Support of government (in technology, management, land acquisition)

In the 1970s the car segment in India composed of Hindustan Motors Ambassador, Fiat’s
Premier Padmini and the nonexistent standard Motors. Around 1970, Sanjay Gandhi, political
advisor and younger son to the then Prime Minister of India, Indira Gandhi, envisioned the
manufacture of an indigenous, cost-effective, low maintenance compact car for the Indian
middle-class. But due to heavy regulation and licensing raj many international companies did
not want to set their factories in India. The story goes way back to the 1960s when Sanjay
Gandhi got land at cheap rate, tax breaks and even funds to start production in India. Back
then he could not start its production due to various political reasons. The prototype it
produced during that stage was met with severe criticism and scepticism. The company went
into liquidation in 1977. Things started to change in 1981 when a bid for car manufacturing
was invited from various international players. Out of the seven international companies
Suzuki was favoured even over the American companies. In 1982 it went into JV with GOI.
Around 300 acres of land was provided to the company near Gurgaon to start its
manufacturing plant. With the funds and land from govt. and the technology of Suzuki it
began to roll out its indigenous Maruti 800 car. Suzuki received a lot of help from the
government in such matters as import clearances for manufacturing equipment (against the
wishes of the Indian machine tool industry then and its own socialistic ideology), land
purchase at government prices for setting up the factory Gurgaon and reduced or removal of
excise tariffs. This helped Suzuki conscientiously nurse Maruti through its infancy to become
one of its flagship ventures.

Relationship between the GoI, under the United Front (India) coalition and Suzuki Motor
Corporation over the joint venture was a delicate till Suzuki Motor Corporation gained the
controlling stake. This highly profitable joint venture that had a near monopolistic trade in the
Indian automobile market and the nature of the partnership built up till then was the
underlying reason for most issues. The success of the joint venture led Suzuki to increase its
equity from 26% to 40% in 1987 and further to 50% in 1992. In 1982 both the venture
partners had entered into an agreement to nominate their candidate for the post of Managing
Director (MD) and every MD will have tenure of five year. The Suzuki Motor Corporation
didn't attend the Annual General Meeting of the Board with the reason of it being called on a
short notice Later Suzuki Motor Corporation went on record to state that Mr. Bhaskarudu was
"incompetent" and wanted someone else. However, the Ministry of Industries, GoI refuted
the charges. The primary aim of Bhaskarudu was to indigenise most of components for the
models including gear boxes especially for Maruti 800. Suzuki also felt that Bhaskarudu
being close to GoI would not let it increase its stake in the venture. If Maruti would have
been able to indigenise gear boxes then Maruti would have been able to manufacture all the
models without the technical assistance from Suzuki. The relation strained when Suzuki
Motor Corporation moved to Delhi High Court to bring a stay order against the appointment
of Mr. Bhaskarudu. The issue was resolved in an out-of-court settlement and both the parties
agreed that R S S L N Bhaskarudu would serve up to 31 December 1999, and from 1 January
2000, Jagdish Khattar , Executive Director of Maruti Udyog Limited would assume charges
as the MD. Many politicians believed, and had stated in parliament that the Suzuki Motor
Corporation is unwilling to localize manufacturing and reduce imports. This remains true,
even today the gear boxes are still imported from Japan and are assembled at the Gurgaon
facility.

Deregulation and Liberalisation.

India had been infamous for its licensing raj and regulatory policies. The passenger car
import was heavily regulated. Only State Trading Corporation and foreign diplomats were
allowed to import cars. The rate of customs duty levied was around 225%. The red tapism
was quite prevalent and the number of clearances a new company needed to start production
was humongous. Then came the liberal era of 1993 when GoI removed a lot of regulations.
Some of them were as follows

• Stabilization measures – Fiscal deficit reduction & rupee devaluation

• New economic policy – Private sector to power industrial development –

address structural problems

• Deregulation of private sector controls & privatisation of PSU’s

• State monopoly abolition – telecom, airlines & other sectors

• Trade regime Liberalization – removal of import license requirements for most

products, tariff reductions, restrictions on FDI/FII eased, several export
restrictions removed/relaxed

• Entry of foreign players – pace of liberalization slow – import tariffs still high,
FDI indigenous requirements still in place

• BJP Govt in 2000– privatises domestic insurance & telecom sector

• Fiscal/Monetary reforms – power economic growth -> enhances consumption

• Passenger car license requirement abolished in 1993, import tariff, excise

duty(91-92 - 66% , 94-95 - 40% , 01-02 - 16%) reduced – FDI still regulated –
51% automatic approval – above 51% FIPB approval required , MOU required
for CKD/SKD imports – minimum $50 million production(not assembly) unit
investment – 50% local content by 3rd year, 70% by 5th year

Strategies adopted by MUL

Following such a huge regulatory changes by GoI Suzuki adopted a lot of strategies to
enhance its market share. Suzuki wanted to do a `22 billion expansion and modernisation
plan to enhance the number targeted production of cars by 100000 units. Moreover Suzuki
proposed the diversification plan so as to gain advantage and monopoly in the decision
making process in the year 1999. It was heavily opposed by GoI. They propose a two stage
diversification process so as to streamline the process. To cater to the rising demand of Indian
middle class MUL .
Impact of New entrant and intense competitions
The new rules and regulation in favour of car manufactures lured a lot of foeign companies
into India right after 1993. By the end of 1997, Daewoo, Ford India, GM, DaimlerChrysler
and Peugeo had started assembly operations in India. They were followed by Honda, HMIL,
and Mitsubishi. Following the entry of these cars the profit and market share of MUL
declined (Appendix A) for the first time since its launch. MUL strongly replied to the
changes by adopting new strategies. Maruti initiated strategic responses to cope with India’s
liberalization process and began to redesign itself to face competition in the Indian market.
Consultancy firms such as AT Kearney & McKinsey, together with an internationally reputed
OD consultant, Dr. Athreya, were roped in. They provided ideas on modes of strategy and
organization development during the redesign process. A 4000 mn expansion project which
increased the total production capacity to over 3,70,000 vehicles per annum was completed
under the redesign process. New models were launced for different segments of the market.
In its redesign plan, Maruti, launches a new model every year, reduce production costs by
achieving 85-90% indigenization for new models, revamp marketing by increasing the dealer
network from 150 to 300 and focus on bulk institutional sales, bring down number of vendors
and introduce competitive bidding. Together with the redesign plan, there was been a shift in
business focus of Maruti. When Maruti commanded the largest market share, business focus
was to “sell what we produce”. Earlier the focus of the whole organization was "production,
production and production" but now the focus has shifted to "marketing and customer focus".
This can be observed from the changes in mission statement of the organization:

1984: "Fuel efficient vehicle with latest technology".

1987: "Leader in domestic market and be among global players in the overseas market".

1997: "Creating customer delight and shareholders wealth".

Focus on customer care now became a key element for Maruti. Maruti service stations were
increased with the scope of one Maruti service station every 25 km on a highway. To increase
its market share, Maruti launched new car models, concentrated on marketing and
institutional sales, which currently contributes to 7-8% of Maruti’s total sales. Cost reduction
and increasing operating efficiency were another redesign variable. Cost reduction was
achieved by reaching an indigenization level of 85-90 percent for all the models. The
approach saved foreign currency and also stabilized prices that fluctuate with exchange rates.
However, change in the mindset was not as fast as required by the market. Maruti planned to
reduce costs, increase productivity, quality and upgrade its technology (Euro I&II, MPFI). In
addition, it followed a high volume production of about 400,000 vehicles / year, which
entailed a smooth relationship between the workers and the managers. Post 1999, the market
structure changed drastically. Just before this change, Maruti had wasted two crucial years
(1996-1998) due to governmental interventions and negotiation with Suzuki of Japan about
the break-up of the share holding pattern of the company. There was a change in leadership,
Mr. Sato of Suzuki became the Chairman in June 1998, and the new Mr.J. Khatter was
appointed as the new Joint MD. Khatter was a believer in consensus decision making and
participative style of management. As a result of the internal turmoil and the changes in the
external environment, Maruti faced a depleting market share, reducing profits, and increase in
inventory levels, which it had not faced in the last 18 years. After their fall in market share
they redesigned their strategies and through their parent company Suzuki they learned a lot.
The organizational learning of Maruti was moderately successful; the cost was relatively
inexpensive as Maruti had its strong Japanese practices to fall back upon. With the program
of organizational redesign, rationalization of cost and enhanced productivity, Maruti bounced
back to competition with 50.8% market share and 40% rise in profit for the FY2002-2003.

Product recall and its impact (2000: Omni and A-Star, 2005: Swift,
2006: Zen and 2009: A-Star)
In due course of time Maruti has faced a few product recalls. In the starting of the millennium it
recalled 76000 Omni vans to recheck the fuel hose system. It recalled Swift in 2005 to change bolts
that reduce the front suspension noise and it recalled the Swift diesel in 2007. It had also replaced
speedometers in M800 and Omni in 2008. But the most talked about recall is that happened this year
when it recalled 100000 units of its premium A Star model for replacing a faulty fuel pump basket.
This led to a sudden 6% reduction in the stock prices of Maruti Suzuki.

Maruti did not have a comprehensive strategy to deal with product recall. It is heavily dependent on
the product liability cover. There was no brand recall strategy or a risk management tool that could
have prevented the loss due to the brand recall. The loss it suffered due to recall costs, consultancy
fees, lab expenses, re-work and replacement costs, plus brand equity loss in case of a defective
product was visibly reflected in its share prices. The brand equity loss that it suffered is difficult to
measure but easy to comprehend.

But it is interesting to see how Maruti portrayed this recall. It sent individual letters to the customers
and personally followed up with them till the process was complete. It took it as a great initiative to
improve its customer relationship. It denied that most of the cars did not have this problem but as a
responsible manufacturer it was taking proactive steps to ensure such problem never occur in future.
The efforts it took did not help much and the results in the market declined.
Appendix
A
Overall Market Share