Jagdish Khattar, managing director of Maruti Udyog Ltd, which makes half of all cars sold in India, has warned shareholders of intense competition in compact cars as more companies enter the segment, following a cut in excise tax in 2005. Small cars are Maruti’s bread-and-butter segment and account for 81% of the company’s sales.
“As in any fiercely competitive market, we will have to shrink the cycle time in introducing new models and upgrades,’’ Khattar wrote to shareholders in the company’s latest annual report. “We will need to respond faster to changing customer demands.”
In the 2005-06 Union budget, the government cut excise tax by eight percentage points for small cars, bringing it to 16%, to make them more affordable to consumers. Maruti, which has five models that avail the excise benefit, saw its sales in the segment grow sharply by 62% to 440,375 units in 2006-07 from 271,280 units in 2004-05.
But the excise cut has also prompted other car makers such as General Motors India Pvt. Ltd and Honda Siel Cars India Ltd to develop small cars for India. At least 10 new small cars are expected to be introduced in Asia’s fourth largest automobile market by 2010. These companies are investing more than Rs30,000 crore in building new factories. Car sales in India are expected to increase to 2.3 million units a year by 2010, from 1.4 million now, according to the Society of Indian Automobile Manufacturers.
“Competition is certainly not going to get easier,” said Ashutosh Goel, analyst with Edelweiss Securities. “Just maybe, they’ll lag the industry growth a little bit as they may find it difficult to replicate this kind of growth. But in absolute terms they will still grow.” Goel has an “accumulate” rating on the Maruti scrip.
The increasing number of factories has also placed a strain on the company’s human resources.
“Like the rest of corporate India, we face the challenge of retaining and motivating employees in the wake of exploding opportunities,” wrote Khattar. “People quality and motivation will become even more critical with competition.” Employee expenses for Maruti declined 1.8% in three years since it listed to Rs288.4 crore in 2006-07. In the same period, Khattar’s total compensation has more than doubled to Rs2.1 crore.
Ashwin Ramarathinam contributed to this story.