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Question1:
Outline the important determinants of demand for automobiles. How are cross and income
elasticity of demand relevant to Maruti’s managerial decisions? (10 Marks)

Answer:

1. The demand for a product is based on several factors

a. Price of a Product or Service

 Affects the demand of an item to a huge extent

 There is an reverse relationship between the price of an item and quantity demanded

 The victory of an organization depends on the result of cost war between the
organization and its competitors

b. Consumer’s income
 The pay of a buyer influences his/her obtaining control, which, in turn, impacts the
request for an item

 Increase within the salary of a shopper would naturally increment the request for items,
whereas other variables are at steady, and bad habit versa

 The income-demand relationship can be analyzed by gathering products into four

categories

• Essential customer goods,

• Inferior goods,
• Normal products, and
• Luxury goods (Cars / ACs …)

c. Distribution of Income in the Society

 If income is equally distributed among people in the society, the demand for products
would be higher than in case of unequal distribution of income.

 The high income segment of the society would prefer luxury goods (Cars / ACs …),
while the low income segment would prefer necessary goods

d. Growth of population
 If the number of consumers increases in the market, the consumption capacity of
consumers would also increase.

e. And Other factors

 Tastes and Preferences of Consumers
 Expectations of Consumers
 Effect of Advertisements
 And so on….
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2. The cross elasticity of demand / cross-price elasticity of demand

 An economic concept that measures the responsiveness in the quantity demanded of one
good when the price for another good changes.
 This measurement is calculated by taking the percentage change in the quantity
demanded of one good and dividing it by the percentage change in the price of the other
good
 The concept of cross elasticity of demand is of great importance in managerial decision
making for formulating proper price strategy
 Below are Demand curves of Good X and Good Y. We will discuss about the Demand
curve dependency Good X on Good Y.
i. P1, P2 are prices of Good Y with P1 > P2. Q1, Q2 are Quantity of Good Y with Q1< Q2
ii. Assume Good Y price decreased from P1 to P2, then because of less price quantity
demand of Good Y increased
iii. Now, the manager decide not to decrease the price of Good X
1. If good Y is a substitute for good X
a. If quantity of a good increases, the marginal utility of its substitute good declines and
therefore the entire marginal utility curve of the substitute good shifts to the left.
b. So, the demand of Good X reduced from M1 to M2 (M2 < M1)
2. If good X instead of being substitute is complement of good Y
a. The resultant increase in its quantity demand of good Y due to fall in its price would
have caused the increase in demand for good X and as a outcome the whole demand
curve of good X, instead of shifting to the left, would shift to the right.
b. The demand of Good X reduced from M1 to M3 (M3 > M1 > M2 )
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Income elasticity of demand

 Refers to the quantity demanded for a definite good to a change in real income of
consumers who buy this good, keeping all other things constant.
 The formula for calculating income elasticity of demand is the percent change in
quantity demanded divided by the percent change in income. With income elasticity of
demand, you can tell if a particular good represents a necessity or a luxury.
 Formula for Computing the Income elasticity of demand

Formula for a small change in income

• Let Y be an initial income, ∆Y for a small change in income, q for the initial quantity
purchased, ∆q for a change in quantity purchased as a result of a change in income and
ei for income elasticity of demand. Then
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• Formulae when changes in income and quantity demanded are large, mid-point method
should be used to measure percentage changes in income and quantity demanded.
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 Income elasticity of demand being zero is of great significance. Zero income elasticity
of demand for a good implies that a given increase in income does not at all lead to any
increase in quantity demanded of a good or expenditure on it. In other words, zero
income elasticity signifies that quantity demanded of the good is quite unresponsive to
changes in income
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 If the income elasticity for a good is greater than one, the proportion of consumer’s
income spent on the good rises as consumer’s income increases, that is, those good bulks
larger in consumer’s expenditure as he becomes richer
 On the other hand, if income elasticity for a good is less than unity, the percentage of
consumer’s income spent on it falls as his income rises, that is, the good becomes
relatively less important in consumer’s expenditure as his income rises

-----Answer 1 Ends Here------

Question2:
What are economies of scale? Where do the economies of scale for Maruti come from?

Answer:
Economies of Scale:

When more units of a good or service be produced on a bigger scale, yet with (on average)
fewer input costs, then this is called economies of scale.
Instead, this implies that as a business grows and manufacturing units also increase, a business
will have an improved chance to cut its costs. From this concept, economic growth may be
attained when economies of scale are realized. This is the reason why a smaller business
charges more for a similar product sold by a larger company. Economies of Scale factor of
smaller business compared to larger business.

Economies of scale offers rise to lower per-unit costs because

1. Specialization of labor and more integrated technology boost production volumes
2. Lower per-unit costs can come from bulk orders from suppliers, larger advertising
buys, or lower cost of capital
3. Spreading internal function costs across more units produced and sold helps to
reduce costs
4. Cost of a product depends on if there are a number of different companies
producing similar goods within that industry

As a result, Companies can achieve economies of scale by increasing production and

lowering costs
1. Costs are spread over a larger number of goods
2. Costs can be both fixed and variable
3. The size of the business generally matters when it comes to economies of scale
4. The larger the business, the more the cost savings

Economies of scale can be of both external type and internal type

1. Internal economies of scale are based on management decisions
2. While external ones depends on outside factors

Where do the economies of scale for Maruti come from?

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Answer is:

It specifically comes from larger production for the reason that of low per capita income,
increasing investment on raw materials, and more future demand. Below are the supporting
figures

 Larger production helps to release the new cars with less cost

a. Total Sales / production (with ref of DOMESTIC SALES, EXPORTS AND TOTAL
SALES (UNITS) data)
• Increased yearly till 2010-11
• However sales were reduced compared to previous financial year During 2011-12 and
2013-14, but still the production was huge
b. Exports
• Increased yearly till 2008-09 and normalized in later years and thus supported larger
production to meet the requirements for international business

 Per capital income of INDIA is very less

With ref of MOTOR VEHICLE PRODUCTION, CAR PENETRATION AND PER
CAPITA INCOME OF SELECT COUNTRIES data
• Per capital income of INDIA was lowest. There is scope of more growth in internal
business (exports) by releasing the new models at less price compared to other countries
• Penetration of Cars per 1000 people was very less in INDIA (i.e. 12 per 1000) which
indicates, India had more demand in future.

 Market share of Maruti is the highest in INDIA

As per the data of TRENDS IN MARKET SHARE COMPARED WITH
COMPETITORS, which is the indicator that its Production is the largest and supporting
the business to release the new models with less cost.

 Cost of Maruti model cars is less

As per the data of COMPETITORS and EX-SHOWROOM PRICES COMPARED
WITH COMPETITORS, which is the result of larger production / Per capita income and
thus helped the market share of maruti to become the top in INDIA

 More investment on raw materials

• As per the data of YEARWISE REVENUE, COSTS AND NET PROFITS FOR
MARUTI
• Net profit increasing every year because of increase of more investment on raw material
and employee cost thus increased the revenue for the company every year

-----End of Answer 2------

Question3:
i. What kind of market structure prevalent in the Indian Automobile industry?
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ii. What are the Maruti’s competitive advantages?

iii. How can Maruti sustain its profitability in the future? (10 Marks)
Answer:

i. Market structure prevalent in the Indian Automobile industry

Market structure prevalent within the Indian industry.

Automobile industry is a great modernization by human kind. Being one in every of the fastest
growing sectors within the world its dynamic growth phases are explained naturally of
competition, product life cycle and consumer demand. The automobile global industry is
anxious with buyer demands for styling, safety, and comfort; and with manufacturing
efficiency. Automobile industry in India has witnessed remarkable growth in recent past and is
ranked 4th largest automobile market within the world. Indian automobile is diversified and is
split into following segments: two-wheelers, three wheelers, commercial vehicles, passenger
cars, utility vehicles (UVs) and tractors.
With increase in economy, the purchasing power of potential customers empowers the
car manufacturers, a flexibility to module the value in step with the demand. Also growth and
demand is inversely associated with interest and fuel prices as 85% of vehicles are brought in
credit. While there's growth in car’s sale, which is 18 units per 1000 and remains all-time
low within the emerging economies. Asia has become the foremost client similarly as provider
of cars. India is concentrating on geographic region and south Asia beside ancient developed
country destinations. With the gradual gap of the part sector, now the challenge is for individual
governments to support the event of domestic critical component and sub- system suppliers
through improvement within the investment atmosphere, tougher patent rules and motivations
for R&D.
Below diagram represents car manufacturer’s sales FY 2018 within the Indian industry.

India is an emerging marketplace for worldwide auto-giants. Credit to cheap labor many that

makes make multinational companies to do business in India. Since the center of 90’s, India’s
automotive industry has grown in a fast pace. India is the 2nd most crowed nation in the World,
and level of Indian economy is extremely high, that shows the presence of massive demand in a
number of industrial areas. Indian automobile sector has huge demand from its own country.
This demand conjointly attracts the 19 large automobile suppliers throughout the planet to come
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back and invest within the India. Credit to the many various factors like sales incentives,

introduction of latest models in addition as variants, easy repayment options, demand and sales
of automobiles are rising continuously. Government has also backed during this growth by
relaxing the norms for overseas investment and import of technology that benefited the
car sector. thanks to increase in petrol and diesel prices, the requirement for alternate fuel came
into picture, companies started manufacturing CNG and PNG vehicles but fuel isn't readily
available, Thanks to rising fuel price and growing pollution level emphasis is on bringing in
more and more electric vehicles recently but the question is still the same, will or not it's a
success? Is that the infrastructure needed in place? Will increase in electric vehicle induce
electricity crises? With a growth in income of market demand for luxury cars have increased
which consequence in increase in investment and attracted more and more overseas brands to
sell or assemble or manufacture cars in India.

The manufacturing of total vehicles rise from 4.2 million in 1998- 99 to 7.3 million in 2003-
04. It’s likely that the assembly of such vehicles will exceed 10 million within the next few
years. The rise within the exports of automobile sector is additionally thanks to the difference of
international standards.

Rate % FY’s 2017 & 2018 within the automobile industry in India is shown below.

ii. Maruti’s competitive advantages

Among all car brands in India, Maruti has special place in heart of Indian people. Maruti is
well known for manufacturing low budget, reliable, fuel efficient, easy to maintain and last
but not the least all over India service and spare part availability. With time Maruti has built
such as trust and brand value that whenever a family plans to buy its first car, Maruti is the
first choice. All above factors give Maruti a competitive edge over other competitors.
Recently in 2006, Maruti invested US$ 0.67 billion on small cars. It is predicted that by
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2016, the turnover of the Indian automobile sector may grow up to $145 billion. Currently,
Indian automobile sector has emerged as an emerging sector. Though, the overcapacity
issue is lingering over numerous players as demand may not go up considerably. Therefore,
several companies are observing for an external market for Indian automobiles. The
prospect of component industry is quite positive. The leading other Indian companies have
established over 200 technical co-operation contracts with other foreign firms to be able to
reach international standards in costing and manufacturing standards.
The competitive approach of Maruti Suzuki India Limited (Maruti), a subsidiary of Japan
based Suzuki Motor Corporation (Suzuki), the leader in the Indian passenger car market.
Maruti was founded in 1981. After the liberalization of the Indian economy in 1991,
numerous overseas players had come in to the Indian passenger car market. Right after that,
Maruti started losing its grip on the market share as the competitors firmly established their
position in the car market with the launch of numerous new vehicle models that became
popular among the Indian buyers.
From the above case study, it is clear that, Maruti is losing its profit margin by sticking to
same price when all components like raw material, labor, etc. have increased. Fuel
efficiency and economic price does not attract the major population which consist of youth.
Maruti introduced NEXA and Arena to attract youth to change its middle-class segment
people’s car. To maintain to market grip Maruti need to come up with next generation ideas
like more safe cars with high star rating, should come up with new and attractive features
before other brands and price them at competitive price keeping healthy profit margins. As
making is shifting towards electric vehicle, Maruti should exploit the opportunity to capture
market. By accepting complete automation, Maruti can decrease the cost of manufacturing
therefore can maintain profit margin without getting in to price increase.

iii. How can Maruti sustain its profitability in the future?

The main challenge before Maruti to handle the rise in Input manufacturing Costs, Labor
Costs, Promotional costs, decreasing demand due to Fuel pricing increments.

Sustaining Profitability

Target to provide the Cars with poor price maneuverability

a) Implementing economies of scale --> Maruti should continue focus providing the low
cost cars. To achieve this Maruti should focus on more manufacturing.

b) Probably be the “state-of-the-art plant in Gujarat” by the Chairman strategy can bring
the Maruti to manage the challenges
i. Reducing manufacturing costs
ii. Aiming huge production
iii. Aiming on Promotions
iv. And providing the new model cars with the competitive price

c) On top of the above, Technology and fuel efficient capability of Indian car
manufactures lead to an increase in exports therefore backing the growth in
International business.
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i. So as per the recent year growth of Maruthi over the Exports might be
disappointing in last 2 years (not increased, stabilized) but definitely with the
larger production - Team get focus on International business exports thus sustain
the profits.

-----End of Answer 3------

Question4:
Explain the challenges and opportunities for car manufacturers in Indian Market? (10 Marks)

Answer:

As rightly said change is the only constant, different people, manufacturer view each change
differently. Few see it as challenge whereas few as opportunity. Similar each in market could be
a challenge likewise as opportunity. The key question is how a company can remain
competitive within the front of the turbulent transformations going down within the automotive
industry. The key to success lies in being focused, responsive, variable and resilient, which
might be accomplished by converting to anon demand company. Adaptively to an ever-
changing environment has become the core business demand, requiring problem-solving tools
and methods to be identified, selected and implemented quickly. Followings are few challenges
and opportunity that car manufacturers face with constant changes.
As the Indian economy undergoes dynamic changes, because of several initiatives undertaken
by the govt., together with the projection of achieving 75% electronic vehicle (EV) fleet by
2030, the industry has opportunities and challenges in equal measures. With Bharat Stage (BS)
VI emission norms prepared to kick in India in April 2020, the $64000 challenge for auto after-
makers would be to technologically upgrade themselves to manufacture components complying
with BS VI standards.
Challenges:
➔ Growing price of material and labor cost.
➔ Increasing fuel prices.
➔ An excessive amount of pricing constraint because of competition.
➔ Too many competitors in market from Indian market and out of doors.
➔ Increasing regulatory and social pressures to create environment friendly and sustainable
product.
➔ Increasing overhead to spend more and more on research.
Smooth transition to the electronic powertrain is one in every of the elemental challenges for the
Indian auto after-market sector within the next 5-10 years. The largest challenge,
particularly for tiny players within the segment, would be to technologically adapt themselves
for EVs. Experts believe that those into manufacturing engine parts will face the
most heat because of a shift focused from fuel efficiency and engine management to drive
motors and batteries.

Opportunities:

➔ New and new technology being implement which put all manufacturers on same page thus
first one to exploit can make huge profit and capture majority market.
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➔ With increasing fuel prices, companies have opportunity to launch cars with alternate fuel or
hybrid cars etc.

➔ As people are earning more, they are ready to spend more on cars, thus instead of focusing
one just one segment thus can focus on luxury cars.

➔ With ‘Make In India’ regime in progress in India, car manufacturer can manufacturer
majority of part locally and reduce the cost thus can make more profit.

➔ Majority of cars companies have established their plants in India which gives car
manufacturers opportunity to export more and more.
In addition to above points, the recent research has listed several opportunities for car
manufacturer in Indian market which are detailed below:
Outsourcing needs from global auto component makers: Credit to competitiveness in terms
of cost of raw materials, labor and a well-established manufacturing base, international auto
component manufacturers are increasingly viewing to outsource components to Indian
manufacturers. By 2026, it is expected that the Indian auto after-makers would register exports
anywhere between USD 80-100 billion. Indian auto component manufacturers can look toward
more orders in the near future resulting boosting their revenues.
Hike on Custom Duty on certain auto components will lead competitiveness: Indigenous
players can look forward to the Government’s proposal in next Union Budget to hike customs
duty on certain auto components to boost their competitiveness and push their products in the
market. Note that the customs duty on completely knocked down (CKD) kits was raised from
10% to 15%, while completely built units (CBUs) are now subjected to 25% tax from the earlier
20%. There has been an increase in 5-7.5 percentage points on certain other specified auto
components.

Bet big on investments by automakers: Indian as well as foreign automakers are expected to
invest USD 8-10 billion in the next 3-4 years to build factories in India and bolster production.
This offers an enormous opportunity for national auto after-manufactures to enlarge production
to provide to the demands of automakers.
-----End of Answer 4------