Q. Maruti has had runaway success with its multiple SUV models. When did you plan for it and how did you go about capturing the SUV market?
A: One of the big strengths, which has resulted in our continued dominance in the passenger vehicle space in India, has been Maruti Suzuki’s deep understanding of consumer requirements and trends. For the SUV space, we saw the trend early. We brought in the prototype, the show model of the Brezza, way back in 2012 at the Auto Expo, though the actual launch happened in 2016. Since then, the entry SUV space has climbed up hugely. It was about 4% of the market. Today, it is 25% plus. But it started off and zoomed up, all thanks to the Brezza. We anticipated that trend.
The rapid pace at which the SUV has expanded, especially in the last three years, just around the Covid and after, has, I would admit, taken us by a little surprise. We had just one SUV, the Brezza, in a space where there are 47 other brands competing. Our market share in 2022 in the SUV space was 8.5%. If you take the financial year 2022-2023, our market share in SUV was just 10.5%.
In the non-SUV space, Maruti Suzuki has always been really great in terms of market share. It is now about 65% in the non-SUV but when you combine it with that 10.5% of SUV, it falls below 45%. So, to meet our target, which is to achieve 50% share of the market in the medium term, we need to increase our market share in the SUV space from 10.5% a year ago. It has already doubled now. We have four SUVs, and with that we can become the No. 1 SUV manufacturer. If you look at the first half of 2023, we are the No. 1 manufacturer of SUVs. In a very quick time, our market share in SUVs has more than doubled from last year to almost 22% now.
Q. How did you come up with the whole building a portfolio approach? What was it like, the strategy?
A: As I said, we had one vehicle among 47 competing brands. Clearly, we needed to strengthen the portfolio, especially in the mid-SUV where we had no vehicle. So, we brought in the Grand Vitara. But when the party is already on and you come in late, your entry must be marked by something special. So, we had the hybrid technology, the AllGrip technology, in the Vitara and it has done so well. Same with Fronx. It is meant for the urban consumer who does not want conventional small SUVs, whether it is the Brezza or the Venue or the Sonet. Fronx has a different shape. That’s why its tagline is “The Shape of New”. It is fresh, and has a lot of tech and features. That’s what the new urban consumer wants.
We identified these white spaces within this very congested market space of SUVs. We could find out a few and that is how we could succeed, of course, backed by a great network and the trust factor. All that helped us become the No. 1 SUV maker in the first half of last year.
Q. What was the one big reason for this consumer shift from a sedan or a hatchback to SUV?
A: First of all, the ‘buying thought’, the criteria of purchase. today is more aspirational. Earlier, it was largely functional. Functionality, price, value, cheaper spares, lower maintenance and running costs… these used to be the key criteria for buyers. But they shifted as India’s economy grew. In the new India, which was more urban, tech-savvy and aspirational, a new customer has emerged. With that came the liking for a new body type which signifies some sort of higher status, the presence on the road, which indicates you have reached a certain stage in life. As the economy grew, the market started shifting towards a slightly higher price, and at that time, SUVs were slightly higher priced.
At the entry level, SUVs now are overlapping with premium hatches and entry sedans which means there is a cross-consideration for the SUVs, which was earlier not there among those who wanted to buy a premium hatch and an entry sedan.
Q. Are there different trends for SUVs, in terms of consumer preferences and buyer behaviour, in tier II or III towns compared to tier I cities?
A: Yes, absolutely. The preference in the smaller towns is, and earlier also it used to be, for diesel SUVs. Earlier, SUVs had a large percentage of diesel. Even today in the mid-SUVs, you have a large percentage of diesel, around 50% or so. But entry SUVs are now largely petrol. In 2019, about 88% were diesel. So, it is now changing.
Another trend is that larger SUVs sell more in urban areas than in the rural ones. I am not talking of the Bolero or Scorpio type of vehicles, but the mid-SUV range of vehicles like the Seltos and the Grand Vitara.
Lately, every year the rural growth had been higher than urban growth except in the year of 2013 when the urban growth was higher than the rural growth. One of the reasons is the larger urbanisation which I can call rural urbanisation or ‘rurban’. In terms of volumes still around 70% is urban, while 31-32% is rural. In our case, about 43% is rural.
Q: How do you manage to protect your margins while running heavy discounts?
A: Margins would get affected obviously because you have a higher sales promotion level in this period [discounts]. But remember, sales promotion, etc, make up roughly 2-2.5% or slightly less of the total cost structure. Marketing spends are around 1.2-1.3%. The major expense for any auto OEM is material cost, which is about 75% to 77% of the total cost structure.
If the material cost comes down, then it sort of compensates for any other increases that you may have on sales promotion or marketing spends. On the other hand, even if you reduce your sales promotion and marketing spends, I am talking about the 2.5% and 1.3%, if something happens adverse on the 75-77% of the cost element, which is the material cost, it generally cannot compensate. That’s why profitability for auto OEMs, clearly a lot of it, depends on the material cost movement. It turned adverse in the last two-and-a-half years, and that’s why you saw a lot of price increases in the industry.
Q: The graph has been quite volatile for hatchbacks. What happened there? Do you think people will further gravitate from SUVs to something else, but not ever come back to the hatchback?
A: The peak for hatches was in the financial year 2017-18, which was 15,58,000 units. It came down a bit to 15,52,000 in the next year. Subsequently, it kept on reducing. In 2021, it came down to 11,60,000. Then, the next year, it went up by 16-17% to 13,42,000. Last year, it has come down again, estimated at 11,95,000 units. The hatches on the higher side will actually see a growth this year.
My theory is that the decline in hatches has been due to the diminishing affordability. Consumer incomes in this segment did not go up as much as the prices did. Prices went up due to commodity price increase, regulatory stringency, the insurance road tax going up, the registration tax going up, and, of course, some higher-level features which consumers are preferring even in the smaller cars. For these reasons, the prices went up, but the affordability came down. I think, going forward, you might see more stable prices of small cars. And if the income level of the consumers too goes up in this segment, you could see the affordability factor getting better and that can actually push the graph back up.
Q: Bharat NCAP (New Car Assessment Program) is here and the competitors are also marching with five stars. What is Maruti Suzuki doing about safety?
A: I think there is no car which has so far been tested as part of Bharat NCAP. So, I do not know who is marching with what. But as far as safety is concerned, it obviously is a very high priority for us. Maruti Suzuki meets not just all the safety norms; we go beyond. There are some features of safety, active as well as passive, in our cars which are not available in respective segments. For example, an HUD (heads-up display) in a Baleno or a 360-degree camera in a Brezza. These are very new factors, and very good for active safety.
Also, we believe safety is not just about engineering of vehicles. It is also about enforcement, education and engineering of the roads as well.
Q: How do you see the market demand coming for the current year? How would it pan out?
A: We are still doing the research before we take a definite position. Flattish, single-digit small growth may be expected. There are a couple of reasons why they are saying it would be flattish even though you expect 6.5% growth projection for GDP. The base is high because at the beginning of the last year you had about 10 lakh pending bookings in the industry, and therefore the long waiting periods for that pent-up demand. Also, the supply chain was disrupted post-Covid semiconductor issues. That is expected not to be there. So, the cushion for additional production has already happened, and since July it is becoming more normal. The pending bookings will shrink by almost 5 lakh. So, that buffer of 1 million pending bookings will not be available.
Second, the stock level at the beginning of the last year was about 1,10,000 in the industry and is expected this year to be much higher. Currently, it is about 3,00,000 plus. That buffer of channel inventory will also not be there.
So, these couple of factors could be responsible for a flattish growth. But, not to forget, some fundamental factors can also be in play such as inflation weighing down on sales.