Jagdish Khattar, (Khattar) Managing Director, (MD) Maruti Udyog Ltd. (MUL), was a man in trouble. Khattar was facing what was the biggest setback ever for the company. With all strategies backfiring, Khattar seemed to be fighting a losing battle. Problems were aplenty - the Maruti 800 segment was facing demand-erosion, Zen and its arch-rival Santro were very close in terms of volumes, the Esteem was losing ground, Baleno, Wagon Rand Alto were yet to prove themselves, while the Gypsy was snugly ensconced in its niche. Despite the fact that MUL had the biggest range of products, the cheapest cars in the market and a service network and cost structures that were better than anyone else, it had steadily lost market share – down from 82.62% in 1998 to 52% in 2000. With the disinvestment2 impending, Khattar was facing flak from the Government as well. With market share declining, MUL‘s valuation had also come down drastically. While it was valued at Rs 80 bn in 1996, by December 2000, the figure had touched Rs 40 bn.

MUL was the largest car manufacturer in India with a market share of over 52%. It was a joint sector corporation set up by the Government of India and Suzuki Motor Corporation, Japan. MUL was incorporated in 1981 to take over the assets of the erstwhile Maruti Ltd. set up in June 1971 and wound up by a High Court order in 1978. The assets of Maruti Ltd. were then acquired by the Government under the Maruti Ltd. (Acquisition And Transfer of Undertakings Act, 1980). In 1982, the government signed a joint venture agreement with Suzuki Motor Corporation of Japan. Suzuki‘s stake increased from 26% to 40% in 1987, and to 50.25% in 1992. The company was a significant exporter with exports to over 50 countries. The company manufactured passenger cars at its factory in Gurgaon, Haryana with an installed capacity of 350,000 vehicles. The first product, Maruti 800 was launched in 1984, followed by the all-terrain vehicle Gypsy in 1985. Over the years, MUL expanded its portfolio with the launch of the Maruti 1000 (1990); the Zen and the Esteem (1993); Zen Diesel (1998); Baleno, Wagon R and the Alto (2000). MUL was known for its =value-for-money pricing‘ strategy, which had been made possible due to the high levels of indigenisation of its vehicles. While the Maruti 800, Zen, Esteem and Omni were indigenised to the extent of over 90%, the Gypsy was indigenised to the extent of 82% and the Alto to the extent of 76%. The company had a network of about 375 vendors and had several joint ventures with some of them to source its raw material requirements. It‘s sales (comprising 112 dealers and sales outlets in 86 locations) and service (comprising 1,010 service workshops covering 412 locations) network was one of the largest in the country.

Till October 1998, MUL enjoyed a market share of 83.6%. Reacting to the increasing number of players, Khattar commented, ?Obviously, our market share will decline with the entry of new manufacturers and models in percentage terms, but not in actual volumes." With cars ranging from Rs 0.21 mn to Rs 0.67 mn, problems associated with an ever-expanding product portfolio constantly plagued MUL. Besides the declining market share, cannibalization was another issue the company could ill-afford to ignore. Forced to take stock of what went wrong, MUL realized that it was dependent to a large extent on a single product - the Maruti 800. The 800, along with the Omni (built on the same platform) accounted for 75% of unit sales in the car market in 1998, it had always been the =breadwinner‘ for MUL. One of the biggest success sagas in Indian automobile history, the 800 started losing its sheen in the 1990s as newer players emerged in the market. The entry-level segment ceased to be the center of action as easy car finance availability and the lure of new cars made the Rs 0.3 mn--0.4 mn segment the most attractive one. The fact that MUL made only minor changes in the models over the years led to the perception that MUL was selling old models. To tackle these problems, MUL adopted a two-pronged strategy. One, to introduce new models; two, it decided to increase the number of variants rapidly, offering a new model with every increase of Rs 25,000. MUL also revamped its engines and took the 800 to semi-urban and rural areas, to compensate for the declining urban sales. The company was aiming to move entry-level prices up without losing out on volumes by launching cars in the segment just above the 800. As part of this, Baleno, Wagon-R and Alto3 were launched in quick succession. However, despite favorable reviews, these cars did not go on to become the saviors MUL was hoping for. The engine-revamp exercise for the 800 had pushed its price close to the base-model of rival Daewoo‘s Matiz, eroding the price advantage on which the model survived. As a final resort, MUL decided to play what it thought was its trump card - price reduction. The move was also justified on the grounds that the company was following the Product Pyramid profit model. MUL reduced the prices of Maruti 800 and Zen by about Rs 24,000 and Rs 51,000 respectively in December 1998. This resulted in a drop of Rs 3 bn in net profit for the year 1998-99. Khattar justified the price-cuts, saying that MUL wanted to make up for the increase in the 800‘s price due to higher sales tax figures for the period. The move was described as an attempt to 'redefine the price-value equation.' MUL sources claimed that they expected lower prices to bring an incremental growth of 25% over the next 12 months. However, despite the price cuts, by March 1999, the company's market share decreased to 54.57%. In early 2000, MUL announced that it would pass on the cost of installing new Euro-II compliant engines with Multi-Point Fuel Injection (MPFI) to its customers. There was a rush in the market for the 800, as many first-time consumers who did not want to bear the hike, hastened their purchase. MUL had to increase the price of the 800 from Rs 0.18 mn to Rs 0.22 mn. Around the same time, MUL decided to meet the competition head-on by having a model or variant with every increase of Rs 25,000. The idea was to give the customer the widest choice possible. By mid-2000, the company offered 43 models in a market, which had only 127 models. In June 2000, sales of the 800 stood at 5296 cars compared to the 11,000 plus cars it had been selling per month for the previous few years. MUL had no option but to again slash prices of various models by Rs 25,000 to Rs 30,000 to bring back the sales to normal levels. Other changes initiated by the company included a transformation in its customer-interface and a revamped branding strategy with the new cars (Wagon-R and Baleno) coming with the Suzuki prefix. The price cuts however, only added to the declining bottomline problem. MUL reported a loss of Rs 6792.11 on every car sold between April and October 2000. MUL sources however attributed this to the fact that MUL had not passed on the cost of upgradation to meet the Euro I and II emission norms to its customers. Towards the end of 2000, MUL again effected a price increase of between 0.3 to 2.5% on its various models due to increase in the cost of production, raw material and other inputs. The company however, decided to pass on only a part of the increase in cost to the customer.

The Indian car market of the early 21st century was a burgeoning one with over 127 models on the roads, and many more in the pipeline. Increased competition had radically transformed the market, manifested clearly in carmakers‘ pricing strategy overhaul. Manufacturers were breaking the conventional rules of auto pricing by moving from cost-based to value-based pricing and the market soon became a buyer‘s market. When the new players entered the market, there were no doubts that the main artillery for the companies in the car-wars would be the pricing strategies. It was not just a case of competition forcing a downward revision, the players were even ready to forego profits in the short run. Brand-building and technology/feature driven campaigns were to be add-ons to the above plan. Industry observers were quick to point out that MUL would have to get entangled in the price reduction game. A Business India report5 pointed, ?No one is better equipped to fight a price war than Maruti. Its phenomenal profitability, cash reserves, and efficiency in manufacturing will allow it to slash prices on all its models without feeling the pinch as much as the others." However, Hyundai was the first company to introduce what came to be known as, pricing based on customer‘s value perceptions. It introduced the base model of Santro at Rs 0.29 mn, while two other versions were priced at Rs 0.34 and Rs 0.37 mn. The basic version was targeted at buyers of the 800, and the other at the Zen. Thereafter, launches in the Rs 0.2 mn-Rs 0.6 mn segment by Ford and Hyundai showed highly innovative pricing strategies being adopted. Soon after, Ind Auto dropped the price of the Fiat Uno Diesel by Rs 64,867 and Premier Automobiles Ltd. (PAL) lowered the prices of the 4 versions of the Premier Padmini by Rs 5,000 - Rs 53,000. MUL had adopted a skimming strategy for the Esteem. Launched in 1993, it was positioned as a luxury car. This continued till the arrival of Daewoo‘s Cielo in 1996, which started eating into Esteem‘s share. In 1999, the segment saw the arrival of Fiat Siena, Opel Corsa, Ford Ikon and the Hyundai Accent. MUL resorted to price slashing and brought the prices down. While the top-end version‘s price was reduced to Rs 0.52 mn from Rs 0.59 mn, the base version was brought down to Rs 0.44 mn from 0.46 mn. However, this was possible only because it enjoyed substantial margins over costs, being the first-mover in the market. MUL also followed the same modus operandi for Zen, albeit in a different manner. The company increased the number of Zen variants to 10, with prices ranging from Rs 0.3 mn to Rs 0.43 mn The price stood reduced for the Rs 0.3 mn variant in terms of stripping down the model‘s features. The competition responded with similar moves. Daewoo offered price-variants for Matiz, Ind Auto offered 7 variants of Fiat Uno, ranging from Rs 0.27 mn to Rs 0.41 mn. Hyundai‘s Santro offered 6 variants between Rs 0.29mn and Rs 0.37 mn; Telco‘s Indica came in the range of Rs 0.25 mn to Rs 0.38 mn with 4 models. N.K.Goila, VP, Honda- Siel Cars‘, aptly summed up the situation, ?It is important to be present with grade-variation and a range to cover the range of potential customers being targeted.? The price-points in the car market were replaced by price-bands. The width of a price-band was a function of the size of the segment being targeted besides the intensity of competition. The thumb rule being 'the higher the intensity, the wider the price-band.' Ford‘s research, before the launch of the Ikon, a car made for the Indian market, revealed that over the previous two-three years, the 800 segment had graduated to the next level of the Zen, Santro, Matiz, Uno and Indica. Ford‘s research on the existing market segments and the consumer response to new cars revealed that beyond the Zen segment, the choice for the consumer was limited. Models like the Esteem and Cielo had had a long innings outside the country and were not exactly contemporary. The other options were the Escort, Lancer and Honda, which were priced above Rs 0.7 mn, between them and the Rs 0.45—0.5mn range of the Esteem and Cielo, there was a vacuum. The gap was identified by General Motors‘ Corsa and Fiat‘s Siena as well. All three competitors plugged the gap by offering several versions at various price points. Ford first launched Ikon 1.6 but later came up with a lower engine capacity Ikon 1.3 CLXI at a lower price. GM and Fiat also followed the same approach.

The fact that 82% of the Indian market was accounted for by cars priced below Rs 0.43 mn, proved how strongly price influenced volumes. Moreover, with domestic car sales dropping by 15.01% in November 1998 over November 1997, manufacturers had to turn towards price to resuscitate demand. In the prevailing conditions, only 'Second P auto-marketing,' price reduction seemed to be the only factor able to rejuvenate the stagnant demand. However, not every player had the financial muscle to play the price-card. Instead of cutting the price of the Matiz, Daewoo Motors introduced an enhanced version with product features like power steering, and product-plus features like better service and customer-care. Players like Hyundai and Telco did not opt for price reductions, as they simply did not have the economies of scale to profit from such moves. Such strategies worked best for companies with offerings in several segments of the market. Higher volumes from the combined sales of products across segments enabled them to drive harder bargains with their suppliers; unit marketing and distribution costs decreased; and the higher margins on products positioned near the top compensated for the pared margins on the basic product. The players who chose to stay out of the race to cut prices had to convince their customers that the higher prices they charged justified by the greater value they offered. A product-and-promotional mix has to be specifically designed to convey the above message. Most manufacturers of mid-size cars, including General Motors, Ford, Honda-Siel, adopted this strategy rather than cut costs to increase sales. They argued that because of the 'snob-value' of a costlier car, buyers in this segment were not that susceptible to be swayed by price-cuts. They cited the Cielo price reduction fiasco as an example. When sales of Daewoo‘s Cielo went down from a peak of 2,260 cars in September 1996 to 314 in December 1997, the company slashed the price of its base model by Rs 0.13 mn in January 1998. Daewoo also introduced zero-interest finance schemes and its dealers gave =unofficial‘ discounts ranging from Rs 0.08 mn to Rs 0.1 mn. Sales increased by 300% to 906 and 1102 by March 1998. However, this was far below the company‘s capacity of 6000 cars per month. Daewoo launched an upper-end version, Cielo Executive and an upgraded version, Nexia at higher price-points. However, the market had discounted Daewoo by then, and sales did not pick up further, falling to a low of 148 by February 1999. Companies realized that only when competing brands perceived to be equal in all other aspects, would price be a deciding issue. As the target segment became more affluent, upgraders as well as first-time buyers did not necessarily start at the lowest price-level. Applied as a brand-level strategy, price helped the auto-marketers win over only the entry-level customer. The biggest price a manufacturer would have to pay for playing the price-game continuously was undoubtedly the loss of customer loyalty. The world over, automobile brands succeed on the basis of their relationships with fiercely loyal customer communities, built around sharp brand images and unique value propositions. By choosing to shift the focus to price, MUL risked the loss of damaging its customer relations and brand valuation, as it ended up antagonizing the buyers who had bought MUL cars just before the reduction. This led to a feeling of betrayal among MUL loyalists. When these customers replaced their cars, it was doubtful whether they would turn back to MUL or go in for a rival car with a vengeance.

As the Indian automobile market moved from monopoly to free competition, marketshare comparisons from the old era seemed to have lost relevance. The alarm over MUL‘s declining marketshare somehow did not seem fully justified. In its hey-days, huge waiting lists for its products ensured that Maruti‘s marketshare was directly linked to the supply side of the equation. In other words, if MUL had an 80% share of the market, that was also its share of the total industry capacity. By the late 1990s, things changed radically with over 12 car manufacturers having a presence in the country, with a total capacity of about 1,250,000 cars, of which MUL produced about 400,000 (33%). Khattar commented, ?Tell me, if we have a marketshare of 50% out of a capacity that is 33% (of the industry), are we doing badly? Why don‘t you ask the others who together have a capacity of 800,000, but cannot match our sales? All said and done, MUL was still the leader in early 2001. It still had its early mover advantages. Provided Khattar played his cards right, MUL could still rule the roost for years to come. Whether this would happen for real, was a question too early to be answered

1. Critically examine the success of MUL in the Indian market over the years. How important was the pricing factor before MNC competition changed the market? Mention some policy measures, if any, that MUL could have taken to be better prepared for it? 2. Analyze the downfall of MUL in the late 1990s. Comment on the efficacy of the measures taken by the company to stem its declining market share. 3. 'Price reduction seemed to be the only factor likely to rejuvenate the stagnant demand in the car market in the late 1990s.‘ Do you agree with statement? Justify your answer. 4. Examine the merits and demerits of adopting price-reduction as a strategic pricing tool with specific reference to MUL‘s experience. Briefly evaluate the Pyramid model‘s suitability for the company. 5. Comment on the pricing strategies of MUL‘s competitors. Why did some of them refrain from participating in the price war?