Changing auto industry in India: How Maruti has coped with it so far

Abstract

The Contemporary Concerns Study aims to study the changing auto industry scenario in India, what it was in the years prior to liberalization of the Indian economy, the major players in the industry then, the competitive forces in play then, the advantages they had and the limitations they faced, and how these changed after the opening up of the Indian economy to multinational auto manufacturers. We plan to go about this by analyzing the auto industry in India with a macro view, and with a specific focus on Maruti-Suzuki. In order to analyze the industry, the competitive forces within, and the relative power of each player (buyer, supplier, manufacturer), it was felt that Porter’s five forces framework was best suited to these requirements. The application of the framework yielded the following results. In terms of supplier power pre-1991, there were two balancing forces: one being the development of supplier expertise by Maruti thanks to the high Japanese technical standards and requirements of Suzuki which made the suppliers highly competitive technically and hence increased supplier’s power; and the other being Maruti’s huge share of the Indian market, which gave them a very strong bargaining power, further compounded by long-term contracts and locking of suppliers into location-specific assets. In the pre-1991 era, it is felt that this balance is very much tilted in favor of Maruti Suzuki. Post-1991, there was an increase in supplier power due to the entry of several multi-national auto manufacturers in India. This was negated by the increase in number of technically competent suppliers and hence competition in the auto supplier industry. On the whole, as time progressed, it seems that supplier power has fallen, thus making this industry more attractive from the point of Maruti’s perspective. With regard to threat of competition, in the pre-1991 era, the Indian auto industry had only 3 major players including Maruti, and the products offered by the other 2 were not in the same segment as Maruti’s. Hence, competition was virtually non-existent from Maruti’s viewpoint. With the opening up of the Indian economy, the scenario became very different, & Maruti faces threat from competitors in all its product segments. However, it continues to maintain a strong position, accounting for about half the Indian auto market, thanks to its low-cost advantage, local knowledge, highly focused small car target segment strategy, and high productivity. There was very limited Threat of Entry faced by Maruti pre-liberalization due to high entry barriers set by the Indian government, which had a major stake in Maruti. The opening of the economy did not immediately pose major threats to Maruti since the foreign players had to import much of their components in the initial years, while Maruti had ready access to domestic raw material and cheaper labor, thus giving it a significant cost-advantage. Significant threat was faced by Maruti only much later in the late 1990s and early 2000s, with barriers to entry at their lowest since Maruti entered India. Buyer Power was quite low in the pre-1991 era, with very few (3) major manufacturers. While the number of potential buyers was also low, suggesting an increase in their power, since Maruti was the only provider in its car segment (e.g. Maruti 800 and Omni) the scales tipped in Maruti’s favor. Post-liberalization, with an increase in the number of auto manufacturers, and with people becoming more conscious about car specifications, quality, brand image, and more willing to pay a premium for this thanks to an increase in per-capita income, buyer power increased substantially. In terms of threat of substitutes, Maruti enjoyed a near monopoly in the car segments where it sold its products, and hence faced no threats. Post-liberalization was a totally different picture, with competition faced by Maruti in every segment it was present in, thus substantially increasing the threat of substitutes. The road ahead for Maruti, though challenging, presents it with several opportunities. Challenges faced are primarily in terms of increase in threats faced along lines of competition, substitutes and buyer power. Opportunities are several, be it the relatively untapped and highly promising Tier II and III cities and rural areas, whose purchasing power is expected to increase considerably, or entry into the currently unexplored luxury sedan segment (in the form of Maruti Kizashi). On the whole, while Maruti seems poised to successfully tackle the challenges in the domestic market, it still has some way to go – be it in expanding its product portfolio or building on its brand equity – before it can consider itself to be internationally competitive.