Suzuki's child comes of age

Within two to three years, Maruti's production will overtake that of Suzuki's in Japan

Come February, over a period of 10 to 15 days, nearly 3,000 of Suzuki's dealers and sub-dealers in Japan will be flown down to India, to visit Maruti's two plants in Haryana, various dealerships, apart from, of course, doing the usual touristy stuff like visiting Agra. In fact, Suzuki chief Osamu Suzuki will play host to the dealers.

So, apart from the usual logistics of catering to around 50 visiting Suzuki executives at any point in time since Suzuki bought a controlling interest in Maruti in May 2002 (the figure was less than half when the government and Suzuki were equal partners), there's an extra flurry of activity in Maruti's Delhi office, trying to arrange for a huge contingent of interpreters, hotel rooms, Japanese food, and even simple logistics like getting the dealers to visit the existing and upcoming factory sites.

If this isn't a powerful enough symbol of just how important Maruti has now become to Suzuki Motor Company's worldwide operations, consider the fact that, in the current year, over a fourth of Suzuki's global investments will be those made in India along with Maruti in setting up a new plant to manufacture 100,000 cars to begin with (and 250,000 eventually) as well as a diesel engine plant (again, 100,000 to begin with and scaling up to 300,000) and a transmission (gearbox) facility at Manesar that is around a 15-20 minute drive from the existing plant.

Maruti's share of Suzuki's global investments was around 13 per cent in 2000-01, then fell to around 2 per cent in 2002-03 "" while this year's figure is exceptionally high due to the bunching of investment, over the next two to three years, the figure is expected to stabilise at 15-16 per cent.

This year's investment of Rs 3,000 crore is roughly half that committed by Suzuki a few months ago. Suzuki will hold a 70 per cent stake in the new car project and a 49 per cent one in the diesel engine unit.

What's even more interesting is that the 600-acre Manesar facility will have a test track that will be even longer than the 4.5-km one at Suzuki's Hamamatsu headquarters "" this will make it the first of Suzuki's facilities anywhere in the world to have such a facility.

While Suzuki officials are tightlipped about the nature of the R&D equipment that will be available here, especially in comparison with the Japanese facilities, insiders say this is part of Suzuki's commitment to help Maruti grow.

There is, however, no commitment, or target, yet of how much of Suzuki's global R&D will be transferred to the Indian operations, even though Osamu Suzuki is on record as having said that, by 2007, Maruti will be Suzuki's R&D hub for developing and designing cars, from scratch, for all of Asia outside Japan.

To some extent, that has already begun. In 1997, the last time Maruti undertook a major facelift of an existing model (the M800), apart from the nominal tinkering around with the headlamps and stuff like that, the designing was all done by Suzuki's R&D team.

In 2002, however, Maruti began sending eight engineers a year to Hamamatsu to be part of Suzuki's design team. By 2003, when Maruti was ready for a second major facelift, this time of the Zen, there were 17 Maruti engineers stationed in Hamamatsu with the R&D team.

This time around, it was Maruti's Japan-trained R&D staff that did all the work for the Zen's redesign, right from the drawings to the clay models and even creation of some of the dies in-house "" while Maruti always made Category D and C dies, this was the first time the company made any Category A dies, the type used for the car's outer skin.

Though figures are hard to come by, Maruti's internal estimates are that the Zen design change cost it Rs 35 crore, a figure that's around 60 per cent that compared to a situation in which all the work was done by Suzuki engineers.

And finally, when Suzuki launched the Swift, 25 of the 50 designers and engineers that were selected to spend more than six months in Europe to study design and styling were from Maruti.

Today, there are 55 Maruti staffers being trained in Suzuki's R&D centre, usually through a placement there of two-three years each. There is also a satellite hookup between Hamamastu and Maruti's Gurgaon factory that enables designers stationed here to interact with their counterparts in Japan, daily if need be.

Part of the reason for the increased R&D involvement, of course, is also to do with Suzuki's new stress on World Wide Procurement, a concept first popularised by General Motors, which essentially involves identifying the best component supplier in the world.

In the case of the Swift, there are six Indian components that are now being supplied for all global production of the model "" Delphi India, for instance, supplies the steering columns.

So, if global suppliers are to be identified from India, it is only natural that Maruti does the groundwork in identifying them and then discussing design specifications and integrating them with the world wide procurement plans.

The new diesel engine plant for which technology was licensed from Fiat and General Motors' subsidiary Adam Opel to Suzuki will also be used to feed Suzuki's global demand for such engines.

Of course, long before Maruti becomes an irreplaceable part of Suzuki's global R&D plans, it will outpace its Japanese parent in terms of the number of cars sold.

Right now, Suzuki produces around 700,000-800,000 cars in Japan, as compared to Maruti's projected 600,000 for the year. By the end of next year, Maruti's second plant with a capacity of 100,000 will be up. Once the plant scales up to 250,000, depending upon the growth in the market, Maruti's production of four-wheelers will be higher than that in Japan.

The company may even squeeze out a bit more, or add more capacity, judging by the statement made by Maruti's chairman Shinzo Nakanishi at the Tokyo Motor Show in October "" Nakanishi said that as many as 2 million cars would be sold in India each year by 2010, and Maruti was aiming to have half that market. Nakanishi also serves on Suzuki's main board in Japan.

Maruti's contribution to Suzuki's financials has also been increasing dramatically over the years. In 2001-02, for instance, Maruti's profits were Rs 1,045 million and of this, half accrued to Suzuki by virtue of its shareholding in Maruti "" in that year, this was a little over 6 per cent of Suzuki's global profits.

In the six-month period ending September 30, 2005, this increased around three-and-a-half times. Maruti's profits for the half-year period were Rs 4,891 million and Suzuki's profits were Rs 11,900 million, taking Maruti's share to over 22 per cent.

In terms of turnover, Maruti's contribution to the Suzuki kitty has gone up from 9.8 per cent in 2002-03 to around 12 per cent in the first half of the current financial year "" since Suzuki's shareholding was below 51 per cent prior to 2002-03, Maruti's turnover could not be added to its global balance sheet (see graphic).

Over the next few years, as Maruti's sales move towards the 1-million mark, it is expected that Maruti's contribution to Suzuki's global turnover will be around 20 per cent while the share in profit will also stabilise at a level slightly higher than the current one "" the years of stratospheric growth in profits will now come to an end since the huge capital outlays will imply equally large depreciation.

In general, any increase in Maruti's turnover will contribute more than proportionately to Suzuki's bottomline since Maruti's profitability is higher. While Suzuki's profit-after-tax to sales ratio is around 2.5 per cent, that of Maruti is around 6-7 per cent "" in the six-month period ending September 30, it was a much higher 8.3 per cent.

Interestingly, in the period since the government ceded control of Maruti to Suzuki for a control premium of Rs 1,000 crore, Maruti's market share has increased from a little under 50 per cent to around 55 per cent at the moment.

Apart from the increased models, the biggest change Suzuki has brought about in the company after it gained full control, is in the speed of decision making and a big makeover in how cars are to be marketed.

While the 1,000 salespeople trained exclusively to sell the Swift has grabbed the headlines, Maruti has increased the number of dealers from 245 when the government exited to 335 now "" more important, it actually terminated around 20 dealerships for non-performance and poor quality, something that was unthinkable earlier, and has changed the attitude of the entire dealer network.

More than the increase in the number of dealerships, the company's sales force has more than doubled as well in the past three years. Maruti's swift price cuts in response to changed market conditions is another post-privatisation development.

In September 2003, the company announced a massive Rs 23,000 reduction in the price of the Alto in order to reposition it; and when, in November 2004, Hyundai offered a Rs 25,000 discount for those who booked the Santro within the next three days, Maruti bettered the offer in a few hours.

During this period, strengthening of other systems and controls has also resulted in a 12 per cent cut in component costs and an increase in worker productivity by around 50 per cent "" each car took 24 hours to produce in the pre-privatisation days as compared to 12.5 now.

Better quality control (QC) has helped increase productivity and the number of cars that now pass the QC standards the first time around ("direct pass" in QC jargon) is now up to around 85 per cent, as compared to 65 per cent earlier. Maruti has also reduced the number of component suppliers from 350 in 2002 to 215 now, despite having three more models.

While both Maruti and Suzuki continue to work on plans to try and enhance the amount of Suzuki's worldwide R&D done out of here, Suzuki is keeping a keen eye on Maruti's existing practices and is trying to replicate some of them back home.

When Maruti had its obligatory once-a-year board meeting in Hamamatsu last year, one of the presentations made was on the JD Power survey of customer satisfaction and how Maruti has managed to remain number one for several years running "" Suzuki has never been rated as tops in a JD Power survey.

The same presentation was later made to other Suzuki subsidiaries, such as the Hungarian one, that were represented at the Hamamatsu meeting.

Maruti's practice of allowing vendors to get on to an extranet to be able to see the exact production schedule online so as to ship their parts in time has also caught Suzuki's attention. Suzuki's Rs 1,000-crore control premium appears to have fetched the company a pretty good return already.