Maruti suzuki and the Nano launch

The flavor of the month has been the launch of Nano by Tata motors. The Nano launch got an extremely wide coverage in media, which is something only Apple’s products are able to get.

My interest around the launch of Nano has been more in terms of the impact on Maruti suzuki. Maruti suzuki is a holding for me and I have analysed the company in the past ( see here and here ).

The percieved threat to Maruti from Nano has been known for quite sometime now. The reason I use the word percieved is due to the fact that I don’t consider this as an immediate threat, but a long term one. Let me explain

The product which is supposed to be impact by Nano is Maruti 800. However this model has been in a state of decline for the company for the last couple of years. In the year 2007, even before the launch, the product had volume decline of 10%+ and now accounts to barely 10% of the sales volume and must account for less than that in terms of profits (I don’t have the profit contribution for Maruti 800, but we can safely assume that the margins for this model are less than the higher end products). As a result, Maruti suzuki seems to be consciously moving out of the lower end of the market and the launch of nano could accelerate the process. Any further loss of volumes in Maruti 800 should not hurt the company much.

So much for the short term. What about the long term ? That is different story. For reference, let me point out the book – The innovators dilemma by Clayton M. Christensen, which talks in detail about disruptive technologies. I cannot explain the key concepts in a short post and would recommend reading the book or using this link.

The key point is that some companies introduce disruptive products at the low end of the market which meet only a subset of the requirements and cannot meet the requirements of majority of the users. These disruptive products or technologies are ignored by incumbents, as they are cheap, low margin and a threat to the current business model and products. However with the time the disruptive companies keep improving these cheap, disruptive products which then become good enough to threaten the mainstream products. A well know example – Personal computers.

Tata’s nano can be a disruptive product in the long term. As of now, this product will not threaten Maruti suzuki and other companies or their profits. But if Tata motors gets it strategy right and keeps improving the product, then they could be a major threat to the other companies.

It is however not a given that the above will happen. It will depend on how the other car companies react. However irrespective of the response, if the Nano is successful, it will affect the profitability of most of the car companies in the long run. I would recommend reading - Clayton M. Christensen’s books to understand how this has typically played out in other industries and you will appreciate how the same could happen in the car industry.

All of the above is still in the future. For the time being, everything is bright and sunny and investors like me in maruti suzuki are not complaining. However, due to the above market dynamics I do not plan to hold the stock for more than a few years (yes my concept of long term is more than a few months :) ).