Question

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?

       

Answer 1

Answer-1

Strengths in the SWOT analysis of Automobile industry

1. Evolving industry : Automobiles represent freedom and economic growth. Automobiles allow people to live, work and travel in ways that were unimaginable a century ago. Automobiles provides access to markets, to doctors, to jobs. Nearly every automobile trip ends with either an economic transaction or some other benefit to the quality of life.
2. Continuous product innovation & technological advancement : With the advent of E-vehicles & alternative fuel such as Shell gas, CNG and others, Automobile Companies are increasing R & D expenditure to drive the next phase of growth through use of renewable sources of energy which may be solar, wind etc.
3. Growth shifting to Asian markets : Although American & European market is the pulse of this Industry, but the focus is shifting to developing markets like China, India & other Asian nations because of the rise in disposable income, changing lifestyle & stable economic conditions.
4. Increasing demand of VFM vehicles : Intense competition in the matured/developed markets has forced automobile manufacturers to target developing economies. But these developing economies have high demand for VFM products (value for money). In the automobile industry, VFM products would be fuel efficient, high mileage vehicles because majority of customers in these nations prefer vehicles for commuting. On the other hand, developed nations need is of vehicles for interstate travelling, and high speed vehicles suitable for long route with high engine power.
5. Increase in demand of luxury commercial vehicles : Companies like VOLVO, Daimler/Chrysler, Bharat Benz are betting high & are targeting the developing nations due to increase in demand of Luxury public transportation system.
6. Manufacturing facilities in Asian nations to control cost : In order to control cost & to manage shrinking margins automobile companies like Harley, Volvo, Bharat benz etc. are building their manufacturing facilities in developing nations like India, China because these nations have cheap workforce, are high in resources & are nearer to developed economies. These are classic conditions of an emerging market.

Answer-2

A price war is a competitive exchange among rival companies who lower the price points on their products, in a strategic attempt to undercut one another and capture greater market share. A price war may be used to increase revenue in the short term, or it may be employed as a longer-term strategy.

Price war in the passenger car industry in India-:

That the Indian automobile industry is going through hell and high waters is no new revelation. But even as the inventory levels for many of the auto manufacturers are hitting the roof, the companies are leaving no stones unturned to woo the customers by launching extremely price competitive products.

Following the success of Maruti's Multi-utility vehicle Ertiga and Renault's SUV Duster, both relatively price-competitive vis-a-vis their peers, the launch of Mahindra and Mahindra NSE.

With price ranging from Rs 5.82 lakh to Rs 7.36 lakh, (ex-showroom Thane), Quanto appears fully geared to take on the competition. While Ertiga's price ranges from Rs 7.8 lakh to Rs 9.13 lakh, for Renault is it's between Rs 8.35 lakh to Rs 11.84 depending upon the variant, making Quanto, so far, the most affordable of all.

Interestingly, Qunato's seating capacity has also been enhanced to 5+2 seats, by providing for 2 additional seats at the rear, though at the cost of comfort for lon

Whether Quanto will succeed in raking in the kind of success Ertiga has seen so far is difficult to tell. This launch however clearly signals that the Indian Automobile industry is getting more price-competitive than ever before and that the customers can expect many more pocket friendly products from this industry in the coming future.

This holds true even for the luxury carmakers like the Mercedes and Audi who have been attempting to woo the Indian consumer by launching extremely price competitive products. While Mercedes has recently launched its least expensive luxury car B180 in India at Rs 21.49 lakh, Audi had already initiated this price war through the launch of Q3 at Rs 26.71 lakh a few months back.

Answer-3

As per industry experts, the 'saving mentality' of the entry-level buyers in times of economic downturn causes many potential buyers deferring purchase.

Another factor hitting the buyer hard is the double-digit rise in acquisition price made customers much more cost defensive, even at the time when industry expects a boom from the festival season, which begins this month and continues till late October. As per industry experts, the prices of entry-level cars have gone up by 14-24% in the last 2 years.

The spiralling effect of such a price-sensitive approach by the customers has led the carmakers to pull the plug on small cars in its portfolio.

Speaking in individual model terms, Maruti Suzuki Alto and Renault-Nissan's Kwid and Redigo are the only participants left in the entry-level cars segment, with Tata Motors and Hyundai pulling out Nano and Eon, marking their exit from the market share of entry-level cars.

Answer-4

Higher the value of cross elasticity of demand between the products, greater will be the competition in the market, and lower the value of cross elasticity, the market will be less competitive. In the same way, if cross elasticity is zero or almost zero, there is monopoly or zero competition in the market

Answer-5

Inflation measures how much more expensive a set of goods and services has become over a certain period, usually a year. The sticky inflation assumption states that "when firms set prices, for various reasons the prices respond slowly to changes in monetary policy. ... Sticky inflation becomes a problem when economic output decreases while inflation increases, which is also known as stagflation.

Answer-6

Sources of Economies of Scale

1. Purchasing

Firms might be able to lower average costs by buying the inputs required for the production process in bulk or from special wholesalers.

2. Managerial

Firms might be able to lower average costs by improving the management structure within the firm. The firm might hire better skilled or more experienced managers.

3. Technological

A technological advancement might drastically change the production process. For instance, fracking completely changed the oil industry a few years ago. However, only large oil firms that could afford to invest in expensive fracking equipment could take advantage of the new technology.

Answer-7

Though Maruti has been a profitable company, rising input costs and poor price maneuverability are making it very challenging for the firm to remain profitable in the future. In 2014, Maruti is contemplating a major investment in a new plant. The chairman of Maruti must determine whether investing in the new plant would reduce costs significantly and help the company remain profitable.