Maruti’s well prepared reaction to the slowdown

Maruti’s reaction to the slowdown, so to say, has come in the form of initiatives to break new ground in consumer markets identifying niche segments to hawk its cars, looking at new sources of consumer finance to drive sales and conscious efforts at achieving flexibility to quickly change product mix to address ever-changing consumer demands. Take the case of latter.

Realising that even in the overall downturn, some of its models were in high demand Swift and DZire had a long wait list Maruti took a series of steps to produce more units of these models in the same facility, adding production shifts and sub-shifts (both petrol and diesel engines). It could do so since it had been working on that flexible manufacturing program for months now. Such an amazing flexibility at the plant was possible as there was a complete buy-in and sense of ownership amongst workers.

Flexible production schedules involve a complex shuffle of manpower, machine and material, difficult to achieve overnight. Maruti, which had been working on it for months, could beef it up with built-in software that aids such fast-track shifts in production line-up. Today, we live in uncertain times when it is difficult to profile the demand for the next months, but Maruti’s in-house developed systems allow that at brisk pace.

Analysts tracking the auto industry feel Maruti has always stayed ahead of the industry on best practices. Whether it is inventory, wastage, flexible production model, the company has processes to keep them under constant check. And it has consciously worked on them even during the boom times. Similarly, Maruti’s remarkable market mapping ability during the slowdown has helped it maintain its hold on consumers. As auto-loans dried up in the market threatening sales, Maruti, which had been tying up with PSU banks over last several months, began leveraging its tie-ups with those banks. This was critical as 80% of cars are bought on auto finance and cash-strapped private sector banks were going slow. When banks like SBI opened new sources of finance for consumers, their nation-wide network allowed Maruti to tap upcountry rural markets. Maruti had anticipated that auto-finance would be a problem, so we increased our exposure to PSU banks. When demand went low, we changed product mix and now when the market is demanding, we are ready to take the advantage.

Meanwhile, flexible production has helped Maruti take the economic slowdown in its stride, so far. After two quarters of negative sales growth, aided by some government sops, things began looking up when the company posted highest ever domestic and total sales in January 2009, up 5.6% followed by 19% domestic sales growth last month. If Maruti is not showing any signs of anxiety about cost cutting, it’s because of the company’s ongoing initiatives of last few years. The firm’s employee suggestion scheme and ‘One component, One gram’ program for instance, turned out to be a big boon in times when every penny saved counts. By simply implementing 1.2 lakh employee suggestions from its Gurgaon plant alone, Maruti claims to have saved over Rs 46 crore this year. Similarly, the latter scheme has helped it save costs and wastage at the shop floor level on an ongoing basis.

The automakers continuous drive for process improvement and cost engineering, initiated long back, did lessen its burden during these times of crisis. Between 2001 and 2008, the firm’s material cost as a percentage of net sales has come down from 90.8% to 76.4%. Similarly, it’s employee cost as a fraction of sales has dropped from 3.1% to 2.4% during the same period. Value engineering, localisation (to minimise the risk of exchange rate fluctuations) and focused cost savings have helped.

Today, Maruti’s top officials and other teams are not in any state of panic. Instead, they want to keep an eye on opportunities 2-3 years down the line. The ability to face a downturn depends on how best a company identifies and minimises slack in the system. When the pulls of the market slow down, the slack begins to show up. Maruti has done very well on that front by operating on minimal slack. That may just keep the company on the fast-track through the slowdown.