MUL: Miles to go

Raghuvir Srinivasan

IT SEEMS to be open season on Maruti Udyog Ltd.(MUL). Virtually every magazine and newspaper has carried articles on the company in the last one month. And, predictably, the underlying theme has been, without exception, the travails of the company and what the future holds for it.

In one such recent article in a business magazine, MUL's Managing Director, Mr. Jagdish Khattar, was projected as being rather confident about his company. He even dismissed the falling market-share as something inevitable when competition intensifies.

Even if Mr. Khattar is a worried man, he can obviously not be expected to admit it openly. But, then, are there reasons to be worried? Is his confidence justified or misplaced?

From an objective viewpoint, there are enough reasons why the chief executive's chair at MUL should be a hot one now. Mr. Khattar is partly right when he says that the leader's market-share is bound to fall when quality competition enters the fray. When the market moves from a near-monopoly to oligopoly, the monopolist's (MUL's in this case) share of the pie will certainly shrink. But there is one crucial test here -- is the erstwhile leader well placed to defend its position in the market? This is where doubts rise in MUL's case. Its problems go beyond a falling market-share.

Model fatigue

Easily, the most critical of these is the fact that MUL has no good competitive offering either in the small or the mid-size segment. The Zen is, no doubt, still sought-after, but it is fast losing out to the `tall-boy' Santro and the `looker' Matiz. There is, then, the Indica. The Zen has held on only because the market itself was expanding. But the market contraction in the last four months has seen Zen sales take a knock.

The introduction of the Wagon R was to take on competition with multiple models in the same segment. But it does not seem to have exactly worked as MUL may have wanted it to. The Wagon R lost the first mover advantage to Santro which seems to have become the ``original tall-boy'' in India; Suzuki Motor Corporation first introduced the design in the Japanese market. There is no gainsaying that MUL was late in moving and it is now paying the price for it.

In the mid-size segment, MUL's problems are more serious. The Esteem is now viewed as the poor cousin of the Ikon, the Accent, the Sienna and the Corsa. MUL has to do something dramatic if it is to retain its base in this segment where its volumes are hit badly. The company seems destined to lose out here only because it has no immediate offerings in this segment and any new ones could take time, which is the critical issue now.

Mass-market moving higher?

It is only in the entry level range that MUL is still holding ground. But there could be worries developing here too. If the trend of rising volumes in the Santro-Zen segment is any indication, then the mass-car market itself appears to be gravitating towards that level from the M-800 model now. The M-800 was typically the first car that a young person bought while upgrading from a two-wheeler. But the trend now seems to be shifting to the next higher, Santro-Zen, level due to several reasons.

First is the comparatively higher income levels now at an early stage of a person's life caused mainly by the boom in professional services such as information technology. This has increased the aspiration levels while going in for a car. Second, the well-designed finance schemes that are now available make owning a car that much more easier. Suddenly, Rs. 3 lakhs does not look too imposing, especially if the choice available at Rs. 2 lakhs is a staid old model of the 1980s, though probably a proud possession of the older generation. And -- model monotony that is the third reason -- propelling mass-market to a higher level where attractive choices are available.

This could be a dangerous development for MUL as the 800 is still its volume car. Take it away, and MUL's volumes could drop precipitously. MUL needs to develop fast a viable offering that would be viewed as qualitatively better and more contemporary than the M-800. The Alto is probably MUL's answer to this problem. But the verdict has to wait till after the car is launched.

Heavy outlay needed

To refurbish its range, MUL needs to invest substantial amounts of money apart from time in developing a vendor network. The company may be able to manage the money but indigenisation would prove as critical to success. This is where MUL could run into practical problems that may delay its plans.

MUL's biggest advantage till now has been its low-debt status which meant that interest charges were nothing to worry about. But that could change as the company borrows to fund its investments. Equity funding does not appear practical at this moment as neither will the government be able to cough up its share, nor can it allow Suzuki Motor Corporation to bring in funds, thereby increasing its stake.

Not comfortable financials

MUL has also lost a comfortable cushion that it had in the form of advance booking money from customers which was interest free. Depreciation charge could also rise in the future from the new investments that MUL would be capitalising. Over and above all this is the fact that it would have to hold the price line in the face of competition. Thus, the outlook on the financial front is anything but rosy.

Whichever way one looks at it, it is clear that MUL is facing the toughest challenge of its 16-year existence. And it certainly does not appear, at least at this point in time, well prepared to face up to it. Mr. Khattar, his confidence notwithstanding, must be a worried man. But there is certainly one other person who ought to be more worried than him -- the President, who, holding almost 50 per cent of MUL's equity (that is, the government's stake), stands to lose the most when he goes out to divest his stake. He could certainly have done better, much better, had the MUL shares been sold even a couple of years ago.