Page 193 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes Similarly, Daewoo plans to woo buyers of the Maruti 800 air conditioned and the Zen by
pricing its car under ` 3 lakhs. And Telco is all set to take on the 800 by offering a model
at a slightly higher price.
The scenario might worsen in 1999-2000 when Maruti would have added to capacity. By
next year the three other car rivals will have the capacity to put 3.6 lakh cars a year on the
road. Of course, they might not reach full capacity but even at a conservative estimate
they would be selling over 1 lakh cars in 1999-2000. Assuming the market grows by 10 per
cent, as some optimists predict, there will be more capacity chasing the 40,000 extra car
consumers.
Competition has already begun to put pressure on the company’s financials. For example,

when Maruti launched the upgraded version of the Zen recently, it decided not to increase
the cost of the car even though it had been hit both by the customs and excise duty hikes
and the extra cost of the upgradation. That is a sharp reversal of its earlier practice of
increasing Maruti 800 prices after it launched an upgrade.
In fact, Maruti is not passing on the customs and excise increases for any model on to its
customers. The cost increase on the Zen alone is ` 28,000 per car. As a result, Maruti has
had to absorb ` 120 crores on this account plus ` 80 crores for upgradation.
Worse, with the depreciation of the rupee, imported components will cost more leading to

an extra outflow of over ` 40 crores. So the total extra tab that will immediately affect the
bottomline will be ` 240 crores.
On the other hand, cost savings for 1998-99 will account for over ` 100 crores – which

means that more than a fifth of Maruti’s net profits last year will be wiped out.
This year Maruti will save around ` 30 crores more – from ` 50 crores to ` 80 crores through
improvements in techniques and another ` 50-60 crores through further indigenisation.
And while negotiations are on with vendors to cut costs, insiders say this would probably
be neutralised by Suzuki deciding to hike the price of components it supplies to its joint
venture.
Why India’s Largest Car Maker will be under threat from this fi scal.
Outgo

Savings

Contd...

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