DATE 04-08-2019

MGT405-Business Economics
ASSIGNMENT

Santosh V Hegde
Assignment: Semester-1
Reg.No. 190101611274
Gradable assignment (30 marks)
Subject: BE
 TERM 1 : MGT405-Business Economics
1. What is the market structure prevalent in the Indian Automobile industry? What are the Maruti’s competitive advantages?
How can Maruti sustain its profitability in the future? (10 Marks)
Ans:
Automobile industry is a symbol of technical marvel by human. Being one of the fastest growing sectors in the world its dynamic
growth phases are explained by nature of competition, product life cycle and consumer demand. After India opened its economy in
the early 1990s, the Indian automobile industry witnessed intense competition. With the gradual opening of the component sector,
India has become an emerging market for worldwide auto-giants. Due to low cost of labour many multinational companies are
investing in India. Its automotive industry has grown very rapidly from the middle of 1990’s. India is the second most populated
country in the World, and the growth rate of Indian economy is very high, which indicates the presence of huge demand in different
industrial sectors. Automobile industry is not the exception in this regard. Indian automobile sector has huge demands from its own
country. This demand also attracts the 19 giant automobile suppliers throughout the world to come and invest in the Indian
automotive industry. Due to the contribution of many different factors like sales incentives, introduction of new models as well as
variants coupled with easy availability of low-cost finance with comfortable repayment options, demand and sales of automobiles
are rising continuously. Government has also contributed in this growth by liberalizing the norms for foreign investment and import
of technology and that appears to have benefited the automobile sector.
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 as shown below chart.
Country Motor Vehicle Automobile Per Capita
Production Density (Cars Income
(in 2014) per 1,000 in US$PPP in
People) 2013–14

India 4,145,194 12 $3,843

China 19,271,808 44 $9,055
Brazil 3,342,617 178 $11,747
Russia 2,231,737 233 $17,518
U.K. 1,576,945 457 $36,569
France 1,967,765 481 $35,295
U.S. 10,328,884 423 $51,714
Japan 9,942,711 453 $35,855
Germany 5,649,269 517 $38,666

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, most of the 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.
Maruthi’s Competitive Advantages: 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 had a production capacity of more than 1.4 million
units per year. Having more than 12, 000 employees and produced more than 16 automobile models.
Maruti’s product offerings and shares in total sales units -
1. small cars (Maruti Alto, Wagon R and A-Star)- 41.2%
2. Compact car segment (Swift, Estilo, Ritz and Celerio) – 24%
3. Mid-size segment (SX4 and Dzire) - 19.1%
4. Sport utility vehicle segment - 5.8%
5. Vans segment (Like Omni and Eeco) - 9.6%
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.
Date 04-08-2019 BE 1
Maruti focused on three key strategies to generate sales.
1. First and foremost, its pricing strategy was very competitive. Keeping 10–20 per cent lower than competing models.
2. Second, Maruti spent a great deal on research and development to create more fuel-efficient engines. Since Indian
customers were very sensitive regarding the fuel efficiency of vehicles because of the high cost of fuel,
3. Third, Maruti offered reliable after-sales service, backed by its extensive service networks. 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.
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 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. Because of these
reasons 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. Therefore, for an Indian middle-class family planning to buy a new car, Maruti
was the first and most obvious choice.
Apart from this Maruti had implemented very few price increases in its passenger car segments over the last 10–12 years.
And 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. 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.
How Maruti sustain its profitability in the future:
1. Keeping down the cost – It is hard to maintain prices of the products being sold where costs of raw materials and operations
continued. 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 measure. 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.
2. Fuel Efficiency - The diesel price was regulated and kept low through subsidies. This helped car manufacturers like Maruti
to charge a premium on diesel cars.
3. Decision to Enter GUJARAT - Maruti had been contemplating entering Gujarat and setting up a plant with an installed capacity of
300,000 units per year with an investment of INR60 billion. It was expected that any new facility would be more efficient, as it would
use the latest technology and subsequently the cost of production would be lower. Therefore, once operational, the facility would help
Maruti achieve better economies of scale so that it could compete better and sustain its profits.

2. Explain the challenges and opportunities for car manufacturers in Indian Market? (10 Marks)
As per the study India is expected to emerge as the world’s third-largest passenger-vehicle market by 2021.1 It took India
around seven years to increase annual production to four million vehicles from three million.2 However, the next milestone—
five million—is expected in less than five years. Hitting that mark will depend on today’s rapid economic development
continuing, with a projected annual GDP growth rate of 7 percent through 2020,3 ongoing urbanization, a burgeoning
consuming class, and supportive regulations and policies.
Challenges:
1. Input Cost - 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. 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.
2. Labour Cost - 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

Date 04-08-2019 BE 2
 three times (see Exhibit7) since 2001. 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.
3. Selling Cost - 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. 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. In per capita terms, expenses had risen from a mere INR18,069 to
a whopping INR56,266 per car during the same period
4. Keeping down the cost - 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
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.
5. Fuel Prices - The rise in the price of crude oil had not helped the cause of the automobile sector in India. Fuel prices had
increased, which significantly impacted the growth of the sector. These prices had increased by 20 per cent in the last two
years, adversely impacting car sales. Apart from the rise in crude prices, local taxes on petroleum products were very high
in India, which further raised the prices.
Opportunities:
Being one of the fastest growing sectors in the world its dynamic growth phases are explained by nature of competition,
product life cycle and consumer demand. After India opened its economy in the early 1990s, the Indian automobile industry
witnessed intense competition. With the gradual opening of the component sector, India has become an emerging market for
worldwide auto-giants. Due to low cost of labour many multinational companies are investing in India. Its automotive industry
has grown very rapidly from the middle of 1990’s. India is the second most populated country in the World, and the growth rate
of Indian economy is very high, which indicates the presence of huge demand in different industrial sectors. Automobile industry
is not the exception in this regard. Indian automobile sector has huge demands from its own country. This demand also attracts
the 19 giant automobile suppliers throughout the world to come and invest in the Indian automotive industry. Due to the
contribution of many different factors like sales incentives, introduction of new models as well as variants coupled with easy
availability of low-cost finance with comfortable repayment options, demand and sales of automobiles are rising continuously.
Government has also contributed in this growth by liberalizing the norms for foreign investment and import of technology and
that appears to have benefited the automobile sector.
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.
3. Outline the important determinants of demand for automobiles. How are cross and income elasticity of demand relevant
to Maruti’s managerial decisions?

Ans. Indian automotive industry is one of the largest auto markets in the world. It has grown up very fast in last one decade due
to rising family income, changing lifestyle, low vehicle penetration, easy finance availability, rapid urbanization and poor public
transport system. But current year auto market growth is in flat to negative due to slowdown in economy growth.
As The demand of a product is influenced by several factors. An organization should properly understand the relationship
between the demand and its each determinant to analyze and estimate the individual and market demand of a product. The
demand for a product is influenced by various factors, such as price, consumer’s income, and growth of population.
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, most of the 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.
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
Date 04-08-2019 BE 3
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.
Demand Factors
1. Financing Option - Auto industry observers cite car loans as the biggest driving factor for the expansion of the Compact Car
segment. At present, almost 85 per cent of all new car sales are backed by auto finance, compared to 65 per cent five years
ago. Interest rates on car loans have come down drastically in the past four or five years, which helps prospective buyers
take the plunge. The growth of the CC-segment in the past few years can be mainly credited to factors such as rise in income
levels leading to increased affordability and simultaneous reduction in interest rates leading to lower EMIs. The drop-in
interest rates usually help very few people to probably shift from the base model to a deluxe model. A larger shift happens
if people are willing to take long-term loans, like five years instead of the earlier three-year loans.
2. Advertising and Marketing - Due to the advertising techniques adopted by all the manufacturers in the CC-Segment the sales
have risen drastically. It is all due to because the companies now a days are using even aggressive selling techniques for
which they are even coping with the Film celebrities and Cricket stars, like Maruti has contracted Irfan Pathan as the brand
ambassador of Zen and for Santro Hyundai has contracted for Shah Rukh Khan. And the companies are even trying to
approach to the customer as to their demand for a vehicle at special interest loans, etc. They are using data according to the
customers return and earning capacity for attracting the customers for their vehicles
3. Price Of The Car - One of the major factors that affect the demand of any commodity in the market is the price of the
commodity. As the law of demand also states that with an increase in price the demand of the commodity decreases and
vice versa. Since, in the compact car segment market even there are very less competitors there is stiff price competition.
Like the price of Zen in 2001 was Rs. 3.93 lacs which increased to Rs. 4.01 lacs in 2005, but still the sale of the Maruti brand
keeps on increasing it was due to the company’s reputation with the customers.
4. Income Of Consumer / Buyer - The income of the consumer or buyer of the car is a very important factor of demand. In
recent time we have seen that due to increase in the Income of the public, there has been a shift from the Lower CC-segment
cars to the Upper CC-segment cars. Due to the recent increase in the number of multinationals in India, the income level of
the employees has risen drastically and has made CC-segment cars an entry level car for a lot of people. The average age of
a CC-segment car owner has also dropped from 35 years to 31 years in India.
5. Increase In Affordability - The demand for passenger cars is driven mainly by greater affordability, which in turn increases
the aspiration level of the customers. Today with high amount of disposable income in the hand of Indian youth, who forms
major portion of the population, PV market has larger addressable market.
6. Demographic Drivers Cars being aspirational products, purchase decisions are influenced by the overall economic
environment. Increase in per capita income increases the consumption tendency of the customer. Growth in per capita
income and rising aspirations and changing lifestyle is leading to increased preference for cars over two-wheelers, which is
also having a positive rub off on car demand.
7. New Offerings - Car sales increase when a new model hits the market. Due to escalation in competition in Indian car market,
frequency of new model launches has increased. In the past one year only, the Indian car market has seen many launches
namely SX4, Swift Diesel, Zen Estilo, Spark, Logan, etc.
8. Exports - The share of exports from domestic production is currently at 12-13%, which is much lower than current export
hubs. Currently, India’s share of global passenger cars export volume stands at less than 1%. But India is fast emerging as a
manufacturing hub for leading global car makers, and several manufacturers have already firmed up plans for setting up
manufacturing bases in India, which will also be used for exports.
Cross and income elasticity of demand relevant to Maruti’s managerial decisions
After India opened up its economy in the early 1990s, the Indian automobile industry witnessed intense competition 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 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, most 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 elasticity of demand
for passenger cars went up steadily over the next 20 years. However, car penetration was still very low compared to in Brazil, Russia,
Date 04-08-2019 BE 4
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.
Maruti had been able to maintain a steady rise in profits despite challenges that were beyond the control of the company,
such as increased costs and fuel prices that affected the demand for cars. Maruti’s decision to entering Gujarat and setting up a
plant with an installed capacity of 300,000 units per year with an investment of INR60 billion. It was expected that any new facility
would be more efficient, as it would use the latest technology and subsequently the cost of production would be lower. Therefore,
once operational, the facility would help Maruti achieve better economies of scale so that it could compete better and sustain its
profits.

Date 04-08-2019 BE 5