Business Economics – Term 2 – Batch 36 Assignment

A.S. Arunkumar 190101611204

Case Study on: Maruthi Suzuki India Limited

1. What is market structure prevalent in Indian Automobile Industry? What are the Maruti’s competitive advantages?
How can Maruti sustain its profitability in the future?

Historical Background:

 First car ran in Indian road was in 1897, till 1930 cars where exported from other countries to India and it was
affordable only be few people in India.
 Evaluation started during 1942 with launching of Hindustan Motors in 1942 – “Premier” considered one of the
prestigious cars during that period and opening of Mahindra and Mahindra in 1945.
 It was during 1970 where automobile industry started to grow slowly after restriction of import of vehicles firmly
in place, but the boom was in tractors, commercial vehicle and scooters, while car remained as a major luxury
item. During which multinational automakers such as Suzuki and Toyota of Japan could invest in Indian market
for the development of Indian automobile industry. Maruti Suzuki was the first and most successful of these
entrants.
 Its was 1990 where India entered into era of privatization and liberalization, no. of foreign companies extended the
hand as a join ventures with existing Indian companies and resulted in establishing manufacturing 12 large
automobile companies in India.

Market Structure – Indian Automobile Industry:

 Initially Cars where considered as the luxurious and was enjoyed only by rich people and there were no much sales
in Car industry when considered in India.
 But two wheelers sector had a good boom in India as it was affordable by the middle-class family and it was best
suited for the Indian roads.
 India is currently largest manufacturer of tractor; second largest manufacturer of two-wheeler and bus and cars
stands in the sixth place followed by eighth largest commercial vehicle manufacturer in world.
 Automobile sector in India can be broadly classified as – 2-Wheeler, Passenger cars, 3 wheelers and commercial
vehicle.
 Business Economics – Term 2 – Batch 36 Assignment
A.S. Arunkumar 190101611204
 In terms of segments, the production of commercial vehicles has increased from 7.61 lakh vehicles in 2010- 11 to
7.83 lakh units in 2015-16. Exports during the same period increased from 74,043 units to 101,689 units. The
production of passenger vehicles increased from 29.83 lakh units in 2010-11 to 34.14 lakh units in 2015-16.
Export of passenger vehicles during the same period increased from 4.44 lakh units to 6.54 lakh units. The
production of two-wheelers has increased from 133.49 lakh vehicles in 2010-11 to 188.30 lakh units in 2015-16.
Export of two wheelers increased from 15.32 lakh units to 24.81 lakh units during the same period. The production
of three wheelers increased from 7.99 lakh units in 2010-11 to 9.34 lakh units in 2015-16. Exports during the same
period increased from 2.70 lakh units to 4.04 lakh units.

 As current India is emerging market on car sector due to increase in population and increase in salary of the
middle-class family and the recent seventh pay commission increase on Govt. employee salary its expected that
Car sales will increase and 100% FDI expect to have more investment from other countries to invest in India.
Example: Japanese two-wheeler manufacturer Honda Motorcycle and Scooter India (HMSI) opened its 4th and
world’s largest scooter plant in Gujarat while Fiat Chrysler has planned to invest USD 513.5 million in
Maharashtra, to manufacture Jeep Grand Cherokee model. “But increase in fuel price and consumption of the fuel
raises the big question on sustainability of the automobile industry of petrol and diesel version and moving
towards the electric car is other solution but cost is not affordable for middle class family even though tax
redemption is provided there is going to be huge drop in market in upcoming year in India if fuel price is not
controlled”
 Business Economics – Term 2 – Batch 36 Assignment
A.S. Arunkumar 190101611204
Indian Automobile Industry Analysis (Source: https://www.ibef.org/industry/automobiles-presentation)

Maruti competitive advantage:

 Established distribution and after sales network. (3053 service center in 1449 cities which is not with others)
 Ability to design the product with differentiating the features.
 Developing cars faster and selling them for less.
 Brand image
 Experience and know how in technology.
 Production of large number of motor vehicles which was necessary for economic growth.
 Pricing strategy was very competitive, 10-20% lower than the competitors in small car segments.
 Fuel efficiency, it provides 3KM more per liter compared to competitors.
 Maruti remains still as People image and still holds the market share among the most middle-class family.
 Partner Relationship management, value chain and value delivery network.

Profitability:

Electric and hybrid technologies are reshaping automobile manufacturing the world over. Indian automakers too are being
impacted by these trends. While the government has set an ambitious target to allow only electric cars in India by 2030,
the country needs a clear policy to fasten the pace of transition. Yet automakers have started showing signs of things to
come.

A. Maruti should convert major of its diesel engine plant to produce petrol engines or add an assembly line for petrol
engines at its plant.

B. It should plan aggressively tap the market for CNG, hybrid and electric cars.

C. Target the middle class and work on releasing the cost effective and fuel-efficient vehicles.
 Business Economics – Term 2 – Batch 36 Assignment
A.S. Arunkumar 190101611204

2. Explain the challenges and opportunities for car manufacturers in Indian Market?

Challenges:
 Increase in fuel price every month and different state tax making it more difficult for middle class family to offer
the cars. Cars are brought thru financial loan but daily need the fuel and maintenance are very costly which is
making them to move towards fuel efficiency vehicle.
 Government rule on low emission on carbon monoxide which resulted in design change and add of cost making it
more difficult for automobile sector to see profits in India.
 Growing competition:
 Different automobile companies with different models targeting Middle class family by releasing small car
segment Like Nano are big challenges for all the automobile companies to beat with that and retain its share.
 Increase in raw material cost. Basic metal prices have significantly increased and major of the cars are dependent
on steel big impact is faced by industries to maintain the low-cost price for the cars and stand against the
competitors in the market.
 Increase in marketing cost. Since there are many competitors on the automobile its necessary for each to advertise
and market their product to reach every single person in country and medium which they use to promote has
drastically increase the cost and its charged for seconds being telecasted which is a huge burden to the sector.
 Changing Consumer Preferences
 Low R&D orientation
 Infrastructure constrains
 Multiple taxes
 Interest rate

Opportunities:
 Increasing purchasing power of the Indian middle-class category
 Government subsidies
 Tax Benefits
 Prospective buyers the 2-wheeler segment
 The combination of lower margins (increasing investments) in the short term and higher revenues & earnings
(growing car sales) in the long term creates a promising investment opportunity.
 Loans offered by many banks with an easily accessible and manageable strategies mainly for the Middle-class
categories.
 Introduction of the companies like OLA, UBER, Meru, etc. enhanced more sales opportunities.
 Business Economics – Term 2 – Batch 36 Assignment
A.S. Arunkumar 190101611204
3. Outline the important determinants of demand for automobiles. How are cross and income elasticity of demand
relevant to Maruti’s managerial decisions?

Important determinants of demand for automobiles

1. 100% FDI and opening of many MNC in India has changed the lifestyle of the middle-class family offering to
afford for more luxurious life.
2. More Financial Bank to offer Loans with striking interest rate attracts people for moving towards buying car which
was out of reach. It said that more than 60% of cars on Indian roads are brought through Loans.
3. As income of people increases, their demand for automobiles also increases.
4. Economic growth and development. As the economy grows, per capita income, education, urbanization, lifestyle
of people also improves, and this has a positive impact on automobiles demand too.
5. Income of buyers – This is the main key factor for the demand. When income of the people rises, the quantity has
demanded. When income falls, demand will also fall.
6. Price: when the prices rise, the quantity of demand falls. That also means that when prices drop, demand will
grow. People base their purchasing decisions on price if all other things are equal.

7. People are attracted to advertisement and it always influenced people to go for it.
8. Increase in population and need of the people creates more demand.
What is cross and income elasticity of demand?

Cross Price Elasticity of Demand (XED) is the responsiveness of demand for one good to the change in the price of
another good. It is the ratio of the percentage change in quantity demanded of good X to the change in the price of Good
Y. The concept of cross elasticity of demand is of great importance in managerial decision mak-ing for formulating proper
price strategy. Multi-product firms often use this concept to measure the effect of change in price of one product on the
demand for other products. When a company sells related products, knowledge of cross elasticity can aid decision makers
in assessing impacts.

How Relevant to Maruti?

 Maruti had been able to maintain a steady rise in profits despite challenges that were beyond the control of the

company, such as increased costs and fuel prices that affected the demand for cars.

 Maruti focus on maximizing the shareholders wealth despite the competitive market which shows one of the

strategies taken by company to increase the market expectation.

 Proof for above statement is in 2014, Maruti’s net profits had risen to INR27.83 billion or 6.3 per cent of net sales

despite of more competition in the market.

 Business Economics – Term 2 – Batch 36 Assignment
A.S. Arunkumar 190101611204

 Competing its own Brand proofs customer that Maruti is striving for the customer needs and their satisfaction.

Example: Alto model competed with the Maruti 800, and the Wagon R competed with the Ritz.

 Maruti produces Maruti Vans, Alto and Maruti SX-4. These products are good substitutes of each other and

therefore cross elasticity of demand between them is very high. If Maruti Udyog decides to lower the price of Alto,

it will significantly affect the demand for Maruti Vans and Maruti SX-4. So, it will formulate a proper price

strategy fixing appropriate price for its various products. When a company sells related products, knowledge of

cross elasticity can aid decision makers in assessing such impacts.

 The concept of cross elasticity of demand is frequently used in defining the boundaries of an industry and in

measuring interrelationship between industries. For example, cross elasticity of demand between Maruti SX-4,

Hyndui’s Verna, Tata’s Indigo is positive and quite high. They therefore belong to the same industry. It should be

noted that because of interrelationship of firms and industries between which cross price-elastic-ity of demand is

positive and high, any one cannot raise the price of its product without losing sales to other firms.

 Maruti had maintained its “people’s car” image since its inception by strategically keeping prices low and

positioning entry-level cars for first-time buyers. Mini-segment cars, which constituted more than 80 per cent of

Maruti’s total sales, carried price tags that were at least 20–30 per cent lower than those of their nearest

competitors.

 Maruti was able to rise their revenue to 500% even though there was sales volume down in period of 2001 to 2014.

 In 2014 Maruti registered INR 445.43 billion where as it was 70.21 billion in 2001. Maruti has never increased the

price and their strategy was to sell more units and they achieved on it and success followed behind them.

But there could be drastic fall if Maruti has not taken prompt action on coming with new design of low cost which

can be of Hybrid car or electric car to meet customer need due to increase in fuel price everyday drastically.

Reference:
1. https://www.eximbankindia.in/Assets/Dynamic/PDF/Publication-Resources/ResearchPapers/81file.pdf
2. https://www.ibef.org/industry/automobiles-presentation
3. LinkedIn website