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Maruti slashes prices to retain lead; 'middle class dream to own a car a wink away from reality'

Rediff Business Bureaux in Bombay and New Delhi

It's war. Rather car wars. Big ones at that, for small ones. The Great Indian Grand Prix, if you will.

Hours before Telco announced the prices of Indica on Wednesday, Maruti Udyog Limited announced it has slashed prices by 5-12 per cent of its popular, top-selling models like Zen, Omni and Maruti 800 small cars.

Other players are expected to follow suit, if not immediately, then during the later part of 1999.

The top and middle segments of the Great Indian Middle Class, industry analysts said, will now be able to afford the small car. ''Even government employees and single-income families can now dream to own a car,'' an analyst said.

RSSLN Bhaskarudu, Maruti's managing Director, said the prices of its largest selling model, Maruti 800, had been reduced by almost Rs 24,000 to Rs 185,000 from Rs 209,000.

He conceded that the price-cuts would impact negatively on Maruti's profit margins. ``Certainly our profits will go down. But we hope to make up for this by increased sales volumes.''

A new model, Maruti 800 EX, with coil spring suspension and radial tyres priced at Rs 209,00 (Delhi ex-showroom), will also be unveiled.

Another model, 800 DX, will be cheaper by Rs 11,127 than 800 EX. It will be equipped with air-conditioner and radial tyres.

A cheaper variant of Zen -- Zen LX -- is also in the pipeline. Its price: Rs 295,000. Zen LX will have an air-conditioner and a heater as standard accessories.

The Zen LX, which will be cheaper by Rs 51,173 compared to the old Zen model, will now take on Hyundai's Santro base model which is priced at Rs 299,000 and the Indica diesel (standard) priced at Rs 285,000.

Zen's diesel version will now be available for Rs 36,808 less at Rs 426,000.

Prices of diesel and petrol versions of Maruti Omni have also been slashed by Rs 17,051 and Rs 6,998 effective from the New Year's Day.

Bhaskarudu said: ``The automotive industry is going through a tough period and many companies have been severely hurt. Being the market leader, we have to take such a step to boost demand in the market.'' He added the company has managed to retain its market shares in spite of the economic slowdown.

Without referring to Indica, he added that the objective is to expand the market specially in high volume models. ``In the past few months, demand and retail sales have been coming down. As a market leader we had to take steps. We do not want a price war,'' he said.

However, in Bombay, Telco's chairman Ratan Tata told the gathering at Indica's launch party: ``Even for those who do not own or buy an Indica, there is good news. We've triggered price drops in Maruti, and made the car market a friendlier place for the consumer. We have done our level best to produce the bigger small car, taking into account our concern for him.''

Mahindra & Mahindra managing director Anand Mahindra said, ``The pricing of the Indica has set a benchmark for the small car market in India''.

Hyundai Motors India Limited officials are reported to have dismissed Maruti's moves as not very significant. "It is surprising that the market leader should use a pricing strategy, rather than a product upgradation strategy,'' a Hyundai executive was quoted as saying.

In Delhi, Bhaskarudu said Maruti's total sales would go up by at least 20-25 per cent over 1997-98, thanks to the price reduction and widened product portfolio. He ruled out any possibility of slashing the prices of its midsize car Esteem and multi-utility vehicle Gypsy.

Maruti officials said the price-cuts should not be seen as being harsh on old customers. In a changing market, this has to expected, Maruti's joint MD Jagdish Khattar said.

Maruti had earlier reduced production by over 20 per cent as stocks piled up at its Gurgaon plant.

Meanwhile, rumours of a new economy version of the Fiat Uno at Rs 259,000 spread in the auto industry. The new models, apparently, will not have features like head-rests and interior fitting and premium upholstery. The company had slashed the prices of its petrol vehicles by around Rs 25,000 earlier this month.

Analysts said the small car market is likely to be exciting as potential car buyers were waiting for the price announcements and cuts. The last quarter of 1998-99 will be action-packed -- that was the general view.

Meanwhile, Hyundai has decided to adopt a wait-and-watch Stance regarding the pricing of the Santro.

Daewoo Motors is not likely to effect any price cut before January 20, 1999, when top officials would meet to take stock of the situation.

In a related development, the Union government is learnt to have initiated a move to sell its 49.5 per cent stake in Maruti. The finance ministry proposal envisages warehousing the government's stock with banks and financial institutions. The stake will later be offloaded through a strategic sale. The industry ministry has to approve the move though.

As per an agreement between the government and Suzuki, which holds a 50 per cent stake in the company, the holding will first be offered to the Japanese car-maker. Only if Suzuki decides to reject the offer will the government be free to offer it to others.

The finance ministry is of the view that intense competition will bring down Maruti's profit levels and earnings per share in the coming years. As a result, the asking price for the government's equity will fall proportionately. The ministry argues that the right time to sell is now.

Industry Minister Sikandar Bakht had given a specific assurance to Parliament that government's stake in Maruti would not be sold.

Maruti share capital stands at Rs 1.32 billion and reserves and surplus of over Rs 20 billion. In 1997-98, the company made a profit after tax of around Rs 650 million.

Maruti has been hit hard in 1998-99 as it had to absorb cost escalations by way of upgradation of models and excise pay-out. The cost absorption in case of Zen-VX with all its special features was over Rs 1 billion.

Market experts said the stripping down of Zen reflects competition from Santro and Indica.

The developments have led industry analysts to opine that the price cuts will expand the Indian car market by increasing the number of car buyers. They say distinction between diesel and petrol car segments is expected to get blurred.

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