further, the diesel car market is growing. Earlier the diesel cars constituted 12 per cent of the total car market. Now it is 20 per cent and is growing. We import Zen diesel engine and there is a cap on the number of engines that can be imported. That has hampered our total capacity. Though Zen is priced Rs14,000 more than the nearest competitor, we still couldn't meet the demand," he added.
Revealing plans to be aggressive in the diesel market Khattar said, "We are planning to set up a diesel one lakh p.a. engine plant at an outlay of Rs350 crore. Through Suzuki we are in touch with General Motors-Fiat joint venture. The JV will provide us with diesel engine technology. However declining to divulge the royalty percentage to be given for the technology Khattar would only reveal, "The plant will be ready in 2006."
Used car and insurance business
Maruti Udyog's other businesses such as the True Value pre-owned cars business and even car insurance have been doing well and recorded triple digit growth rate last year.
MUL had 140 'True Value' outlets in 102 cities last year, as compared to 50 outlets in 34 cities in 2002-03. The business sold 14,005 pre-owned cars and 10,700 new cars under the exchange route last year.
According to Khattar around 1,600 vehicles are exchanged at the Maruti True Value outlets every month. True Value Solution Ltd saw an increase in total income last year to Rs 1.59 crore, though there was a dip in profit due to increased expenditure on manpower.
For car financing MUL had entered into a tie-up with the State Bank of India under the brand name `SBI-Maruti Finance' in February 2003, which was subsequently extended to all SBI associate banks last year. Over 44,000 vehicles were financed under this tie-up with SBI and their associate banks in 2003-04.
In the insurance segment, MUL already tied up with National Insurance Company and Bajaj Allianz General Insurance Company and is also planning to enter into an insurance tie up with Royal Sundaram Alliance General Insurance Company, Chennai.
Arvind Saxena general manager (sales) says, "For us the insurance tie up is part of our service package to our customers and not a money making activity." The total premium is around Rs600 crore and Maruti gets around Rs60 crore. The insurance tie up also ensures the dealers to get assured accident service work. It should be noted that the dealers see money only in service."
Alto; the future bread and butter model
MUL is the leader in the Indian car market only because of its leadership in the small car segment. Domestic sales of Maruti 800 grew by about 16.8 per cent last year and the company closed the year with sales of 1.7 lakh units in this segment.
While sales of M800 have been falling, sales of the Alto, Wagon R and Zen saw a rise of 80 per cent in the first quarter of 2004-05 on sales of 59,201 units (32,885). Total sales, including exports, in the first quarter stood at 1,23,624 units, a growth of 19 per cent over 1,04,017 units sold in the first quarter of last fiscal.
Maruti Alto has now become the front-runner in the B (A2) segment. In the months of April and May its sales exceeded not only that of MUL's other compact cars such as Zen and Wagon R, but also that of Tat Motors' Indica and Hyundai's Santro. In May, Alto touched sales of 10,373 units, followed by Indica at 8,471 units, while Santro sales totalled 6,394 units.
Alto notched up sales of 8,399 units in January this year, 8,324 units in February and 9,011 units in March. In April, its sales increased to 9,350 units, while in May, it sold 10,373 units and overtook Maruti 800 sales by over 350 units for the first time since its launch.
Khattar says, "The car market is price sensitive. Car ownership penetration at 7 per thousand is low. In the last two years we have been working to increase penetration in the B or A2 segment and our share has gone up from 32 percent a year ago to almost 50 percent now," he added.
Last year MUL sold 1,76,151 compact cars a steep increase of 46 per cent over 1,20,603 units sold in the previous fiscal. A total of 3.7 lakh units of compact cars were sold in the domestic market in 2003-04 an increase of 23 per cent over previous year's sales comprising more than half of the total cars sold and about 40 per cent of the total passenger vehicles industry (including utility vehicles) in India.