Maruti Suzuki : the story behind the merger

December 25, 2020

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marutisuzukireuters — Image source: https://bit.ly/3heejhK

The article is written by Shreya Pandey from Banasthali University, Jaipur. The article deals with the story of the merger of Maruti Suzuki and its success.

Table of Contents

Introduction

Maruti Udyog Limited was established by the government of India on 24 February 1981, now known as Maruti Suzuki India Limited, which is an automobile manufacturer in India that manufactures a full range of cars that starts from Maruti Alto and ranges till sports utility Grand Vitara. Its first manufacturing factory was established in Gurugram, Haryana. It is a subsidiary of Japan’s leading mini car manufacturer Suzuki Motor Corporation (SMC), holding a 54.2% stake in Maruti. It is engaged in the manufacturing, purchase, and sale of motor vehicles and spare parts. It is also engaged in other activities such as facilitating pre-owned car sales fleet management and car financing. It was formed to manufacture cars for middle-class people in India. In 1990, SMC increased its stake in the company by 50%.

History

Maruti Udyog Limited and Suzuki Motor Corporation signed a Joint Venture Agreement (JVA) in 1982. Maruti Suzuki was only a car importer in the beginning. In the first two years, it gained the right to import 40,000 fully built Suzuki cars. The early goal was to use 33% of indigenous products that the local manufacturers did not favor. By 1991, 65% of indigenous products were used in the manufacturing of vehicles. When the Indian economy liberalized in 1991, Suzuki increased its stake in Maruti to 50%. The company was made a 50-50 joint venture holding half of the stake by Suzuki and half by the government of India. It launched a twenty-four-hour emergency on-road vehicle service. It became the first car company in India to launch a call center for customer services as well as internal services.

Maruti and Suzuki set up another joint venture, “Maruti Suzuki Automobiles India”. They joined it to establish two more manufacturing plants. One plant would manufacture cars and the other, engines. When Bharat Stage VI emission standards came into effect, Maruti Suzuki announced on 25th April, 2019 to produce diesel cars by 1st April, 2020. The standard would require an investment of a significant amount to upgrade its existing diesel engines to comply with the emission standards. Chairman R.C. Bhargava at the announcement of the production of diesel cars by 2020 stated that the decision is made to meet the Corporate Average Fuel Efficiency (CAFE) norms. He further states that higher shares of CNG vehicles would help the company to comply with the norm.

The joint venture became a near monopolistic trade in the Indian automobile market. Because of the joint venture, the equity of Suzuki increased from 26% to 40% in 1987. In 1992, the equity increased to 50% and then till 2013, its equity increased up to 56.21%. In 1982, an agreement was signed by both the companies to nominate their candidates for the appointment for the position of Managing Director. The tenure of every Managing Director would be 5 years.

Merger of Maruti Suzuki

On July 12, 2012, the Board of Directors of Maruti Suzuki India (MSI) approved a proposal of merging Suzuki Powertrain India Ltd (SPIL) with MSI. SPIL is a subsidiary of Suzuki Motor Corporation that supplies diesel engines and transmissions to Maruti Suzuki. Suzuki Powertrain is a subsidiary of Suzuki Motor Corporation that holds 70% of its stake and the rest of 30% is held by Maruti Suzuki India.

After the merger, the holding of Suzuki Motor Corporation will increase from 54.2% to 56.2% in Maruti Suzuki India. Maruti Suzuki India proposed to make a fresh issue of 13.17 million shares to Suzuki motors in lieu of its 70% holding in Suzuki Powertrain. In the merger process, there will not be any cash outflow as the merger would be effected through a share swap agreement with the ratio of 1:70. It means that Suzuki Motors will receive one share of Maruti Suzuki India worth 5 rupees each for every 70 shares worth 10 rupees that it holds in Suzuki Powertrain.

When the regulatory approvals and legal requirements are done then the books of accounts of SPIL would be merged with MSI with effect from April 2012. After the merger, MSI would bring its entire digital engine capacity under a single management control. MSI would take initiatives to strengthen the business and manage in controlling the sourcing, localization, production planning, manufacturing, flexibility and cost reduction. The merger would benefit in areas like finance, capital structuring, administration, and consequent reduction of transaction costs. Maruti Suzuki is the largest car company in India.

Strategies

The existing dealers have shown their trust and confidence by establishing new showrooms and workshops of the company.

The strategy used by the company is to divide the country into four zones which is further divided into 16 ROs and 15 ROs. The sales technique would be decentralized so as to enable solutions for different regional challenges. Alternate fuel segments like LPG powered WagonR and Swift Diesel have witnessed encouraging responses from the customers in the period when the company has launched six new models. The company focussed on the manufacturing and production of compact cars.
Focussed marketing efforts must be done to persuade customers to buy new cars who can afford them.
Special schemes for certain sections of societies like government employees would encourage them to buy cars.
Launching Employee referral scheme through which each employee would be acting as a salesman.
Since almost 75% of the cars are sold through finance, exclusive tie-ups with the financers would be profitable.
To provide a superior experience to the customers, new initiatives such as Maruti Insurance, Maruti Finance, Extended warranty, loyalty program, AutoCards etc are to be focussed upon.
The company should encourage the “Customers for life” concept and for this, it should provide viability to the customers through which they can approach the company whenever and wherever they require it.

Success formula

For achieving success, the formula is to strengthen itself in the following areas:

Providing superior value propositions to the customers- the customers would be provided with low acquisition and operation costs and provide a higher residual value for the products.
Its pricing strategy was just in accordance with Indian customers. It offered cars with a better driving experience, mileage in a less amount than to others in the competition.
It created successful entry barriers for its competitors. It provides a service network that is easily reachable to its customers and its quality of service is so good that it creates barriers for others to compete.
It has the largest distribution and service networking. It has more than 400 sale showrooms, over 600 dealer workshops, and 1900 authorized service stations spanning across over 1190 cities.
To reach to those rural areas where setting up a complete dealership was not possible
Opening extension counters that would be operated from the dealers residing in cities so that the customers could reach easily without risking the viability of the dealers.
Its excellent brand building activities help customers create a trust upon it by advertising upon the exact issues that customers think before buying any car such as its mileage, its service centres, etc.
It understands and senses the future needs of the country and therefore it has proposed to tie-up with Toyota to build EV vehicles in India.

Success story

Maruti Suzuki is not a leading player only in the small cars segment but also in it has pushed out Padmini Fiat and Ambassador. At present times, Maruti Suzuki is the sole ruler of Indian roads leading in each segment of passenger automotive technology. It has a wide range of new as well as old cars that hold the position of hot sellers. Its rivals have a very limited range of successful models due to which it is considered difficult to give competition to Maruti in the field of automobiles. Its success has led itself to be a barometer to judge the well-being of the auto tech business and the reason for its success is its solid performance over the passenger vehicle segment.

The sale of small cars in FY 17 Alto was the leader offering 2.4 lakh units per year. Its closest opponent in the small car segment was Renault Kwid whose sale was around 1.09 lakh units. In the same year, its top-notch hatchback Swift’s sale was approx 20,000 units more than the Hyundai Grand with the sale of 1.66 lakh units. Maruti was a market pioneer in categories of SUVs, Sedans, crossovers, vans, and small cars in March 2017. Its volume in the UV segment increased by 45% per year to 57,125 units. Even the biggest producer of UVs, i.e. Mahindra and Mahindra experienced a decrease in its volume by 5% to 53,082 units. Maruti’s market share has increased to 30% in the UV segment while on the other hand, the biggest UV producer held 27.9%.

Reason for its success

Maruti has been the leading automobile manufacturer for 40 years because of its compatibility with the Indian customers. The reasons behind Maruti Suzuki’s success in India are:

Its affordability- It offers affordable cars to its customers in all segments. Even its premium cars are also affordable and cheaper than its competitors.
Its mileage- It offers the best mileage. For those who prefer not much expensive daily traveling through cars, Maruti Suzuki is the best car available in the market whose mileage can be of 32km/kg when running on CNG. Therefore, Indians prefer their cars.
Availability of best spare parts- A service center of Maruti Suzuki is available all across the country and anyone can easily reach to its service centre for services. Its original spare parts are even available in the local shops that provide an ease to the customers to not rush to the service centre whenever they need to change any spare part of their cars.
It provides for the best resale value- It provides the best value while reselling the old cars even after the use of 2-3 years.
Its maintenance is not much expensive- Maruti cars are made cheap and affordable from the very starting so that the customers don’t have to think much while buying a car. Not only its initial price of sale is affordable but also its maintenance is affordable and cheap.
It gives a homely feel- All the parts of Maruti are sourced from the local manufactures which gives a homely feeling to its users.
Its functioning is simple- The functioning of its cars is very simple and for a learner or new driver nothing can be better than Maruti cars that provide them with easy functions to learn and drive with ease.
Its vast network and dealership- It owns a 50% share in the automotive industry of India. Being the largest car producer and having such a vast networking and dealership all over the country just adds one more reason for being the leading car manufacturer of the country.

Conclusion

Maruti is not the oldest car manufacturer of India yet it is the leading company that has control over all the segments of cars. It is because of its intelligence and its understanding of Indian customer’s needs. It has expanded its business in all the areas that would comprise within the realm of automobiles. Its service, performance, and viability is one of the core reasons for its success and that is why other companies are left behind by Maruti. The durability of its cars are worth appreciation as one could use it for years without spending a heavy amount on its maintenance. Its pricing strategy is according to Indian customers. Its India Centric Product portfolio fulfils the needs of the customers using cars on Indian roads. Its ever reachable network and quality of its service leave no space for any complaints.