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Can Maruti fight a global player in the long term?

Vikas Sehgal, Managing Director & Global, Sector Head - Automotive, Rothschild says Maruti can do well in the short term but the longer term may prove more challenging.

     Last Updated: January 15, 2014  | 13:04 IST
Vikas Sehgal, Managing Director & Global, Sector Head - Automotive, Rothschild
Vikas Sehgal, Managing Director & Global, Sector Head - Automotive, Rothschild

Indian car manufacturer Maruti, a subsidiary of Japanese manufacturer Suzuki, can do well in the short term but the longer term may prove more challenging. Given the bottom-heavy structure of the Indian market, by 2020 it is possible that Maruti may be able to retain its significant volume share of the small car market given its traditional positioning and/or lack of interest from global majors.

It's hard to predict the future, however, Maruti's share of revenue and, most important of all, profitability is likely to face extreme pressure due to the fact that the high-volume, low-price segment barely generates any profit in absolute terms, even after taking into account Maruti's depreciated asset base.

Can Maruti fight a global player in the long term? It is possible that Suzuki could change the paradigm in India, however, in no other market has it been able to effectively compete with the likes of Toyota, Ford, Volkswagen and Hyundai. In fact, Suzuki's withdrawal from the large car market in the United States, its lack of significant presence in the premium small car market in Europe, and its marginal position in the emerging car market in China indicate it struggles to compete in markets where global majors have a focused presence. It has performed well only in the small car markets of India and Pakistan during decades when global majors did not show much interest.

What if Toyota or Ford were to deploy the strength of their global resource base to compete in India? Suzuki's narrow portfolio and small scale make it difficult to see how the outcome of this would differ from what has happened in North America, Europe or China.

Pricing is also an important issue. Porsche, Ferrari and BMW are very profitable at small volumes, but you cannot be small in scale and low in price. You can be large-scale, mass-market; you can be small-scale and premium; you cannot be mass-market and small-scale.

Maruti's high-volume models, like the Alto, yield a relatively small profit, with a large proportion of profit coming from only a few of its more premium cars such as the Swift series. What if this sector comes under attack from the global majors, which it inevitably will?

An interesting scenario to consider occurred in the United States in the 1980s. General Motors' mainline business came under attack from Toyota on the basis of reliability, pricing and product freshness. When oil prices fell in the 1990s, new demand developed in minivans, SUVs and pickup trucks. Toyota never tapped into this new market, which saved GM, as it was able to dominate what became a booming, high-profit market segment, fortifying its market position. That is a luxury Suzuki does not have.

If success is survival, Maruti is going to be all right. If success is thriving….

Vikas Sehgal, Managing Director & Global, Sector Head - Automotive, Rothschild

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