The Emerging Issues In Financial Management Commerce Essay

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Maruti Udyog Ltd. (MUL), a subsidiary of Suzuki Motor Corporation of Japan, has been the leader of the Indian car market for about two decades. Its manufacturing plant, located some 25 Km south of New Delhi in Gurgaon, has an installed capacity of 350,000 units per annum, with a capability to produce about half a million vehicles. The company has a portfolio of 11 brands, including Maruti 800, premium small car Zen, Swift, international brands Alto and Wagon R, off-roader Gypsy, mid-size Esteem, luxury car Baleno, the MPV Omni, Versa and Luxury SUV Grand Vitara XL7. In recent years, MUL has made major strides towards its goal of becoming Suzuki Motor Corporation's R and D hub for Asia. It has introduced upgraded versions of Wagon R, Zen and Esteem, completely designed and styled in-house.

Passenger cars segment extremely competitive: The passenger car segment in India is extremely competitive. Along with MUL, the other strong players are TML, Hyundai, Ford India, Honda Siel cars, General Motors India etc. The table below gives a snapshot of the key models of MUL and the competitive models of its competitors.

The cheapest Indian car launched in 2008: MUL's key competitor - Tata Motors has launched the cheapest car in India i.e. Tata Nano priced at around Rs.100,000 which is extremely attractive to the Indian consumer - particularly the younger and middle class families. The styling and design of the car have been completed and prototypes are being tested within the plant. It is a rear-engine, 4-5 seat, 4-door car with about a 30 horsepower engine. MUL had its M800 which is the lone offering in the 'Mini' segment with no competitor for the last 25 years. The competitive car from TML has created a newer segment at a price point which is lower than M800. Further, the new car from TML has diesel offering which is further upside for the new car. This car would pull away volumes from the motorcycle segment (which is a total market of 8m) and also the first time car buyer which principally used to go to MUL before the launch of Tata Nano.

Absence of a successful product on the 'Diesel' side: Out of the total cars sold in India, around 20-22% runs on diesel. This proportion is expected to increase in the future as the petroleum prices keep on increasing everyday. However, the inherent cost benefit of around Rs.14/litre between petrol and diesel coupled with the fact that diesel cars generally give higher mileage has resulted in some of the new car buyers being attracted to diesel. MUL traditionally has been extremely strong in the petrol technology (due to its association with Suzuki). It did have a few models with diesel option - Zen and Esteem in the past. However, they have not been that successful and currently MUL does not sell any diesel vehicle.

Commodity price risk: The principal raw materials for the company are steel, non-ferrous metals, rubber and engineering plastics. These prices have increased in the last 12-18 months as reflected by the rising raw material to sales revenue ratio trend in the last 2 years. This has resulted in rising of car prices by the company too which would affect the sales volume for the company.

Macro economic factors: The demand for the Company's products is affected by changes in the macro economic conditions like interest rates, excise duty rates, inflation, oil prices, etc. Over the last few months, there have been significant changes in the economic environment. There have been negatives like hardening of interest rates and oil price escalation. Though the company is exposed to all these factors, the company's presence in diverse product segments, in diverse geographies and in diverse fuel segments helps to spread the risk.

Investments and Utilisation: The Company is making heavy investment in the areas of capacity expansion, R&D and marketing infrastructure. Sustained demand of products is critical to generate returns on such investments. Capacity utilisation shall be a key parameter to ensure business viability both for the Company and its channel partners. It also does a careful cost benefit analysis to ensure, the investment generates a competitive advantage to help secure volumes.

Rise in petrol prices and growing popularity of other substitute fuels like CNG is another threat to Maruti. There is also a threat from R&D investment by Toyota and Honda in Hybrid cars. Hybrid cars could run on both petrol and gaseous fuels.

VARIOUS RISKS IN AUTOMOBILE SECTOR IN INDIA

Increasing threat from the new players: Most of the major global players are present in the Indian market; few more are expected to enter. Financial strength assumes importance as high are required for building capacity and maintaining adequacy of working capital. Access to distribution network is important. Lower tariffs in post WTO may expose Indian companies to threat of imports.

High Rivalry within the industry: There is keen competition in select segments. (Compact and mid size segments). New multinational players may enter the market.

Low Market strength of suppliers: A large number of automotive components suppliers. Automotive players are rationalizing their vendor base to achieve consistency in quality.

Increasing market strength of consumers: Increased awareness among consumers has increased expectations. Thus the ability to innovate is critical Product differentiation via new features, improved performance and after-sales support is critical. Increased competitive intensity has limited the pricing power of manufacturers.

Low to medium threat from substitutes: With consumer preferences changing, inter product substitution is taking place (Mini cars are being replaced by compact or mid sized cars).Setting up integrated manufacturing facilities may require higher capital investments than establishing assembly facilities for semi knocked down kits or complete knocked down kits. In recent years, even though the ratio of sales to capacity (an important indicator of the ability to reach break-even volumes) of the domestic car manufacturers have improved, it is still low for quite a few car manufacturers in India. India is also likely to increasingly serve as the sourcing base for global automotive companies, and automotive exports are likely to gain increasing importance over the medium term. However, the growth rates are likely to vary across segments.

RISK ASSESSMENT AND MINIMISATION AT MUL

The Company has established an appropriate risk management framework. All such risks have been identified and categorised based on their nature and significance. The detailed mitigation plans for each such risk have been formulated, affected and reviewed periodically. Appropriate risk assessment and minimisation procedures are established. The process for formulating a defined risk assessment framework encompassed, inter-alia, a methodology for assessing and identifying risks on an ongoing basis, risk prioritising, risk mitigation, monitoring plan and comprehensive reporting on management of enterprise wide risks. An Executive Risk Management Committee (ERMC) is in place to review the risk management activities of the Company on a regular basis. The composition of the Committee includes the Managing Director and all Whole-time Directors. Risks are evaluated by ERMC. In addition to the company level risks, ERMC also reviews, from time to time, any new risks that may arise due to market dynamics and changes in the business environment. The Audit Committee and the Board of Directors also review the status of the risk management activities in the Company.

Few strategies followed by MUL are:

Pricing of products that cater to all customer segments.

Offering one stop shop to customers or creating different revenue streams like Maruti finance, Maruti Insurance, True Value (for used cars), etc.

Repositioning of products from time to time.

Realisation of importance of vehicle maintenance services market.

POST EFFECTS OF APPLICATION OF RISK MANAGEMENT TECHNIQUES

The Company attained its highest ever domestic sales and exports. There are many positive developments that augur well for the future: the success of new models including two in the sedan segment, customer appreciation for the new Suzuki design philosophy of bold and aggressive cars, success of the Company's new diesel program, a sales and workshop network that is profitable and growing, scale-up in R & D strength and of course, top ratings in customer satisfaction for eight years in a row. By all accounts, competition will intensify in the future as more players enter, new models are launched and new market segments are created. In particular, with several markets internationally remaining flat or showing slow growth, global manufacturers are directing investments and focus towards the Indian market.

While the Company enjoys a strong customer connect and has an excellent track record, it is approaching the future afresh and taking nothing for granted. The Company has laid down a clear roadmap for the next three years, and is working towards a target of domestic sale of 1 million units and exports of 200,000 units by 2010-11. It is expanding capacity, strengthening the network, recruiting talent, working on next generation engines and enhancing its cost and productivity initiatives to attain these targets. The new model launch plan remains aggressive: the Company is committed to launch A World Strategic Model Kizashi in India in few months.

Macro economic factors like GDP growth, inflation, interest rates, currency changes, fiscal policies and commodity prices have a strong bearing on the Company's business. Barring commodity prices, the other factors have been, by and large, positive for the passenger car industry over the past few years. While there is some reversal in the macro environment, it remains to be seen whether this is a short term phenomenon or a more sustained shift in the trend. The Company has decided on certain critical initiatives to retain leadership in the long term. These include investments in marketing infrastructure such as brand centres and regional stockyards for cars and parts, all of which will enhance customer satisfaction. The development of in-house R & D capability, combined with strong support from Suzuki in terms of models, technology and best practices, will also help the Company strengthen leadership in the future.

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