An Indian Carmaker with a Japanese Engine

Suzuki money and knowhow make for a better-running Maruti

Customers like Vikram Shroff don't come around every day. For 15 years, Shroff, his father, and two uncles have driven the same model passenger car, the Maruti 800. The four-door Indian minicar, known for its small but trouble-free engine, retails for just $4,200 and ranks as the world's cheapest auto. Now Shroff, a Bombay garment trader, is especially thrilled. On June 9, he and his family became proud owners of 2,200 shares of the first stock offered by recently privatized Maruti Udyog Ltd. Even though the stock leapt 30% on the first day of trading, to $3.50, Shroff is holding on. "Everyone loves Maruti," he says. "And why not? It has a good product, and now it has good private management."

Maruti will need to maintain that kind of loyalty in the coming years. Because of its former near-monopoly status, the company commands a 54% share of India's annual 700,000-unit passenger-car market. But Maruti struggled after 1995, when its 50-50 joint-venture partners, the Indian government and Japan's Suzuki Motor Corp., began a public fight for control lasting three years. The Industry Ministry refused Suzuki's pleas that Maruti modernize its two factories and offer new models. It also appointed a managing director unacceptable to Suzuki. Paralyzed, Maruti saw its market share drop from 64% to 50% by 1998 as aggressive new rivals such as South Korea's Hyundai Motor Co. swooped in. Maruti's sales and profits for the year ended Mar. 31 -- $1.55 billion and $31 million -- are still below 1998 levels. And liberalized investment rules mean that competition from foreign carmakers is heating up.

Now Maruti is on the counterattack. Last year, the government gave Suzuki clear control by selling it a 4% stake for a premium of $1 billion. Suzuki hiked investment in capacity and distribution and promises a new Maruti model each year. In June, Suzuki got an even freer hand when the government sold 27.5% of its remaining stake in an initial public offering that raised $215 million.

With the auto market now picking up, "all of the positives are coinciding for Maruti," says Managing Director Jagdish Khattar. In the past year, Maruti boosted its market share by four percentage points. Profits for fiscal 2003 were up 40%. Maruti's sales will climb by more than one-quarter, to about $2.1 billion, over the next two years, predicts Bombay's Kotak Securities Ltd.

The force behind Maruti's turnaround, Khattar, is a former Maruti marketing director. After his promotion in 1999, Khattar persuaded 1,100 employees, 20% of the workforce, to take early retirement, and he spent $300 million to more than triple capacity, to 350,000 cars. Maruti has also launched three new Suzuki models. In early July, it introduced a two-door version of its popular compact, the $8,350 Zen.

Clearly, Maruti is on the move. "With Suzuki in charge, the company is more focused," says auto analyst Sachin Kasera of Bombay securities firm Pioneer Intermediaries. By copying quality-control and production methods from a Suzuki plant in Kosai, Japan, Maruti's factory outside New Delhi has boosted output. Marketing Director Kinji Saito, a Suzuki veteran who arrived in India last year, is charged with making Maruti a global export base for Suzuki cars. Under him, Maruti also is upgrading its 159 showrooms into one-stop shops for everything from auto financing and insurance to secondhand-car sales. Average revenues of its dealers jumped 40% in a year. "Our dealers are the interface with our customers, so we have to take care of them," says Saito.

Rivals don't intend to give Maruti a free ride. Hyundai, No. 2 in India with a 19% share, is also building a national dealership network; its models are more advanced than Maruti's current lineup. Tata Engineering's $7,500 diesel Indica is gaining popularity, and the Indian outfit also wants to develop a car that would sell for just $2,000. General Motors Corp., which has a 20% stake in Suzuki and has done poorly with a midsize sedan in India, also plans a small model.

Khattar isn't worried. Most competitors still market one model in India. "We have five small cars," he notes. But that edge won't last long. Maruti needs to keep charging to make sure its loyal customers don't stray.

By Manjeet Kripalani in New Delhi

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