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Maruti's Big Makeover Gamble

Moving into the premium segment of the market is more than just a cosmetic change for the iconic car maker.
By Pavan Lall

On a warm August afternoon, in the middle of an interview at Maruti Suzuki’s office in Gurgaon, Kenichi Ayukawa,the company’s Japanese MD and CEO, decides to play trivial pursuit with me. “How many villages do you think there are in India?” he asks. “A couple of lakhs?” I venture. Ayukawa smiles. “More than six lakh, as far as I understand,” he says. His challenge, he adds, is right there. Maruti Suzuki is present only in a quarter of these villages, and has to step up its rural expansion drive.

I’m nodding, and about to say something about how important it is to expand in rural India, when I slam the mental brakes. Hard. Ayukawa himself had been part of the Maruti Suzuki team that had just recently announced that the car maker was going to enter the “premium” category—making larger, way more expensive vehicles. How does that tie in with the rural push?

That’s the contradiction that lies at the heart of India’s largest car company. From inception, Maruti Suzuki has been known as the maker of the “common man’s car”, and has occupied the value-for-money slot in all its categories. Maruti’s biggest strength, from the time it was set up in the 1980s, has been in understanding exactly what customers want. It was easy enough in the early years: cheap cars. As the market matured, Maruti’s offerings also evolved, but it was always careful to ensure that it met the price expectations of its customers.

But cheaper cars mean slimmer margins. And the company has been facing greater challenges from competition in the cheaper hatchback space, as well as in the B segment of cars costing up to Rs 10 lakh. Maruti gets  80% of its sales from the lower-end B segment and has little to offer in upper C and D segments. Ergo: If competitors from across the pond were to take it on and succeed against such icons as the Alto and the Swift, Maruti would have little to fall back on.

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“You can’t give the competition a foothold as Maruti has done time and again,” explains Vikas Sehgal, global partner and executive vice chairman (automotive sector) at investment banking firm Rothschild. Maruti, he says, has traditionally been the first mover in several categories, but competition has not sat back and watched. “If Hyundai wants, they could bring a very aggressive fight to the table.”

Ayukawa says he is not really worried. “I know that serious competition will come in sooner or later,” he says, adding that he is not threatened because “Maruti is a brand that belongs to the people” and has always prided itself on “being close to the customer”.

Still, with its core business—small cars—under attack, Maruti is looking for new ideas. This time, it has resurrected something it tried unsuccessfully in the past: to play in the premium end of the market.

Maruti had gone down this path a decade or so ago, when Jagdish Khattar was managing director. Khattar was responsible for bringing in the premium SUV, the imported Grand Vitara. That didn’t do well, and the car was withdrawn. A few years later, the company tried again, this time with the fully imported Kizashi. With the same result. This time around, there’s even more money being pumped in, with exclusive dealerships for its premium cars, and a line-up of these cars over the next few years.

Nobody’s willing to venture an answer to why Maruti is not spending on beefing up its presence in the sector it dominates, but after speaking to industry insiders, I think it’s a combination of two things. 

One, the belief (hubris, if you will) that if it does well in one segment, it will automatically do well in another. Two, that if it wants to play in all segments, it needs to create some aspirational value.

The India business represents two things to Suzuki Motor in Japan. With a market cap of Rs 1.28 lakh crore (per the latest annual report), Maruti Suzuki is its most profitable and largest marque. It’s also the cash cow that now supersedes any other business venture the company runs. Unlike for many global car makers, India is not an “emerging market” for Suzuki; it has first-mover advantage here and has virtually shaped the small-car segment with the iconic Maruti 800.

One of the significant reasons for the company to consider bigger cars is something Suzuki learnt in the U.S., a market it was forced to leave after 30 years. The car maker actually had to file for Chapter 11 bankruptcy protection. But it came away with something valuable: the knowledge that it was not in a position to win a fight with companies that make premium cars. In India, where it has had pole position so far in small cars, it’s facing a host of problems. Competitors such as Ford, Honda, and Toyota are invading the segment, even as they build on an established range of mid-sized and large cars. More, the first-time buyers, traditionally easy pickings for Maruti, are becoming far more informed and not buying based on price alone.
 

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So, is Maruti relying on its historical closeness to the customer to evolve into a different segment? I ask that consummate Maruti man, R.C. Bhargava, chairman, who has been with the company for 30-odd years. “Maruti Suzuki will not be producing cars like Bimmers or Mercs or even Honda Accords,” he says categorically, explaining that “premium” has to be seen in the context of the company. While the market sees premium cars as those priced around Rs 20 lakh, for Maruti, its most expensive offering right now is the S-Cross that goes for Rs 16 lakh.

Bhargava is equally forthright about Maruti’s earlier failures with more expensive cars—the Grand Vitara in the late 1990s, and the fully imported sedan, the Kizashi, a decade or so later. Ironically, the two cars parked in his porch are a Kizashi and a Grand Vitara. And that says something to me: that the cars may be solid pieces of engineering, but the marketing and pricing let Maruti down.

Which leads me to my big question: Is Maruti making the same mistake now? Across the board, the only real example of a mass auto manufacturer successful at a luxury or premium brand is Toyota with its Lexus range, but even that took the best part of 20 years to establish. Acura by Honda and Infiniti by Nissan, have had limited successes in a few countries, but overall volumes are insignificant.

Neither Bhargava nor Ayukawa acknowledge that this could be an issue for Maruti. Bhargava wagers that a significant proportion of the country’s vast population of two-wheeler owners will graduate from bikes and mopeds to “Marutis” (shorthand for inexpensive hatchbacks), and only then to “premium cars”. The problem, which he fails to articulate, is that when the choices before the two-wheeler graduate include names such as Toyota and Honda, Maruti Suzuki could fall behind.

Consider this. Honda, which positioned itself as a premium car maker for the longest time in India with its Civic and Accord, has in the past three years introduced at least three models priced under Rs 10 lakh (the compact diesel sedan Amaze, hatchback Brio, and the people mover Mobilio). Today, after Maruti and Hyundai, Honda is the only car maker growing in sales, and its market share stands at an impressive 7%. This is where Maruti faces a serious threat. It’s not out of the realm of possibility for the $118 billion (Rs 7.4 lakh crore) in sales) Honda Motor to invest a couple of billion dollars in India, set up another factory, and churn out half a dozen more models priced below Rs 10 lakh. 

What’s Maruti’s counter? Ayukawa points to the company’s new Nexa brand of dealerships that will focus only on premium vehicles. The decision to open 100 Nexa dealerships across the country, selling only premium cars, is a strategic call Suzuki is taking for the first time. The dapper, laconic Ayukawa admits that pulling off  Nexa will not be a piece of cake given the combined challenge of Honda, Toyota, Renault-Nissan, and Ford, but says Nexa should be able to make a difference. I ask Bhargava about this, and he says I should see Nexa as just another set of dealerships to accommodate new launches. “Where is the room in a single showroom to display some 14 different kinds of cars?” The solution: Break up the product pipeline into categories. 

Maruti is clearly seeing Nexa as a viable option that will let it meet its goal of selling two million cars by 2020. Without models in the upper SUV, sedan, and premium hatchback categories, latching on to micro segments seems the way to go. Of course, this does not mean it is ignoring that it is new cars that drive sales today, not refreshed updates of eight-year-old market successes. Just before we went to press, Suzuki’s global president Toshihiro Suzuki told journalists in Frankfurt that the company would introduce 20 new models over the next five years and, except for maybe five mini-cars, they would all be launched in India.

Maruti is going to use its premium launches in India not just as a way to push sales but also as a base for exports; presently, the company sells about 120,000 cars in foreign markets. C.V. Raman, who heads engineering and research and development at Maruti Suzuki tells me that group chairman Osamu Suzuki has been exhorting the team to use India as a platform to sell cars to Africa, ASEAN countries, as well as Latin America. 

But there’s more at play. Suzuki is of the opinion that a car maker “should own its showrooms and dealerships” in order to create a bedrock of stability. While that may work in Japan, the fact is that it’s cheaper for the company to allow the dealer to own the dealerships. Bhargava adds that the company will soon start an initiative that will include buying land for showrooms and service centres, which it will then lease to  its dealers.
 
As a car maker, Maruti Suzuki has many pluses. Its cars are economical, have a low cost of ownership, and are retailed through the largest sales network (1,682 locations), backed by  the biggest service network in the country (3,112 centres). The one thing a Maruti does not have is aspiration value. And that’s something that its No. 1 rival Hyundai has capitalised on.

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To start with, Hyundai signed on Shah Rukh Khan as brand ambassador 16 years ago, a move that has paid off in spades, especially with younger buyers. Then, the Korean automaker has always made sure to satisfy buyers’ demand for bells and whistles, something Maruti cars rarely provide (other than in the high-end variants). 

After years of giving the customer whatever the company wanted, Maruti Suzuki has begun listening to its buyers. R.S Kalsi, executive director of marketing and sales at Maruti, says that the aggregated feedback in terms of consumer suggestions, focus groups, and web comments in the past four years outlined three key things that the “evolving, younger buyer” wants. 

“The new car buyer wants technology like parking assist sensors, navigation systems, and hook-ups for their smartphones to the car’s central unit. Then they want the car’s design to be futuristic and sporty, and, of course, they want it to be fuel-efficient. All the cars sold through Nexa now and in the future will have these features built-in,” Kalsi says.

Maruti’s new line-up of cars boasts renewed global ambitions. The recently launched S-Cross, which cost Rs 600 crore to make, is an SUV with clean lines, a punchy 1.6 litre engine, and fancy gadgetry including automatic rain-sensor wipers. Its silhouette resembles the Audi Q3. 

The downer is the high sticker price. I discover this when I’m in Delhi, wandering through a Nexa dealership. I open the passenger-side door of the demo S-Cross, and find a potential buyer in the driver’s seat. I ask if he’s planning to buy. “I love the way the 1.6 litre drives and looks,” he says. “But would I pay Rs 16 lakh for a Maruti?” He shakes his head vehemently. Would he pay a couple of lakh less for the 1.3 litre variant, I ask. Again, no. After driving the powerful 1.6, he doesn’t want to own the lower-powered vehicle. 

This is going to be Maruti Suzuki’s big problem: convincing buyers that the “people’s car” has gone upmarket. 

Like the S-Cross, the new Baleno, which debuted at the Frankfurt Motor Show in mid-September, is a goodlooking hatchback with pedigree that hints more at Honda or Toyota than Suzuki. The Baleno is touted internally as a global model and India will be its first market. Still, when the trademark “S” badge on the bonnet is the same as on lesser cousins, the Alto 800 and the Swift, will customers bite?

I spoke to some auto analysts about this. Asking to remain unnamed, the response from all of them was: You can’t sell a car for Rs 3 lakh and another for Rs 15 lakh, and expect the customer to accept the same badge on both. Bhargava and Ayukawa say there are no immediate plans for new labelling; from an export perspective, such a change could lead to confusion. However, the “Maruti Suzuki” badging on the rear of all its cars will be removed in the premium line-up.

Ajay Seth, Maruti Suzuki’s CFO, says apart from competition, “you may have an outlet run by a dealer in a new market that may not break even for 10 years. It’s not easy.” Seth says the company has set aside a war chest of around Rs 4,000 crore, which it will use to invest in and launch some five new cars in the next couple years.

“It’s got to be either a brilliant sedan  or a great SUV,” says automotive writer Gautam Sen, who recently published the book A Million Cars for a Billion People. His point is that Maruti needs to belt out another blockbuster hit like the Swift, which completely changed the company’s image—but it can’t be another small car. His reading of the market: “India is naturally a market for sedans and larger SUVs, but for the cost. People can’t afford them.”

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It is going to be a new experience for customers to check out expensive products from Maruti. This is a brand that’s synonymous with affordable. Most of Maruti’s blockbusters are priced below Rs 6 lakh and almost all below Rs 8 lakh. For argument’s sake, if the Rs 1 lakh Tata Nano had been a success, it would have been in the same sweet spot as Maruti, and would have disrupted two or three of Maruti’s most popular models.

That didn’t happen, but Maruti has not been lying low waiting for competition to fell it. The company has invested some Rs 7,500 crore in its Gujarat factory. This factory, close to the Gujarat port, is likely to be a platform for exports and is expected to be a hub for some of the newer cars that roll out in the future. 

Then, of course, there’s the Rs 4,000 crore earmarked for the new cars, and the investment in Nexa. Like any car dealership, Maruti’s only investment will be the cars with which it populates the showrooms. Dealers invest and Maruti acts as a consultant in terms of the kind of branding and customer experience the showroom must provide. 

Those who remember Maruti in the Khattar days will remember that he had tried to revamp the dealer network. Then Maruti was still partly owned by the Indian government, and was not accountable to shareholders. That has changed since, and the company will have to answer its shareholders if the hundreds of crores spent on the S-Cross doesn’t show returns.

It’s up to Ayukawa and Bhargava now. Bhargava is known to be one of the shrewdest minds in the industry, not someone who will gamble with shareholder money. Ayukawa, meanwhile, is a Suzuki board member and was in charge of a number of markets before being sent to oversee India. Despite some blips in his India stint so far, notably labour trouble at the company’s Manesar factory, he seems to have got most things right. Their handling of this new phase of Maruti will show if the company has become a true Indo-Japanese partnership or if it’s still a Japanese company operating in India.