Can maruti repeat the magic?

While everyone was scampering about, frightened by the slowdown ghost, Maruti peacefully posted a 105% increase in bottomlines during FY 2009-10. Result: it Climbed 21 places to #27 on this year’s list. But can maruti repeat the magic? By Pawan Chabra

If you look at the Q1, FY2010-11 result, the answer is an obvious no. The past quarter has been a party spoiler for the company. Not only did its domestic market share fall below 50% for the first time since it crossed that mark 25 years ago, the company registered a 20% y-o-y dip in net profits too (which fell to `4.65 for Q1, FY2010-11). So what caused the fall? Says Shinzo Nakanishi, MD, Maruti Suzuki, to B&E, “The dip in profits is because of the rising commodity prices and the royalty payments made by Maruti to Suzuki Motor Corporation.” There are other issues too.

Despite the fact that the company managed to post a 25% y-o-y growth in unit sales (of 283,324 units) during Q1, FY2010-11, currently, almost all its car models are facing a situation of undersupply. “All that we are making is being sold. We are producing as much as we can, but it is not enough. Currently, we have close to 15-20% backlog on our books,” says Mayank Pareek, Managing Executive Officer – Marketing & Sales, Maruti Suzuki, to B&E. Thus, Maruti is missing out on the opportunities presented by the increased demand in the Indian car market. Who gains? Its competitors. The Indian car market has grown by over 30% this fiscal, and what is happening is that players like Ford, GM, Volkswagen, Nissan & Hyundai, which had/have spare capacities, are filling the demand-supply gap.

Royalty payments to Suzuki is another itch. But it can do little about it. The company still depends greatly on the parent company, and it has no solution to lighten the burden, at least over the forthcoming few quarters. “Maruti depends on Suzuki for its brands and technology. So, it is very difficult to get the royalty payments down. However, I don’t think it will go above the current 5.1% mark in the times to come,” says Nakanishi.

But there is some good news for investors. The company is trying to prepone its capacity expansion plan to 2012, to solve the problem of undersupply. This will help add an additional capacity of 250,000 units per year to the current production levels. In fact, it has already started its ground work on its 6th plant at Manesar (Haryana). This, coupled with the planned R&D Centre at Rohtak (which have collectively attracted an investment of Rs.1 billion) will determine the success of the company in the years to come. But till then, the company will have to continue bearing the pain of dealing with backlogs.

The outcome for this financial year is clear. Maruti might outshine last year’s numbers in terms of unit sales, but in terms of financials, it will fall a little short, even if it scales back its market share to 50%+. As per estimates by Thomson Reuters, its bottomlines for FY2010-11 will fall by 2% to `24.48 billion. Thankfully, the fall is only marginal. For now though, the company is running hard. But so are competitors, and it knows that.

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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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Second time lucky but determined not to lose first spot again

When GM went broke four years ago not many gave it a chance to spring up a fight and come back from financial rehab. Those Cassandras are now eating their words as the former lumbering auto giant strikes back with a vengeance.When GM went broke four years ago not many gave it a chance to spring up a fight and come back from financial rehab. Those Cassandras are now eating their words as the former lumbering auto giant strikes back with a vengeance.

A lot has changed for General Motors (GM) since it went adrift in rough seas that threatened to dash its corporate ship against dangerous waves just four years ago. In the summer of 2008, about a year before GM became a ward of the state, its chief executive Rick Wagoner was desperate to catch at straws in a futile bid to avert his company from going belly up. The financial results for the 2008 spring quarter left no one in doubt about GM’s bleak prospects: a $15.5 billion loss, its third worst in a century. GM’s revenue in North America had fallen $10 billion — a breathtaking 33% — from the year-earlier quarter. And for the first time, after donning the mantle of being the No. 1 car maker in the world from Ford in 1931, GM lost that coveted position to Toyota. In the midst of a significant downturn in the American and global economy, Toyota raced ahead of GM in global car sales, selling about 620,000 more vehicles in 2008 than GM’s 8.35 million.

But the worst was yet to come. Finding itself at the end of financial tether, Wagoner flew into Washington D.C., cap in hand, to ask for $10-12 billion of easy loans from the Federal government to bail out his cash-strapped company. But his demeanour - flying in a private luxurious jet at the company’s expense - rubbed many in Washington the wrong way. Sensing that GM was fast on its way to go kaput, the Obama administration had the good sense to push through some painful but imperative decisions. In quick time Wagoner was booted out and the doddering company was offered a lifeline in the form of government bailout funds after being put under bankruptcy court protection. GM - which hadn’t made a profit since 2004 - declared in its filing that it had $172 billion in debt and $82 billion in assets. Its market capitalisation, having plumbed the depths of investor confidence, stood at $2.21 billion in March 2009 when Wagoner departed. The value of GM stocks had cratered to $3.62 as against the trading levels of above $70 when Wagoner had joined as CEO in June of 2000.

Wagoner’s exit did not exactly move GM away from over the hump. Through the initial months of restructuring, the company became a revolving door for a succession of CEOs who drifted in and out without leaving any mark or making an impression. It was only after Daniel Akerson - GM’s fourth CEO in just under 18 months - arrived in September 2010 that the company once again rediscovered it automotive mojo and competitive gene. Since then the automaker, which had lost about $100 billion in the years before its 2009 bankruptcy, has been consistently profitable. In the latest quarter (Sept-Dec. 2011) for which results are available, GM made about $1.7 billion in profit, besides having already repaid $24.1 billion of the $49.5 billion in federal government aid it had received. But the biggest icing on the cake was that GM’s worldwide sales rose 7.6% to 9 million vehicles in 2011, helping the auto major to once again grab pole position as the world’s No. 1 car seller (a position it had ceded to Toyota in 2008). That’s surely a remarkable achievement for a carmaker that looked completely down in the dumps until two years ago.

The uptick in sales came about on the back of the strong showing by its flagship Chevrolet brand, which sold a record 4.8 million vehicles last year (even more than total sales of brands like Nissan and Honda). European carmaker Volkswagen was the second-largest seller of vehicles worldwide whose sales rose 14.3% to 8.2 million vehicles followed by the likes of Toyota, which expects its 2011 sales to come in at around 7.9 million vehicles, down about 6% from 2010. Analysts attribute GM’s recent swell performance to its strong US and China operations. Being the two biggest markets for carmakers today, GM has done well to wedge the China market open in its favour by collaborating with its local partner (SAIC Motor Corp), a strategy that has paid off handsomely. In 2011, GM sold more than 2.5 million vehicles in China, registering an 8.3% increase from the previous year. In its North American home market, GM clocked sales of over 2.5 million vehicles at a 13% growth trajectory last year.

According to Jeremy Anwyl, Vice Chairman of Edmunds, an automobile industry information website, GM was lucky to have come out of its bankruptcy and consequential restructuring at a time when global market conditions were once again turning favourable for the automobile industry. “The bankruptcy allowed GM to cut costs and fundamentally restructure its operations from a cost and incentives perspective. GM came into a growing market with a lean inventory and, at the same time, it introduced impressive new products such as the Chevy Cruze.” What also helped GM pip Toyota to the post was the fact that the Japanese car maker could not exploit the tailwind of growth and the resurgence in the global car market as it was badly kneecapped by supply-chain and production glitches at its plants, arising due to the double whammy of the tsunami and earthquake that struck Japan early last year.

But despite making the most of the opportunities in the past year, the real test of GM’s ability will be to consolidate and expand its market share without diluting its profitability. With Japanese car makers like Toyota and Honda emerging from the shadow of last year’s contretemps and players like Volkswagen and Ford stepping up on the throttle, can GM continue its alpha dog run in the industry? Already, Toyota has come out with its sales forecast of 8.48 million units for the current year, Volkswagen is pulling out all the stops to top the industry league tables by 2018 and Ford is on track taking its One Ford strategy to the next phase that might give it a fair shot at becoming market leader. In other words, GM is up against the most competitive automobile market in its history and its ability to continue delivering stellar results is bound to come under increasing strain. “Ford, VW and Hyundai are some of the toughest players there are and they lead by dint of their product line-ups. GM has to push harder to get ahead of the curve to compete head to head with these companies in all market segments globally,” says Laurie Harbour, President, Harbour Results, an industry analyst.
         
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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.

IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting