CASE STUDY ANALYSIS:

MARUTI SUZUKI INDIA LIMITED:

SUSTAINING PROFITABILITY

Submitted By – Himanshu Jha ( 16S517 )

Himanshu Jha 16S517 himanshu.18@tapmi.edu.in 9556455332 Page 1

Introduction of the Case:

Maruti Suzuki began operations in 1981 in India and has been a dominant player in the Indian
automobile industry ever since. After continuous growth in sales volume since inception, it
faced a YoY decline for the first time in fiscal 2011-12 and even by 2014 it had not recovered.
The chairman, R C Bhargava, was deliberating on the prospects of opening a new plant in
Gujarat or of raising prices of the cars to sustain profitability.

Issues Faced by Maruti Suzuki

Due to increasing competition from new car manufacturers and new car models, the existing
companies need to continuously innovate. This innovation needs to be in design, performance
and most importantly, fuel efficiency. The majority of the Indian population prefers fuel
efficient cars. This is the reason Maruti Suzuki has been able to capture a large market share. To
continue to lead, it has to continue to spend greatly on research and development. These are
some of the issues faced by Maruti Suzuki :-

 Total sales of Maruti cars (domestic and exports) has fallen from 1271005 in 2011 to
1133695 in 2012 with not a lot of progress in the coming years of 2013 and 2014
 Market was facing fierce competition in the sector
 Low purchasing power of the average indian customer and low penetration
 International automobile player taking advantage of indian engineers
 Fuel prices affecting the demand for automobile
 Raw material costs have seen tremendous hikes. In 13 years, steels costs tripled and
inputs like copper, lead and rubber saw an increase of at least 240%.

Opportunities for Maruti Suzuki and similar car manufacturers in India:

 Using economies of scale, companies like Maruti Suzuki, Tata Motors, Hyundai and
M&M can offset lower profitability per model. They have healthy market positions with
Maruti having about 49% of the domestic car industry and Hyundai having 21%.
 Maruti’s parent Suzuki Motor Corporation formed an alliance with Volkswagen AG in
2009. Now Maruti and VW can tap into each other’s strengths in the domestic market.
These kinds of strategic alliances will always be fruitful for all players.
 Players can use platform-sharing and advanced and flexible manufacturing technology
to substantially reduce product development and changeover times.

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  The Indian market continues to show great potential, as income levels are rising and yet
fewer than 12 people out of 1000 owned a car in India in 2014. This number can only
keep rising with time.
 By sourcing inputs locally rather than importing them, players can significantly reduce
their production costs and increase profits. This coupled with a favorable exchange rate
and increasing exports would continue to sustain great profits.
 Players can diversify operations like M&M has. The Indian market bears a huge demand
for two wheelers as well. This is a good opportunity to increase market share.

Oligopoly

Based on the data provided in the case, the Indian automobile industry can be classified as an
oligopoly. To justify this, consider the facts below:

1. Only few firms like Maruti, Tata, Mahindra, Hyundai, Honda, Toyota account for most of
the production in the Indian automobile industry, out of which maruti (49%) and
Hyundai(21%) are the big players.
2. There is an intense price completion, any change in price by any of the players cause the
reaction from other firms. When one company reduced its prices, the others were left
with no choice but to sell their cars at reduced/stagnant prices
3. The industry has significant entry and exit barriers, making it difficult for the new players
to enter the market. The customers have existing brand preferences. Setting up a new
plant was a messy affair in India, with regulations related to land acquisition and
obtaining clearances from different ministries

Profitability shown by Maruti Suzuki India Ltd.

 Maruti maintains a steady growth and profits

 In 2014, net profit rose to 6.3% of net sales
 Focused on maximising shareholder’s wealth
 Rising input cost and fuel prices were a major concern
-

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Solutions for the problems faced by Maruti Suzuki India Ltd.
1. Cost Cutting can be done
Reducing the cost of manufacturing is one way of increasing the profitability. There are
certain problems associated with cost cutting with respect to Maruti
a. Input Costs:
o Price of steel increase 3 times
o Copper, lead and rubber cost went up by 240%
o Price of aluminium rose up by 7%
o Increase in price of electricity and fuel prices
b. Labour Costs: The labour costs have risen considerably due to various factors from
the employee cost being 1.99 billion in 2001 to 10.69 billion in 2014
c. Selling costs and fuel prices: Cost of advertising in per capita terms had risen from
18069 to 56226 per car. Also the deregulation of diesel price affected demand
With the increasing costs in each of these areas, the possibility of cost cutting is very
low. Also it is mentioned that Maruti offers its product at a lower price in comparison to
its competitors. Hence, we can rule out the option of cost cutting.

2. Increase the prices of the cars: Since, we are talking about the oligopoly market (as
stated earlier), the market is very price sensitive.
If maruti increases the price from the current price, none of its competitors will follow
suit, so it will lose most of its sales

Fig. 2 shows a kinked demand curve

Fig. 1 Fig. 2

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 Fig. 3

Also the lower middle class, whose budget forces them to stick to two wheelers whose
buying capacity increases and gradually moves to the small car segment. This leads to a
corner solution and hence ruling out this option two (Fig. 2)

3. Start a new production plant in Gujrat

The exports are estimated to increase by 12%, so a greater demand is expected .

Based on the information given in exhibit 6, the predicted net profit;

2015 - 29.64 B Maruti can actually get back its investments

in new plant within 2 years (Best case
2016 – 38.81B scenario) and 3 years (Worst case Scenario)
2017 – 33.99B

Himanshu Jha 16S517 himanshu.18@tapmi.edu.in 9556455332 Page 5

Conclusion and decisions to be taken

Maruti Suzuki can continue to dominate the market and sustain profitability provided it keeps
innovating. It already enjoys economies of scale and opening up a new manufacturing unit may
not turn things around as much. It can instead rely on favorable exchange rates and reduce
input imports while increasing car exports. Since it has a lower price than other players, it can
afford to slightly raise prices and improve its profits. This price raise should not exceed the
average in the particular segment.Maruti has to set up a production plant in Gujrat as it would
be more efficient in making use of the new technology, lowering the cost of production and in
the process help maruti achieve economies of scale. It would also eliminate the opportunity
loss.

Himanshu Jha 16S517 himanshu.18@tapmi.edu.in 9556455332 Page 6