Tipping Point
Maruti Suzuki finds itself at the receiving end of the unprecedented slowdown in India’s automobile market. It has slipped out of the top 10 list.
MARUTI SUZUKI INDIA’S second quarter financial performance was its worst in almost five years. The reason for the slump that the company finds itself in is low demand for its vehicles. Sales tumbled by close to a third during the three-month period.
The cyclical automobile sector routinely goes through crests and troughs. What set Maruti apart from the other players was its ability to perform better than the industry even in tough times. Not this time, though. The second quarter was not a one-off either.
In the first half of this fiscal, Maruti’s sales fell 27 per cent as against the industry average of 23.6 per cent. This resulted in the company losing 2.33 percentage points market share (from 52.1 per cent to 49.77 per cent). This is the most Maruti has lost in a six-month time frame, barring the period in 2012/13 and 2013/14, when it was facing labour issues at Gurgaon and
Manesar factories.
The stock market has not taken kindly to this. The company’s average market capitalisation fell over 23 per cent in the one year between October 2017-September 2018 and October 2018-September 2019. The four-position fall in the company’s BT 500 ranking has pushed it out of the top 10 list of India's most valuable companies this year.
The Triggers
There are several reasons for Maruti’s under-performance over the last 18 months. The automobile industry has seen widespread changes during this period. Right from new safety regulations to intense public debate on electric vehicles as choice of the future and transition from BS IV to BS VI emission norms in April 2020, everything has conspired to discourage people from buying a car. At the same time, insurance and finance costs have gone up. The fall in overall consumption on the back of diminished economic activity, low wage increases and high unemployment have not helped either. The biggest impact has been in the entry-level segment, where Maruti is the king, as the budget consumer is the one who has seen his growth prospects dampen sharply in the last few months. “The main reason for the slowdown is that the cost of buying a car has gone up substantially this year. The safety and emission norms being implemented at the same time (Maruti has proactively launched BS VI petrol cars ahead of the April deadline), change in regulations for insurance where consumers have to buy for three years in the first year itself and as many as nine states increasing road tax have made owning a car more expensive,” says R.C. Bhargava, Chairman, Maruti Suzuki India Ltd. “On top of it, availability of finance for cars went down by almost a third. Higher interest rates resulted in an increase in initial deposit at the time of buying by up to 11 percentage points from 10 per cent earlier, an over two-fold jump.”
Not everything, however, can be blamed on the external environment. The company has had a relatively lean two years as far as new launches are concerned. Most of its launches were refreshed versions of older models like the new Swift, Ertiga and Wagon R. Before the S Presso last month, the last time the company had launched a new brand in India was in January 2017 (Ignis). During this period, not only did new competitors like Kia Motors and MG Motors enter the fray, older rivals like Hyundai, Tata and Mahindra launched new brands like Venue, Nexon and Harrier and Marazzo and XUV3OO, respectively.
Maruti’s relatively weaker position in the utility vehicle segment also hurt the company. An ill-timed announcement last April that it is discontinuing its smaller 1.3 litre diesel engine in the BS VI regime from April 2020, with no clarity on whether another engine will be offered in its compact SUV Brezza, has been a major faux pax. It came at a time when Hyundai Venue was getting ready for launch and immediately hit the fortunes of Brezza, one of Maruti’s bestselling and most profitable new models. “It would not have hurt that much had the market generally been good, but in the context of the current situation, it was a self-goal,” says an industry analyst who does not wish to be identified.
“The confusion that this created in minds of consumers was exploited well by Hyundai. Controlling that damage proved to be very costly as Maruti had to offer five-year warranty on all its diesel models and steep discounts on Brezza. In a matter of a few months, we saw a car that was being sold without any marketing effort being offered at skyhigh discounts,” says the analyst.
On a more long-term perspective, too, given the disruptions the industry is poised to witness, Maruti's future is a tad uncertain. The first question is whether it will be able to compensate for the loss of the diesel market with either a commensurate growth in petrol models or by pushing its CNG portfolio. The growth of electrification of mobility in India and the role that Maruti will play in it are also unknowns. While its market leadership is a given for at least the next decade, holding on to a 50 per cent share, a high, will be a tough ask. “It’s a challenge. Globally, one company has never been able to get 50 per cent share in one country,” admitted Toshihiro Suzuki, the President of parent Suzuki Motor Corporation and the son of patriarch Osamu Suzuki. “The Indian market is very special to us and we will try to keep the 50 per cent share but there are varied challenges. General Motors in the US has around 16 per cent market share. The same is the case with Volkswagen in Europe. But I will try to keep the 50 per cent market share (in India).”
If the company manages to do that, its financials, stock market performance and market capitalisation will take care of themselves.
Most launches of late have been refreshed versions of older models like the new Swift, Ertiga and Wagon R