Maruti's coming of age

INDIA'S LARGEST CAR MAKER, the 28-year-old Maruti Suzuki, could well have emphasised tradition at this year’s Delhi Auto Expo. As usual, it had an entire hall to itself at Pragati Maidan. But unlike its conventional stall design, there was a modern, almost futuristic feel to the venue, with its psychedelic lights, LED panels and glowing platforms atop which stood cars, most yet to be launched. In the middle, drawing all attention, lay a machine still under wraps. As leggy models lifted the covers off the rIII to thumping background music, the audience fell silent—then broke into frenzied applause. Standing quietly in a corner that cold January morning, a tall, thin, bearded man in glasses smiled.

That was I.V. Rao, the 58-year-old R&D chief at Maruti, who, along with his team of designers, created the rIII entirely in
India. But the wildly cheering audience, which included executives from rival auto companies, perhaps didn’t fathom just how significant that moment was. It wasn’t just about the rIII, a roomy van that will take another couple of years to hit the road. It was really about Maruti showing off, not to the world but to Suzuki Motor, its Japanese principal, what it could do.

That day, Maruti set off on the road to becoming the new Suzuki Motor.

The Japanese company’s acknowledgement of Maruti’s capabilities began three months earlier, in September 2009, when it announced the opening of a new 700-acre R&D centre, which is coming up in Rohtak, Haryana. By May 2010, four months after the car show, Rao was deputy general manager of the global R&D team, signalling Suzuki Motor’s vision of unified product planning, with the Rs 30,120 crore Maruti playing a major role.

The Rohtak R&D centre is Suzuki Motor’s only such facility outside Japan, a significant departure from Japanese companies’ customary reluctance to share technical expertise with foreigners. Maruti wonks describe this as integration of their product planning department, body design section, and powertrain electrical designing division with the technical headquarters in Japan. In auto manufacturing, these are the first steps towards building a car. Excellence here determines its success or failure.

No other Japanese subsidiary has an R&D facility in India, unless you count Canon’s small team that develops digital camera software. Auto giants like Honda and Toyota tweak global products for Indian roads. Even India-specific cars that use 70% to 85% localised products, like Ford’s Figo or General Motors’ Beat, have been designed and tested abroad.

R&D units soak up huge investments—Rs 1,000 crore in Maruti’s case—and nearly all car companies say their volumes in India do not justify setting them up here. A Honda executive says his company’s stringent quality parameters prevent it from localising too much, and that an R&D unit here may not be feasible right now. But, as the official of another rival Japanese car company, requesting anonymity, grudgingly admits: “An R&D unit here reflects the confidence of the company and the maturity of the market. It helps localise production and cut costs.”

Tetsuo Yamaguchi, senior manager (Japanese business services) at Ernst & Young, explains why this is big. “Until now, Maruti excelled as a manufacturing firm. With R&D coming to India, it will become a complete auto company.”

And serve Suzuki’s interests, according to Maruti chairman, R.C. Bhargava. “In the past, there was no business need to part with core technology. If you could do it from Japan and stay highly competitive, why transfer technology to anyone?” With India accounting for over 50% of Suzuki’s volumes, Maruti had little choice but to do more R&D in India.

For far too long, India was a manufacturing outpost. Even though the R&D teams of Maruti and Suzuki Motor have worked together for nearly a decade now on projects such as the Swift, Swift Dzire, and the new WagonR, it was never a partnership of equals. Suzuki Motor’s headquarters in Hamamatsu, in Japan’s Shizuoka prefecture, always drove the thinking. As a former Maruti managing director recalls, even five years ago, you couldn’t alter a headlight or get a new bumper without Hamamatsu’s nod.

That balance of power may finally be shifting. At the heart of any auto maker is its ability to design cars for different markets. That’s why the Rohtak R&D facility is significant. As a run up to its launch, 700 engineers were recruited in the last two years, raising R&D headcount to 1,000, despite a hiring freeze in other departments.

What first impressed the Japanese wasn’t the rIII or any of the other cars in which Maruti engineers played a junior role. In 2006-07, the Omni van was nearing the end of its lifespan, and its successor, the Versa, had bombed. As always, Maruti executives visited Hamamatsu to choose something from Suzuki Motor’s existing line-up. This time, however, they found nothing they could use.

Rao then wanted to develop a new car based on the Omni platform as an alternative to the Versa. After much resistance, Suzuki Motor agreed to let him try. That was the first time the Japanese company allowed a new car to be designed for India, in India, by Indians. It meant developing a new engine and chassis, albeit on an older platform. Though this was a first for Maruti’ s engineers, Rao and his team developed the Eeco, a five-seater van, in just two years.

What stunned the Japanese was the Eeco’s material costs—Rs 48,000 or 20% below those of rival models. That made it possible to price the car under Rs 3 lakh. “No one imagined we could achieve this level of reduction,” says Rao. His team went beyond cosmetic changes and worked on a new engine. Since market feedback on the Versa showed that it bombed due to poor mileage, the team began by downsizing Eeco’s engine to 1.2 litres. This helped tackle the fuel efficiency problem and even gave the company excise concessions. Further, as part of better engine management, a new piston and piston rings were used to reduce friction, and knocking sensors were installed. All this increased fuel efficiency by 20% over the Versa. The Eeco gives 15 kilometres per litre under actual driving conditions. Since its launch in January, it has sold nearly 3,600 units a month—already half as many as its 26-year-old predecessor, the Omni.

The journey from concept to commercial production takes roughly three years. Suzuki Motor’s Indian R&D facility will cut down the gestation time and help develop cars for other markets. “It’s not just about R&D, but also about developing a complete ecosystem of vendors and suppliers,” says Rao.

Already, Maruti and Suzuki Motor are working on new fuel-efficient engines for future cars and dual fuel injectors for green vehicles. (Earlier, Suzuki Motor was working on alternate fuel injectors and engines with General Motors (GM), but the latter backed out.) In August this year, Maruti launched five CNG variants of the SX4, Eeco, WagonR, Estilo, and Alto with the new engine technology. A project is also under way to develop a global car out of India by 2014.

“Suzuki has to give greater importance and autonomy to Maruti to remain No. 1 in the small car segment globally,” says Kohei Takahashi, auto analyst at J.P. Morgan, Japan.

1982. Osamu Suzuki’s advisors try to convince him that partnering the Indian public sector is a bad idea. The chairman ignores them.

AT 80, OSAMU SUZUKI is the oldest person leading a Japanese auto company. And he has a problem. Make that problems, plural. China, the world’s fastest growing market, is dominated by Volkswagen (VW), GM, and Ford. In the U.S., Suzuki Motor hardly matters. Ditto for Europe. The only country where it has a firm foothold is India, with a share of over 50%. Conveniently for its chairman, it’s the second fastest growing market in the world: Passenger vehicle sales in 2009-10 were up 26% from the previous year. But here again, hungry competitors have begun making inroads and have shaved 15% off Maruti’s market share between 2001 and 2010, even though in absolute terms the market has expanded. Passenger vehicle sales were 699,612 in 2001-02: Today that number is nearly 2 million. (In September 2010, Maruti’s market share was 44%.)

OSAMU SUZUKI DESPERATELY NEEDS to protect his Indian business and figure out ways to use India in a global play. After all, in the financial year ending March 2010, Maruti accounted for nearly 43% of Suzuki Motor’s sales volume (more than 1.02 million vehicles of the 2.4 million that the Japanese firm sold worldwide). The Indian arms of Honda and Toyota contribute less than 2%. Maruti’s closest competitor, Hyundai India, delivers a 12% share to its Korean parent.

By 2015, the Indian car market is expected to cross 4 million units annually. Maruti will have to sell 2 million cars a year just to maintain its 50% share. That’s roughly as many as Suzuki Motor sells worldwide today. It took Maruti nearly 25 years to hit the million mark: Now, it will have to double that in less than four years.

So far, Maruti has been able to hold on to its near-first mover advantage in India, with a portfolio of 14 car brands and over 150 variants catering to every budget. No other Indian or multinational car company has a portfolio in the double digits, if one excludes the CNG variants. After a decade in India, Hyundai fields seven cars, Toyota seven, Honda five, GM eight, Ford four, Tata Motors seven, and Mahindra & Mahindra four, not counting the Logan from its joint venture (JV) with Renault.

But with most global auto makers now turning to India, this will change. Many older players have a new range ready for launch. Then there are companies like VW and Nissan, which set up base here last year. Based on the numbers declared by the industry, an estimated Rs 20,000 crore will be spent between 2007 and 2011 on building new capacity in India, the highest ever.

1982. Osamu Suzuki has one ally, Shinzo Nakanishi, a young executive in the overseas marketing department and a rising star at Suzuki Motor. The 34-year-old gives the JV a favourable appraisal, which strengthens Osamu Suzuki’s resolve.

TWO YEARS AGO, while Rao and his team were designing the Eeco, the patriarch from Hamamatsu shifted gears: He appointed Nakanishi as CEO and managing director of Maruti. By then, Nakanishi was already on Suzuki Motor’s board, responsible for global export strategy. Honda’s Takashi Nagai is the only other Japanese CEO in India who is also on the parent board.

This is familiar territory for Nakanishi, who worked here between 1983 and 1987. He remembers Prime Minister Indira Gandhi’s speech at the inauguration of Maruti’s Gurgaon factory in 1983. “It was an emotional speech, where she remembered Sanjay Gandhi,” he recalls. He also remembers how her son and future prime minister Rajiv was “impressed” by Maruti’s work culture. Bhargava says Suzuki couldn’t have chosen a better man to head India. Maruti insiders see Nakanishi as their man in Hamamatsu than the other way around.

Nakanishi admits maintaining a 50% market share will not be easy, but he’s willing to give it a shot. “This year, our India volumes could surpass Japan’s,” he says, indicating where things are headed.

In the grand skirmish that is building up, Maruti’s 2 million car sales will need to be backed by efficient component supplies. Locally manufactured components reduce overall costs of ownership and never fall prey to global currency fluctuations. Nakanishi sees this as one of Maruti’s biggest strengths and says that, in many ways, the investments in R&D will encourage even more component localisation.

Working closely with the Indian R&D centre will upgrade the skills of Maruti’s component partners in India. Their challenge will be to create parts in tandem with the Indian R&D setup. “Suppliers have mastered process technology. Now they need to move to product technology,” says S. Maitra, Maruti’s managing executive officer (supply chain).

It’s the ability of Indian vendors to keep costs low that makes them attractive. When Osamu Suzuki talks of a 1% cut in the cost of each component, India not only gets it, but takes things up a notch by outlining a strategy to cut costs by 50% and hike production by an equal amount. The shop-floor calls it the ‘50:50’ strategy, after the popular biscuit brand.

THERE IS ONE BIG APPREHENSION, however: Is Suzuki Motor becoming too dependent on its Indian subsidiary? On the Nikkei, Suzuki Motor has the lowest market cap —$14 billion (Rs 62,076 crore)—among auto makers (Toyota’s is $111 billion, Honda’s $56 billion and Nis­san’s $38 billion). On the Bombay Stock Exchange, Maruti is valued at $9.6 billion. Though one can’t strictly compare valuations across countries without taking into account a range of economic factors, the numbers are indicative.

J.P. Morgan’s Takahashi warns that increasing competition will put pressure on operating margins—around 10% to 15% in the last three years and already showing a declining trend—in India. “Suzuki should not depend too much on India and should look at other ways to benefit shareholders,” he says.

The high volumes out of India are also partially responsible for driving down Suzuki’s average realisation per vehicle, currently at Rs 4.87 lakh. Osamu Suzuki believes this should be close to Toyota’s Rs 11.35 lakh per vehicle, nearly three times higher. “We need to improve our yield in Japan and India,” says Nakanishi.

Launching bigger cars, like the Kizashi sedan which debuts in January 2011, is one way of doing that. It also signals a subtle shift in Maruti’s approach here—a move away from focussing only on small and widely affordable cars. Nakanishi chooses his words carefully to describe the job at hand: “We will not be shifting from small to big cars, but merely expanding our portfolio.” The yield in India has started inching up, from Rs 2 lakh in 2005-06 to Rs 2.67 lakh in fiscal 2010.

For Suzuki, this is the obvious way forward, given how large Maruti has become. It could, of course, diversify geographically to derisk India. Asia—excluding Japan—accounts for 55% of Suzuki Motor’s volumes, Japan constitutes another 38%, with the rest of the world (North America, Europe, and some 185 nations put together) making up the remainder. However, India already accounts for 70% of Asia production. Then, Suzuki Motor’s foray into Europe also has a strong India angle: Bestseller A-Star is manufactured here.

North Africa and South America are two other regions that Suzuki Motor is bullish on. But here again the
cars and spares are mostly shipped from India. That’s where the deal with VW—which bought 20% of Suzuki Motor in December 2009—could be significant. The Japanese firm can pitch in its small-car expertise, while VW can contribute sedan models and diesel engine knowhow.

The deal could pave Suzuki’s road into Europe and emerging markets, but India would continue to be an important companion on the journey. VW may agree to the common sourcing of parts if the two companies decide to jointly develop cars. Having burnt its fingers trying to source parts in India, the German auto major may be glad to benefit from Maruti’s proven supplier base. It could also get tips on lean manufacturing from Maruti; its teams have already visited Maruti’s Gurgaon and Manesar plants. But at the moment, it’s unclear how the Volkswagen-Suzuki Motor deal will play out.

There’s another question mark over Maruti’s future: after Osamu Suzuki, who? He is yet to appoint a successor. Some years ago, there was talk that his son-in-law, Hiro­taka Ono, would take over. But 52-year-old Ono died of pancreatic cancer in 2007. Those who know Osamu Suzuki say his succession is far from settled.

There are two theories here. One possibility is that VW buys up more of Suzuki Motor and runs the company. This would fit in nicely with its ambition to become the world’s largest car maker. Alternatively, Osamu Suzuki’s successors may take up the reins. Whichever way the dice roll, Maruti will continue to be important to Suzuki Motor, no matter who is at the helm.