Suzuki’s real race begins now

Daewoo’s small car, the Matiz, is expected to be on the roads in a few months and is likely to pose a major threat to Maruti. Since the 800ccMatiz packs more power than even the 1,000cc Zen, it will, to use marketing jargon, re-segment the car market to Maruti’s disadvantage. With the Matiz almost certain to be priced below the Zen, this means that it will cut into sales of both the Zen as well as the current Maruti 800 which is terribly under-powered in comparison. To be sure, Maruti will introduce a range of new models and will upgrade, or change, its engines. That, however, will mean a sharp rise in costs which will erode its competitiveness in a big way.

Maruti’s toughest challenge, even top Suzuki officials admit, will lie in the ability to source components cheaply. Though it has the best and most developed vendor base in the country, this is essentially in comparison to existing auto-manufacturers. That, admittedly, isn’t saying too much.

So far, Maruti hasn’t really been pushing its vendors too hard to cut costs as it didn’t really matter too much when it was the undisputed market-leader. While vendors were generally allowed pricehikes which were lower than the levels of overall inflation in the country, large cost-cuts should have taken place, given the volumes of production — at around two lakh cars a year, the Maruti 800 is among the largest selling models in the world. Maruti’s vendors, in fact, typically operate on far higher margins than those elsewhere in the world.

That no enough emphasis has been paid to cutting vendor costs is also borne out by an examination of vendor complaints over the years. Vendors have been complaining that while certain favourites have been allowed to hike prices for component supplies, the same benefit has not been passed on to them. Pressed for an answer. Suzuki will probably pass the blame on to managing director R. S. S. L. N. Bhaska-rudu, saying this is one of the reasons why they said he was “inefficient’ — Bhaska-rudu has been in charge of vendor development for a long period of time. But Suzuki can’t escape the blame either as, till recently, its nominee R.C. Bhargava was in charge ofMaruti.

What is equally true is that Suzuki hasn’t paid enough attention to developing India as a base for supplying components to its global operations, and thus used world-wide cross networks to ensure very low-cost components for its cars. Let’s say, for example, that Maruti-Suzuki wants to introduce a new model whose sales will be limited to around 30,000 units a year. And this will increasingly be the trend with new models being introduced by the competition every year. With such low volumes, it doesn’t make sense to make parts such as engines locally. Maruti, however, would have no problem importing these parts if, for example, it was supplying some other components to other parts of the world.

This, incidentally, is the strategy that is being followed by Daewoo. Daewoo plans to have just three or four bases across the world which will supply parts to its global operations. With large volumes in these areas, it will then be possible to supply low-cost components to all its plants. The Surajpur(Uttar Pradesh) plant, for example, will eventually be supplying certain engines, gear boxes and various body parts to plants in Korea and Uzbekistan. Since the beginning of the year, this plant has begun supplying engines for the Nubira and Lanos models being produced in Korea. While it has been importing the engines used for its Cielo model, eventually it hopes to become forex neutral using this method, apart from the fact that it will get components at the cheapest rate. Apart from the question of costs, it is simply not possible to introduce new models in rapid succession without an efficient use of such global networks — how else can critical components be sourced quickly?

Developing, and constantly re-defining, these networks will be Suzuki’s real challenge, and that will determine Maruti’s future. And while Suzuki’s excuse, a valid one incidentally, so far has been that the government has held it back, this will no longer wash. With its own chairman, two management committees to look after purchaseand marketing decisions, and a new joint managing director who is seen to be their’ man, Suzuki is in control of most of the levers at Maruti. It is up to it to use them to the company’s advantage.