Who'll rule the road?

Will the Nano's arrival affect Maruti Suzuki's leadership in small cars?

The Nano was not the only car that made a splash across newspapers around March 23, the day of its launch. Another car company also carried huge advertisements of one of its bestsellers at the same time. It was Maruti Suzuki telling prospective customers the virtues of its small car, the Alto. Radio ads exhorting two-wheeler owners to upgrade to a Maruti Omni too were put on air.

Was it the Nano effect on the market leader (market share of over 52 per cent at the end of February 2009)? In the days following the Nano’s launch, car makers said the small car will eat into the two-wheeler market; smug two-wheeler makers retorted that the damage will be borne by carmakers. The debate will take at least a couple of years to settle, reckon sector experts, especially since the Nano will take another year to be produced at full capacity.

But it will usher in an irreversible change for Maruti Suzuki. After 25 long years, Maruti Suzuki will no longer be the first point of contact for a large number of car owners. This is important as it allows a carmaker to hook a customer for life by providing him with an option whenever he wishes to upgrade. In fact, the company at one time used to sell the Baleno at a loss only to make sure that any customer doesn’t desert it when he wants to upgrade from a small car to a sedan.

This space will now be occu­pied by Tata Motors. Every time a Nano owner wants to move on to something bigger, the company will have a car to offer: the Indica, Indigo, Prima (a concept luxury sedan unveiled at the recent Geneva Motor Show), Sumo and Safari. In fact, for the customer who does rea­lly well in life, Tata Motors can even offer a Jaguar or a Land Rover!

Maruti Suzuki Chairman Ravindra Chandra Bhargava isn’t sure that if it is possible for  Maruti Suzuki to hold on to a customer right through his life any longer. The expertise of Suzuki, and hence that of Maruti Suzuki of which it owns 54 per cent, lies in small cars. For bigger cars, it may not be able to provide the options a customer looks for. “Our upper-segment cars are not high-volume players. The most expensive is the SX4 which comes for Rs 700,000. People don’t perceive Suzuki cars in this segment to be at par with others,” Bhargava admits candidly.

Maruti Suzuki has maintained since early-2008 — the time when the Nano was unveiled at the 9th Auto Expo in New Delhi — it will not come up with a car to compete with it. Bhargava puts any lingering doubt to rest: “We have been told by Suzuki that it can’t design a product at this price (of the Nano) to address the segment that might get created.”

The space for Maruti Suzuki thus is well defined. It has to grow in the segment above the Nano and below the executive cars like the Honda City or the Toyota Corolla.

Its oldest entry-level war­horse, the Maruti 800, doesn’t have too much life left in it. On April 1, the company annou­nced its intention to withdraw the car and the Omni from as many as 11 cities by next year. Maruti Suzuki will not spruce up the engines of either to meet the Bharat Stage-IV emission norms that will be levied by then. But Maruti has models such as the Alto, Zen Estillo, WagonR, A-Star and Swift to bank on. The Ritz, a “tall-boy” with a 1.2 litre petrol engine priced slightly above the A-Star, will find its way to the list in the next few months. These cars will help Maruti Suzuki thwart any challenge to its supremacy, feels Bhargava, including the one posed by the Nano.

Ernst & Young Partner and National Director (automotive practice) Rakesh Batra says: “Maruti Suzuki’s expectation is that the Nano is for customers who will upgrade to a car sooner because now there is such a product available. Competition would also be with used cars rather than with the Alto.” He feels that Maruti Suzuki must have already assessed whether to enter the market or not and decided against it because it would not be meeting its own safety standards.

Comfort brand

In difficult times, says Bhargava, customers turn risk-averse and stick to trusted brands. The current financial crisis is the worst Indian consumers, especially the urban ones, have ever seen in living memory. Fears of joblessness are rampant. Banks had turned reluctant to lend in the middle of last year. It is only now that public sector banks, obviously under the government’s diktat, have loosened their purse strings and brought the rates down to 10-12 per cent.

In such a scenario, Bhargava says customers have started flocking to Maruti Suzuki showrooms like never before. The company produced close to 85,000 cars in March, which is an all-time high, even as dealer inventories including cars in transit hit a new low of less than 50,000. Sales too crossed the 73,000 mark for the first time in March. “Because of strong sales in March, we will end the year 2008-09 with growth of 1.5 per cent in domestic sales over the previous year. Earlier, we were expecting a decline,” says Bhargava.

The company now makes projections for three months at a time. And the next three months, according to Bhargava, should maintain the momentum showed in March. He attributes it to the strong brand equity of Maruti Suzuki.

“In troubled times, people become more risk-averse in making large investments. They try to play as safe as possible. People would rather buy a Maruti Suzuki car than a new and untested product which is often seen as a risk,” explains Bhargava. The slowdown and the credit crunch in the cities mean that despite the spiffy city car that the Nano aspires to be, it might be a challenge to get people to experiment with a new car right away.

Apart from the performance, what will work in favour of Maruti Suzuki’s small cars, says Bhargava, is its network of about 19,000 authorised service stations, the low cost of maintenance, the availability of inexpensive spare parts and the familiarity of roadside mechanics to fix any minor trouble in the car.

The high resale value of most Maruti Suzuki cars vis-à-vis rival brands too will play on the mind of the buyers. “Every locally made component fitted in our cars runs on test tracks for 20,000 km to check its performance before it is approved for substituting an imported part,” says Bhargava. “It is a time-consuming and costly process but our rigorous quality control (hence, more durability) is why even our second-hand cars fetch a good price.” Market estimates put a premium of Rs 10,000-15,000 on a three-year-old Maruti car over those from other carmakers.

Big aspirations

Could the Nano’s price tag of Rs 1 lakh become a liability for Tata Motors, marking it out as the poor man’s car — a car for somebody who couldn’t afford an expensive car? Had price remained the decisive factor in car purchases, the sales of the Maruti 800 would not have dwindled regularly over the last few years, says Bhargava. While the car sold as many as 20,700 at its peak in March 2003, March 2009 saw the number plummet to only 2,430.

Bhargava explains, “The bulk of urban customers buy on installments, so their main concern is not the total initial cost but how much the equated monthly installments come to. The less the interest rate, the lower is the monthly installment and the greater the demand for more expensive cars. Smaller installments make it easier for people to show off.”

What he hints at is significant. The base model of an Alto comes for Rs 223,814 ex-showroom in New Delhi. The fully-loaded Nano will carry a price of Rs 172,360. The difference in the equated monthly installments for the two cars, therefore, will not be significant. That being the case, aspirations for more features could make a prospective customer settle for the tried and tested Alto.

Batra of Ernst and Young too feels that Tata Motors will finally push the top-end models of the Nano. “The Rs 1-lakh tag is smart marketing. Tata Motors, just like other car makers, will push the Nano’s higher models because the base model is a very stripped-down version.”

Is that enough?

Tata Motors is dead serious this time. The tax benefits thrown in by the Gujarat government (some experts expect these to add up to over Rs 9,000 crore of savings for Tata during the life of the tax sops) mean that Tata Motors can hold on to the price points it has announced for the Nano. The company has clarified that the car is not being sold at a loss. And Chairman Ratan Tata has said that the car will not be sold as a taxi. He clearly doesn’t want the Nano to become another Indica. For the first 50,000 Nano cars, almost a million application forms were purchased all over the country. Dealers said people from all socio-economic categories had bought these forms.

Not everybody is convinced that Maruti Suzuki will not come out with a cheaper car to take on the Nano. Abdul Majeed, a partner with PricewaterhouseCoopers, says the decision to take the Maruti 800 out of 11cities was a clear sign: “The Maruti 800 can’t compete with new cars such as the Nano. Its technology is outdated and it is a small vehicle which doesn’t excite the customer. Maruti  might just bring in a new product, though for now it is keeping the cards close to its chest.”

In another 12-18 months, adds Majeed, the industry will get an idea of how the demand for the Nano stacks up as this is the time it will take for the car to be produced at full capacity. But he is hopeful since “Maruti Suzuki has always read the market to find answers. It has consistently brought in new products so that fatigue doesn’t develop.”

Still others ask the question: If not a refurbished and price-revised Alto, could the Suzuki Cervo, plying in Japan with a 660-cc engine, as against the Nano’s 623-cc engine, and a footprint similar to the Alto, be a likely candidate, even if the price is not matched?