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Week 4 – Harvard Business Case Write-up # 1 ???????? P


 Week 4 – Harvard Business Case Write-up # 1         

Please Read Harvard Business Case – Maruti Suzuki India Limited – Sustaining Profitability available at 

 Links to an external site. and answer the questions below in detail:

1) What are the challenges and opportunities for car manufacturers in the Indian Market? (perform a SWOT analysis)

2) What is a price war? How would you describe the price war in the  passenger car industry in India? (Discuss the kind of market this  company is facing)

3) Why have prices remained sticky for entry-level cars in the Indian market?

4) How are cross elasticity and income elasticity relevant to Maruti's managerial decisions?

5) What role does inflation play in expanding the market base in a sticky-price model?

6)  Where do economies of scale for Maruti come from?

7) How can Maruti sustain its profitability in the future?

All papers must be between 8 to 10 pages long with proper APA  format.  In addition, students must use between 5 to 8 scholarly  resources to answer the questions above



Ramakrushna Panigrahi wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected];

Copyright © 2018, Richard Ivey School of Business Foundation Version: 2018-09-10

At Maruti Suzuki, our endeavour is to make sustainability a way of life where all business decisions are taken in consideration of their impact on the environment and society, in addition to the return on investment. We believe in sharing our best practices and learnings with business partners so as to create a multiplier effect.2

-S. Nakanishi, former managing director and CEO, Maruti Suzuki India Limited

After India opened up its economy in the early 1990s, the Indian automobile industry witnessed intense competition. Maruti Suzuki India Limited (Maruti) had been a dominant player in the Indian automobile industry since it began operations in 1981. Maruti was so popular that in India people had long used the word “Maruti” as a synonym for “car.” Maruti had experienced a dream run for three decades, achieving the largest market share in the passenger car industry in India. But for the first time after 28 years of consistent growth, Maruti experienced a fall in sales volume in 2012 (see Exhibit1). Even in 2014, after two years, it had not yet recovered. Maruti had little control over pricing, given the fierce competition in the sector. Despite the price of cars remaining stagnant over the last decade, Maruti and its competitors were experiencing declining sales.3 Prices of fuel had adversely affected demand. Input costs for manufacturing were increasing year after year. With such a dismal outlook for the automobile industry and with poor price maneuverability, how long could Maruti sustain profits? The chairman had to decrease the costs of manufacturing and he was considering building a state-of-the-art plant in Gujarat.4 Would this reduce costs enough to help Maruti become more profitable?

1 This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Maruti Suzuki India Limited or any of its employees. 2 Maruti Suzuki India Limited, “Sustainability Report 2010/11,” p.6,, accessed September 20, 2014. 3 “Maruti Suzuki, Hyundai, Honda, Renault to Hike Car Prices By April 1,” Overdrive, March 28, 2014,, accessed September 10, 2014. 4 Surajeet Das Gupta, “Purchasing Power to Buy a Car Has Been Eroded: R C Bhargava,” Business Standard, April 23, 2014, 114042300139_1.html, accessed September 10, 2014.

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The Indian passenger car market was the fastest growing in Asia, driven by India’s large population of 1.28 billion and a low penetration of fewer than 12 cars per 1,000 people (see Exhibit 2). Prior to the 1990s, the Indian automobile sector was in poor shape compared to the automobile sectors in other countries, largely because of demand-side constraints such as the low purchasing power of the average Indian consumer. Before India’s economic liberalization, the majority of India’s population could not afford to buy a car, and car penetration was less than three per 1,000 people. After liberalization, with rising income levels of middle-class families, the demand for passenger cars went up steadily over the next 20 years. However, car penetration was still very low compared to in Brazil, Russia, China and developed countries (see Exhibit 2). From a supply-side perspective, the automobile industry had greatly benefited from liberalization, as international automobile manufacturers took advantage of India’s affordable yet highly trained engineers, establishing manufacturing operations throughout the country. Due to India’s huge pool of talent and rising income levels, India’s passenger car market had grown in terms of production and sales and was expected to grow further in coming years.5

Passenger vehicles in India could be broadly divided into three segments — passenger cars, utility vehicles and multi-purpose vehicles — with passenger cars contributing around 80 per cent of total sales volumes. As of 2014, this segment was expected to grow at a compound annual rate of 15 per cent for the next 15 to 20 years. Apart from domestic growth, automobile exports from India were predicted to grow at 12 per cent. It may be noted here that, in a low per capita income country like India, two-wheelers (motorcycles and scooters) constituted a major mode of transportation for the lower middle class, who would eventually graduate to the small-car segment. In most cities and towns, due to the poor quality of roads and excessive traffic congestion, motorcycles were the first choice for daily commutes. However, a car was considered a prized possession for a middle-class Indian family, even though it was not used on a daily basis. With rising income levels, this held great promise for car manufacturers, as fewer than 12 people per 1,000 owned a car in India, reflecting huge market potential.


There were many players in the passenger car segment in India. Some of these players were domestic, such as Maruti, Tata and Mahindra. Others such as Hyundai, Honda and Toyota were from other Asian countries. The two companies with the largest market share in India were Maruti, at 49 per cent, and Hyundai, at 21 per cent (see Exhibit 3 for trends in the market share of Maruti and its competitors). Although there were many players in the luxury segment of the market such as Mercedes-Benz, BMW and Audi, there were few buyers who had the income to support such purchases. There were other competitors for Maruti such as Ford, GM, Nissan, Renault, Škoda and Volkswagen that competed in mini- and mid-segment cars. These companies had taken considerable market share from Maruti in recent years.


Established in 1981, Maruti enjoyed the largest market share in the Indian passenger car segment. In 2014, Maruti, with two production facilities at Gurgaon and Manesar (both in the National Capital Region of Delhi), had a production capacity of more than 1.4 million units per year.6 The production facilities had

5 Though sales in India had slowed down due to the economic recession, they had still maintained a positive trend in the last two years. 6 Maruti Suzuki India Limited, “Manufacturing Facilities,”, accessed September 18, 2014.

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more than 12, 000 employees7 and produced more than 16 automobile models,8 each with multiple variants.9

Examples of Maruti’s product offerings included small cars like the Maruti Alto, Wagon R and A-Star. Small cars made up 41.2 per cent10 of Maruti’s total sales units. In the compact car segment, Maruti offered cars such as the Swift, Estilo, Ritz and Celerio. This segment made up 24 per cent of Maruti’s total sales. In the mid-size segment, the company offered the SX4 and Dzire, which contributed 19.1 per cent of sales. The sport utility vehicle segment made up just 5.8 per cent of sales and contributed less to Maruti’s profits than small and mid-segment cars. Finally, in the vans segment, the company was known for the Omni and Eeco, which contributed 9.6 per cent to its overall sales. The remaining sales came from other models of Maruti cars. From the Maruti 800 in 1983 up to the launch of the Celerio in February 2014, Maruti had rolled out model after model and exceeded customer expectations in terms of quality and value for money.

Maruti focused on three key strategies to generate sales. First and foremost, its pricing strategy was very competitive. For example, in the small car segment, the Maruti Alto was priced 10–20 per cent lower than competing models such as the Hyundai Santro, Tata Indica and Chevrolet Spark (see Exhibit4). Second, Maruti spent a great deal on research and development to create more fuel-efficient engines. This decreased the cost of owning a car for a consumer; Indian customers were very sensitive11 regarding the fuel efficiency of vehicles, since fuel costs were high relative to average income levels. Third, Maruti offered reliable after- sales service, backed by its extensive service networks.12 There were more than 15 competitors in the market and it was never easy for a company to retain more than 40 per cent of the market share. But Maruti had done it consistently over three decades. Maruti cars enjoyed a unique position in the Indian consumer’s mind. Maruti scored higher than its competitors in terms of price, fuel efficiency and reliability, and its sales were boosted by the promise of efficient after-sales service. The uncertainty of getting stuck on Indian roads due to machinery failure was effectively exploited by Maruti. As Maruti had a network of 3,053 service stations in 1,449 Indian cities, its promise of reliability was unmatched by any of its competitors. In terms of fuel efficiency, Maruti cars provided an average of three kilometres more per litre of petrol/diesel compared to its competitors. The resale value of Maruti cars was also far higher than that of any of its competitors. Maruti offered its True Value used-car business, with more than 454 True Value outlets in 255 Indian cities, reassuring its customers that they would attain the highest resale value from any Maruti brand. For an Indian middle-class family planning to buy a new car, Maruti was the first and most obvious choice.


Maruti had implemented very few price increases in its passenger car segments over the last 10–12 years. Nonetheless, competitors had emerged in each of these segments. Out of Maruti’s 16 car models, each model had anywhere from one to seven close competitors from Hyundai, Tata Motors, Volkswagen, Toyota, Honda or Chevrolet (see Exhibit 5). However, despite intense competition, Maruti had retained its leadership position in most segments. In fact, it was so pervasive a brand that some of its models competed

7 Maruti Suzuki India Limited, “Annual Report 2013/14,” Maruti%20AR%202014%20cover%20to%20cover%20dt%2006-08-14%20Deluxe.pdf, accessed September 18, 2014. 8 Maruti Suzuki India Limited,, accessed September 18, 2014. 9 Each Maruti car model had many variants such as Standard, LX, LXI, VXI, ZXI, LDI, VDI, ZDI, etc. The Standard variant of any model did not usually have air conditioning (AC) and power steering. The LX variant had AC, but did not have the power steering feature. The LXI had both AC and power steering. The VXI had power windows along with AC and power steering. The letter “D” in a variant represented a diesel engine and “X” denoted petrol as fuel. See Suzuki/New-Swift#variants, accessed September 12, 2014. 10 The percentages and other figures were calculated by the author based on Maruti’s official website and annual reports, and, accessed September 18, 2014. 11 The Indian customer’s emphasis on fuel efficiency was evident from one of Maruti’s advertisements, shown in the following video: “Maruti Suzuki KitnaDeti Hai – Juno,”, accessed September 12, 2014. 12 Maruti had an extensive service network. The ad in the following video underlines the strength of Maruti’s after-sales service: “Maruti Suzuki Service-No Matter Where You Go Commercial,”, accessed September 12, 2014.

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among themselves. For example, its Alto model competed with the Maruti 800, and the Wagon R competed with the Ritz. Maruti had maintained its “people’s car” image since its inception by strategically keeping prices low and positioning entry-level cars for first-time buyers. Mini-segment cars, which constituted more than 80 per cent of Maruti’s total sales, carried price tags that were at least 20–30 per cent lower than those of their nearest competitors.

The bestselling mini-segment models of Maruti were the Alto and the 800. The prices of these cars had remained stagnant for a long time. In fact, in many instances, the prices of these cars had been reduced. For example, the launch price of the Alto LX model was INR299,00013 in 2002, and the price was subsequently reduced year after year until 2009, when the price was INR257,000, a reduction of approximately 14 per cent after seven years. The price of the 800 model was INR281,000 in 2002, which was reduced to INR221,000 in 2010, a drop of 21 per cent. The price of the Wagon R was reduced from INR359,000 to INR338,000 during the same period. However, Maruti was able to increase the price marginally for the compact and mid-size segment cars over this period, which boosted the revenue of the company.

The passenger car market in India had witnessed intense price competition. It was so intense that not a single price change by any of the players had gone without a reaction from rival firms. If one looked carefully at all the models of the different brands, the intensity of the price war was evident. Specifically, in the case of the Maruti Alto, even Maruti’s close competitors — Hyundai and Tata — could not raise the prices of their cars over the years; they had to reduce the prices of their models to retain market share. For example, in April 2004, when the price of the Maruti Alto fell by around 7 to 8 per cent, the Hyundai Santro price correspondingly fell by 4.6 per cent. Similarly, in June 2009, when the Maruti Alto price fell by 8.8 per cent, the Hyundai Santro price fell by 7.7 per cent, while the Tata Indica price fell by 9.8 per cent. Though it was never easy for car manufacturers to reduce prices, they were left with no choice but to sell their products at reduced or stagnant prices. Even for the mid-size and compact segments, Maruti could not increase price when it wished to due to price competition. Though the company had been able to retain its leadership position, its market share had fallen over the years due to the intense price competition.

In 2001, Maruti had total revenue of INR70.21 billion, which included other income with net sales. There was a steady rise in Maruti’s revenue even though sales volumes fell from 2011 to 2014. In 2014, Maruti registered sales revenue of INR445.43 billion, a rise of more than 500 per cent in 14 years (see Exhibit6). Even though Maruti could not raise the prices of its mini-segment cars, the rise in sales revenue was mainly due to a rise in unit sales and marginal increases in the prices of its compact cars.


The prices of raw materials for cars had risen significantly since 2001. Basic metal prices had increased sharply, except for the price of aluminum. Steel was the major raw material for cars, and the price of steel had increased by at least three times (see Exhibit7) since 2001.14 Apart from steel, other inputs for automobiles such as copper, lead and rubber (see Exhibit7) had gone up in cost by at least 240 per cent. Even the price of aluminum had experienced a marginal rise of 7 per cent. The only raw material for which there had been no significant price rise was palladium, but its usage in car-making was relatively negligible. Apart from these materials, the prices of other materials and inputs such as electricity and fuel had gone up during the same period. The rise in input prices had been as much as 300–400 per cent. Specifically, steel and rubber prices had significantly raised the cost of production.

13 The exchange rate in 2014 was approximately INR61/US$,, accessed September 18, 2014. 14 The prices of different grades of steel varied. An index of iron, steel and ferro alloys has been presented in Exhibit 7 to show the trend in price increases for steel, which is the most consumed raw material for automobiles. The base year of the index is 1993–1994. The index value has increased from 137 points to 412 points during 2001–2014. See UNCTAD STAT,, accessed September 12, 2014.

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Labour Costs

The cost of labour had gone up significantly due to the rise in general price levels (inflation) in India. Though Maruti depended heavily on contractual labourers to cut down on labour costs, it had to keep pace with the market in terms of compensation and perks in order to retain employees. The wage disparity between Maruti’s regular employees and contractual employees in the past had led to HR issues that had given Maruti much bad publicity. The tragedies of the Manesar plant15 had forced Maruti to revisit the compensation packages given to its employees. This had resulted in further rising employee costs. The employee cost had been a mere INR1.99 billion in 2001, but had risen to INR10.69 billion in 2013–2014 (see Exhibit6). It may be noted that along with Maruti’s costs, the labour costs per unit for its competitors had also risen accordingly during the same time period.

Selling Costs

With the automobile sector being so fiercely competitive, Maruti needed to spend a lot on promotional activities. The distribution and channel costs had also risen with the rise in fuel prices.16 For Maruti to retain its market share, it had to engage in extensive ad campaigns on television and through other promotional avenues. The cost of advertising on television had risen each year, resulting in increased spending on promotion. The promotion and television costs had risen from INR6.33 billion in 2001 to INR64.99 billion in 2014 (see Exhibit6). In per capita terms, expenses had risen from a mere INR18,069 to a whopping INR56,266 per car during the same period.


The automobile industry was at a crossroads where the costs of raw materials and operations continued to increase substantially without a corresponding rise in the prices of the products sold. For companies in this sector, it was very difficult to sustain profit levels that met the expectations of stakeholders and the market. It seemed that the solution lay in the implementation of more efficient production. As prices had remained sticky for an extended period of time and costs kept rising, firms needed to innovate to bring costs down. Manufacturers continued to add new features to their products and in the process discovered cost-cutting measures.

Maruti had been doing this successfully for more than two decades. However, in the scenario of rising costs, the company faced major challenges, as there was no cushion allowing it to pass on the burden to consumers. Any attempt on Maruti’s part to raise prices was met with a price cut by its rivals. Yet the rival firms were also facing the same challenges; in fact, the challenges were worse for them than for Maruti. The only alternative for the manufacturers was to keep the costs of production down through increased efficiency. As increasing the price for most Maruti models was out of the question, the only solution lay in achieving technical efficiency and economies of scale. The gap between the average cost and the price was quickly shrinking for each model. Therefore, to remain relevant in the market, Maruti had to innovate constantly to cut down costs and achieve the right scale of production. Achieving economies of scale was the only solution in the face of rising input and labour costs.

15 In July 2012, a strike by Maruti’s workers to settle wage disparity demands led to one person being killed and at least 100 company officials being injured. This resulted in a huge production loss for Maruti. See Amrit Raj, “What triggered the violence at Maruti’s Manesar factory?,” Live Mint, July 20, 2012, factor.html, accessed September 12, 2014. 16 The cost of transporting each car from Delhi to other parts of the country had gone up by 3.5 times between 2001 and 2014 due to rises in diesel prices and other prices.

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