Global Economics

Smooth Ride for Maruti Suzuki in India


The automaker's executives believe that the company's ability to "constantly innovate" has helped it cope with the economic slowdown

If you retain your sanity in good times and avoid going overboard, the chances are, you'll carry that into troubled times when you need it the most. Speak to Maruti Suzuki employees and the top brass, they'll tell you how. While the global economy is deep in the recession roil and its tremors being felt in India, the country's largest automaker seems unfazed. On the contrary, there's a palpable sense of poise in Maruti Suzuki's office corridors. "There's no special medicine for recession," says Shinzo Nakanishi, MD & CEO, Maruti Suzuki, who believes it's always back to basics in such circumstances. "You have to do what you must."

There's an uncanny note in his voice as if he had a premonition about the current crisis. Little wonder then, while most firms across sectors show knee-jerk reactions to the slowdown and are busy making midcourse corrections in their strategies—Honda, Japan's second-largest carmaker, last year postponed the opening of a new factory in India and Hyundai, South Korea's largest automaker, said in December it will cut temporary staff in India and may reduce production this year—Maruti is planning for the next three years. Most of its plans are well on track as if nothing has changed despite two bad quarters of negative sales (the firm posted negative sales of 3% and 11% during July-September and October-December 2008, respectively ).

"What is helping Maruti today, is the company's ability to constantly innovate even beyond product," says Jagdish Khattar, former MD, Maruti and now CEO, Carnation, a multibrand auto retail chain. "For years it has developed business models in line with existing issues with a long term view."

That's true. Nothing happens in auto industry overnight and what we see in Maruti today is the result of evolution of the company's years of best practices. "You have to ensure that any disruption in the environment doesn't jeopardise your market position, and Maruti has done that well," adds Khattar. If Khattar's phase saw emergence of related businesses for the company and additional revenue streams, Nakanishi's focus on internal processes and new projects is readying the company for the coming years.

The company has completed its capacity expansion to ten lakh units, up from eight lakh and introduced its new technology engine, K10B on the A-Star model launched in November. Its export port facility at Mundra is up and running and the company's incessant investment in R&D continues. When most companies, hit by recession, are cutting jobs and salaries, Maruti has increased its headcount of R&D engineers to 730, up from 350 in August, and wants to take the number to 1,000 by 2010. "There's been no salary cut at Maruti," says SY Siddiqui, managing executive officer (HR & Administration). "Although we are a Suzuki subsidiary and have to align ourselves to the fortune of the parent, we are optimistic that employees could also expect hikes when it's due later in May."

Only those businesses that hope for the best and prepare for the worst can speak that kind of language . And Maruti has been doing just that for the last several months. Mission critical attitude and fiscal prudence has been a way of life within Maruti, good or bad times notwithstanding. And what has fuelled this over the last 18 months is the Japanese major's 3-G philosophy pushed by Nakanishi, which he refers to as 'going back to basics'. "Arm chair management doesn't help," says Nakanishi.

Genba (go to actual spot), Genjitsu (see what's happening) and Gembutsu (identify actual problem) have laid down the framework for Maruti in its 3-year rolling plan till 2010-11. All that has come in handy when the slowdown hit Indian shores. The company was all charged up to face the challenge. "We have ensured that whatever we do should have a long term perspective," says Nakanishi. After all, it had months of solid combat preparedness to do that. When sales declined in the second and third quarter last year, Maruti looked at focus areas that held promise and went all out to leverage them.

The reaction to the slowdown, so to say, has come in the form of initiatives to break new ground in consumer markets—identifying niche segments to hawk its cars, looking at new sources of consumer finance to drive sales and conscious efforts at achieving flexibility to quickly change product mix to address ever-changing consumer demands. Take the case of latter.

Realising that even in the overall downturn, some of its models were in high demand—Swift and DZire had a long wait list—Maruti took a series of steps to produce more units of these models in the same facility, adding production shifts and sub-shifts (both petrol and diesel engines). It could do so since it had been working on that flexible manufacturing programme for months now. "Such an amazing flexibility at the plant was possible as there was a complete buy-in and sense of ownership amongst workers," says MM Singh, managing executive officer and production head at Maruti.

Flexible production schedules involve a complex shuffle of manpower, machine and material, difficult to achieve overnight. Maruti, which had been working on it for months, could beef it up with built-in software that aids such fast-track shifts in production line-up. "Today, we live in uncertain times when it is difficult to profile the demand for the next months, but our in-house developed systems allow that at brisk pace," says Singh.

Analysts tracking the auto industry feel Maruti has always stayed ahead of the industry on best practices. "Whether it is inventory, wastage, flexible production model, the company has processes to keep them under constant check," says Arun Krishnan, manager, KPMG Advisory Services, and ex-Maruti executive. "And it has consciously worked on them even during the boom times." Similarly, Maruti's remarkable market mapping ability during the slowdown has helped it maintain its hold on consumers. As auto-loans dried up in the market threatening sales, Maruti, which had been tying up with PSU banks over last several months, began leveraging its tie-ups with those banks. This was critical as 80% of cars are bought on auto finance and cash-strapped private sector banks were going slow. When banks like SBI opened new sources of finance for consumers, their nation-wide network allowed Maruti to tap upcountry rural markets. "We had anticipated that auto-finance would be a problem, so we increased our exposure to PSU banks" says Mayank Pareek, managing executive officer (Marketing). "When demand went low, we changed product mix and now when the market is demanding, we are ready to take the advantage."

Meanwhile, flexible production has helped Maruti take the economic slowdown in its stride, so far. After two quarters of negative sales growth, aided by some government sops, things began looking up when the company posted highest ever domestic and total sales in January 2009, up 5.6% followed by 19% domestic sales growth last month. If Maruti is not showing any signs of anxiety about cost cutting, it's because of the company's ongoing initiatives of last few years. The firm's employee suggestion scheme and 'One component, One gram' programme for instance, turned out to be a big boon in times when every penny saved counts. By simply implementing 1.2 lakh employee suggestions from its Gurgaon plant alone, Maruti claims to have saved over Rs 46 crore this year. Similarly, the latter scheme has helped it save costs and wastage at the shop floor level on an ongoing basis.

The automakers continuous drive for process improvement and cost engineering, initiated long back, did lessen its burden during these times of crisis. Between 2001 and 2008, the firm's material cost as a percentage of net sales has come down from 90.8% to 76.4%. Similarly, it's employee cost as a fraction of sales has dropped from 3.1% to 2.4% during the same period. Value engineering, localisation (to minimise the risk of exchange rate fluctuations) and focused cost savings have helped, says Ajay Seth, CFO, Maruti Suzuki:

"Today, we are not in any state of panic. Instead, we want to keep an eye on opportunities 2-3 years down the line." According to Krishnan of KPMG, the ability to face a downturn depends on how best a company identifies and minimises slack in the system. "When the pulls of the market slow down, the slack begins to show up," he says. "Maruti has done very well on that front by operating on minimal slack."That may just keep the company on the fast-track through the slowdown.


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