Monday, September 21, 2009

Global Recession and Indian Response - 1: The Case of Maruti Suzuki

The global recession has hit the world economies badly. The growth prospects of companies were affected adversely. As companies aimed to survive or remain profitable they instituted severe measures to close down or realign businesses and operations and implement severe cost compression measures. Jobs were lost and savings were wiped out while purchasing power crumbled and confidence wilted.

Indian economy too faced the adverse impact of the global recession with reduced GDP growth and heightened liquidity crisis. The fiscal year 2008-09 represented one of the most excruciating years for Corporate India. Different companies, of course, were affected by the economic recession differently and also responded to the evolving situation differently. 

The author examines in a series of papers, the first of which is this paper, as to how Maruti Suzuki, India’s leading automobile manufacturer responded to the situation.

Maruti Suzuki – the small car titan

Maruti Suzuki India Limited (Maruti Suzuki) requires no introduction. Maruti Suzuki was set up on 14th December 1983, in collaboration with Suzuki Motor Corporation, Japan, which was an innovator in small car technology. Maruti Suzuki revolutionized the Indian automobile industry with its small cars and vans, and provided unprecedented choice to the Indian automobile user, consistently from the 1980s. Set up to produce 100,000 cars a year the company grew by leaps and bounds to reach a production capacity of a million cars a year by 2009. Maruti has become an icon of India’s industrial capability with four plants, nineteen related companies, several hundred dealers, vendors, service entities and business associates.

Despite the entry of several global automobile majors into India and the foray by India’s own leading truck and bus maker, Tata Motors, into the car sector, Maruti continues to hold an impressive market share of  55% in cars and vans. The company has sold over 7 million cars cumulatively and despite the domestic orientation exported over 500,000 cars cumulatively.

Like every other company, Maruti Suzuki was buffeted by the adverse economic developments of 2008 and 2009. Recession hits automobile markets rather instantly and intensively, with sharp curtailment of automobile finance and postponement of automobile purchases by individuals and institutions. The car industry did register a healthy growth of 15% in physical sales during Q1 of FY09 but saw the growth plummet to 0.5% in Q2 and then to a negative growth of 15.5% in Q3. The growth recovered to 1.6% in Q4. In the overall for the year, it was creditable that Maruti’s vehicle sales increased by 1.6% to 792,167 and the total income increased by 14.3% to Rs 214,538 million (USD 4.47 billion; USD 1 = Rs 48).

Yet, given the growth impetus that existed in the company, total expenditure increased faster by 17.6% to Rs 187,610 million,  Earnings before interest, depreciation, tax and amortizations (EBIDTA) reduced by 22.3% to Rs 24,333 million, Profit before tax (PBT) reduced by 33.1% to Rs 16,758 million and  Profit after tax (PAT) reduced by 29.6% to Rs 12,187 million. Three other critical parameters of performance showed interesting trends. Inventories declined by 13.1% to Rs 9,023 million and sundry debtors understandably increased by 40.2% to Rs 9,189 million.

Fixed assets increased by 22.3% to Rs 49,321 million, given the significant capacity creation that was effected. Given that around 75% of the company’s components are outsourced working capital management plays a key role. It is significant that the company’s inventory turnover ratio increased significantly increased from 15.7 in FY08 to 16.7 in FY09 while the average receivables holding period increased only marginally from 12.2 days in FY09 to 12.4 days in FY09.

Sound finances and robust strategies

The manner in which Maruti Suzuki withstood the recession underlines the fact that a cumulative set of virtuous strategies can help a company withstand the volatility of economy and the vicissitudes of business. Being virtually debt free and enjoying healthy cash balances (Rs 44,907 million), the company’s ability to fund growth from internal generations has laid a solid financial foundation for operational resilience. The company consistently followed prudent financial policies whether relating to dealer incentives or vendor payments which helped the company to build strengths in these two vital stake holders. In addition, continuous efforts at cost cutting and productivity improvement, even in good times, helped the company make reasonable profits despite the higher commodity prices and a weaker rupee. The company recorded complete capacity utilization and provided full employment to its workforce despite the recession.

Maruti Suzuki’s strength lies in its emphasis on product-market equity. Continuous expansion of product range (8 new models in 40 months; a new car and a new engine in the year of recession), focus on product quality, service infrastructure and customer connectivity. Maruti’s products continuously rank high in J D Power surveys on excellence in automotive performance as well as in customer satisfaction. The company’s continuously expanding distribution network of 681 sales outlets spread over 454 cities and towns, 315 pre-owned car outlets in 181 cities and towns, and 2767 service workshops across 1314 cities and towns remains the bulwark of a foresighted marketing strategy that the company steadfastly pursued. A network of over 50 driving schools further reinforces customer connectivity.

Maruti is perhaps one of the leading companies with an integrated operational excellence model. The Japanese parentage has, no doubt, helped the company to implement the famous Japanese automobile management systems from the very beginning. Maruti was a pioneer in India in terms of a massive vendor development system covering both tier-I and tier-II, and even tier-III vendors. This has helped the company create a contiguous vendor eco-system and implement a just-in-time inventory system, customized to Indian scenario. In terms of manufacturing too, Maruti Suzuki adopted well the parent’s practices of balancing high throughput and high product variety. An end-to-end optimized supply channel drives Maruti’s business efficiencies.

A robust financial strategy well supported by a strong product-market strategy and an efficient supply chain strategy provided Maruti with strong fundamentals and the capability to withstand the severe recessionary climate. Maruti’s example illustrates that an integrated operational framework that is strategically designed and assiduously reinforced over the years helps companies withstand turbulent times.

Organizing for core competencies 

A forward looking organization innovates in organization design to ensure core competencies for a sustainable future. A competent board that comprises the representatives of Suzuki, the parent, the full time executive directors of Maruti Suzuki and eminent retired CEOs of leading Indian companies as independent directors brings scholastic vision to the company. A business and operations team well honed in the Japanese management techniques provides business and operational efficiency.

Simplicity in organizational design leads to focus, empowerment, responsibility and accountability, and results in superior performance. The latest Maruti organization design comprises five verticals: marketing & sales business vertical, production business vertical, supply chain business vertical, engineering business vertical and administration business vertical. Each is headed by two managing executive officers, one of whom is also a board member. Together with the MD & CEO they constitute the core leadership team. This unique system has enhanced decision speed, execution agility and business performance in the company.

Each business vertical has its task cut out. The marketing & sales business vertical has the task of strengthening the sales and service infrastructure, increasing the reach to rural markets on one hand, and entering relatively untapped urban segments such as taxi and institutional markets on the other. The production business vertical has the task of enhancing manufacturing standards to higher and more exacting levels.  Reducing line change set-up time, which was reduced from 7 days to current 1.5 days, to even lower levels is a key factor for manufacturing flexibility. Balancing automation and human intervention is a particularly relevant factor.

The supply chain business vertical has a major task in terms of enhancing localization and upgrading quality continuously. The engineering business vertical has perhaps the most exacting task of building a total engineering capability to develop new models with granular cost points. The administration business vertical which provides corporate services has the tasks of enhancing human resources base, leveraging information technology, framing financial framework and assuring corporate governance. The combined set of objectives of these five business verticals constitutes Maruti’s quest for future, which Maruti calls as quest unlimited.

Sufficient for today and superior for future?

There is no doubt that by charting through the recessionary waters successfully Maruti Suzuki has demonstrated its strengths and capabilities. These have been a result of the typical hands-on Japanese approach of focusing on fundamentals and continuously enhancing competitiveness through kaizen. Maruti Suzuki brought a new wave of world class industrialization to India, long before the economy was liberalized in the 1990s. Should Maruti Suzuki be content with retaining its exemplar role or play a pioneering role once again? Is Maruti conceptualizing the necessary strategies and building the enabling competencies for such a breakthrough iconic role again? Will Suzuki’s tight ownership and management offer an opportunity or pose a constraint in such an endeavor?

Industrial scenario in India is significantly different from what existed in the early 1980s when Maruti Suzuki entered the country. At that time Maruti with the technological  backing of Suzuki and a creative leadership team led a technological and business revolution in the automobile industry, virtually single handed. Today, however, industrial competencies are resident in a much wider spectrum of companies and the competitive dynamics are far more complex. Launch of an indigenously designed micro car, Nano, by the very Indian Tata Motors reflects the maturing of skills in the Indian industry.

Maruti’s FY09 Annual Report discusses the enhanced design and engineering competencies the company now has. There is no evidence, however, in the report that the company is geared to design and develop a whole new automobile by itself. Maruti’s R&D expenditure at 0.42% of the sales turnover is hardly sufficient to design and launch a new car. While it is commendable that the engineering talent base has been virtually doubled to 730 people in just one year (FY09) and would be increased to 1000 people by 2011, the potential to further harness Indian engineering talent to design new cars and vans needs to be more comprehensively leveraged. Higher levels of capital and revenue expenditure in the R&D domain are called for.

Clearly, India is emerging as a global hub for small car production, an initiative ironically is being led by Hyundai Motor, which never believed in small cars until it entered India. In contrast Suzuki Motor was a pioneer in small car design and manufacture for decades. Perhaps, Maruti Suzuki India Limited and Suzuki Motor Corporation need to develop a new global strategic plan for small car design and manufacture for global needs. The plan could also focus on the van segment which could lead a new revolution in intra-city movement of goods and passengers.

It is clear that a focused business model with technological strengths and management efficiencies has assured market and financial leadership for Maruti Suzuki, even in the toughest of the times. Strong fundamentals should therefore continue to ensure a vibrant future for the company.

Posted by Dr CB Rao on September 21, 2009

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