The Hindu Business Line : Automobiles: Working on a better product mix

Raw material costs for five majors — Tata Motors, Ashok Leyland, Mahindra and Mahindra, Maruti Suzuki and Hero Honda rose by an average 19 per cent year-on-year in the June 2008 quarter, compared to the 10 per cent rise of June 2007.

Understandably, this led to lower operating margins, with all companies barring Hero Honda (margin expansion aided by launches and higher volumes) seeing a decline in margins of just over 1 percentage point.

Passenger car maker Maruti Suzuki was the worst hit, its margins declining from 14.6 per cent to 9.8 per cent, year on year.

Mixed strategy

To beat the blues, automakers are using a combination of price increases, better product mix, cost reduction, and renegotiation with vendors.

For example, Tata Motors has increased vehicle prices by 7 per cent in a span of three months, a level of increase they admit they would normally take over three years!

Thanks to this, the company’s sales grew 15 per cent this quarter, though volume growth was only 8 per cent.

To improve margins and boost realisations, companies are also looking at tweaking their product mix.

With the introduction of the Swift, SX4 and Dzire and the A-Star, Maruti Suzuki is trying to mark a presence in the mid-size segment, which offers better margins.

From being a leader in entry-level and entry-premium bikes, Hero Honda is now focusing on selling more executive and premium brands like the CBZ Xtreme and Hunk.

As part of a drive to rationalise costs, Hero Honda follows a policy of aggressively availing cash discounts from vendors by making payments before the due date and deploying surplus funds in its core business.

Ashok Leyland too has an ongoing strategy ‘Mission Gemba’ to reduce costs at the shop-floor level.

Maruti has turned the spotlight to ‘value analysis’ and ‘value engineering’.

Realising the need to add value by increased efficiency, the company has rolled out the ‘One-Gram, One-Component’ initiative to reduce the weight of components.

Maruti also recently convinced steel vendors to accept a 25 per cent hike in steel prices for the first six months of the year, as against the 40 per cent demanded by them.