April 8, 2009

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 :) ).

14 comments:

Anonymous said...

Dear Rohit, your assumption seems to be very valid. I feel Nano will create space for itself out of the Indian 2/4 wheeler market segment by eating away some of the existing market for itself. I like your explanation about the 2nd part, disrutive products becoming a mainstream products for the company in long run and helping the company a lot. I see Tata Nano being a disruptive product in long run.
I know that Tata Motors won't be of interest for you, but can you say your opinion about Tata Motors from investment point of view? I

KD said...

Hi Rohit,
I agree on this. I would put it like this: Nano would be more beneficial to TaMo, and can boost their profits if successfull, rather its adverse impact on Maruti. Since Maruti has already said that they will phase out 800 and Omni by 2010, Nano will create its own MARKET and Maruti may have to bank upon Alto and subsequent models to remain 50% mkt share holder

Manish Chauhan said...

Rohit

There are some rumours that company is planning to stop production of maruti 800 by 2014 .

What do you think this news can have impact on Maruti Suzuki ?

Also , I think with Auto Industry now getting some positive clues and markets also ready to perform in long term , Maruti and Tata Motors (because of Nano) should be good BUY.

The other thing is that investors should be waiting for Nano launch and see its performance on roads . May be it can give some surprises :)

Manish
http://www.jagoinvestor.com

Ninad said...

Hi Rohit

I think the real challenge that the Nano would pose is to the 2 wheeler and the 3 wheeler segment expecially at the higher end of the 2 wheeler segment.

I would say Bajaj Auto is the most vulnerable in this aspect. The consumer would look at skipping the bike and upscaling directly to the Nano.

I think what the Tata's will achieve out of the Nano is to cement their positon as a auto major and the volume of the Nano will enable a profitable and wide after sales support. This is a key competitive advantage that the Maruti has over other car manufacturers reducing the total cost of ownerhsip of a maruti car.

I agree the Nano is a game changer and it could transform Tata Motors as a organisation.

Cheers

Ninad

Sachin Purohit said...

Tata Motors - from Investment point of view. A Grahamian (I assume all the visitors of this blog as well as its creator) would say that Tata Motors falls in the Speculative grade and not an investment stock. The company is highly leveraged. Its earliest redemption is coming in June 2009 and it is still facing problems refinancing this obligation. It has a senior issue with 12.83% p.a. interest rate. I haven't been able to study its numbers much. The challenge for TaMo will be to be able to survive that long to reap the long-term benefits of Nano described by Rohit.

Anonymous said...

From my understanding of automobile market Maruti can easily compete with Nano with their existing products (M-800/Alto/Omni)in price segment of 1.5-2.0 but at the cost of the Profit(Not loss). Now question for Maruti is to go for war or wait & watch?
Also note that in 2 years bajaj is also coming with some innovative product in range of Rs. 1.5-2.0. So sooner or later Maruti have to enter in this price segment.

Rohit Chauhan said...

Hi anon1
I think nano could be a disruptive product (could be is the key word, one cannot be sure). however tata motors is too complex for me. they have so much stuff going on ..nano, JLR accqusition etc ..i would be prefer a simpler company. why solve tough problem when there are simpler one around :) ?

regards
rohit

Rohit Chauhan said...

KD - my concern is that nano would allow Tata motors to disrupt the car markets in the long run. In the short run no issues for maruti, but if they ignore this threat ..then in the long run they could be impacted

regards
rohit

Rohit Chauhan said...

Manish
M800 is very old model and hence the reason for maruti to discontinue it by 2014. anyway the sales is dropping and in the next 2 years M800 would be an insignificant model.

i am not sure how nano will play out and how that impacts tata motors. as i said earlier, tata motors is in the too hard pile ..there are simpler ideas

Rohit Chauhan said...

Hi ninad
i agree, if tata motors get nano right it could be a game changer for them. that said , it is diffcult to use that logic and extrapolate that into an investment thesis for tata motors..atleast diffcult as of yet ..too early

yes bajaj motors could face a bigger impact especially on the high end bikes. the profit impact could be even higher if some high end bike buyers move to nano

Rohit Chauhan said...

Hi sachin
Tata motors may be speculative investment, but i dont think its survival is at stake. The Tata group is behind the company and they will figure out a way to take care of the debt and the cash flow issues. still that may not make it a good investment

Rohit Chauhan said...

anon2
i guess we have to see if maruti will respond in the long run or like the typical company described in the book i mentioned, reteart upwards (higher margin product).
if they do that then the company may have problems in the long run

regards
rohit

Anonymous said...

Hi Sachin Purohit, yes your comment may be accurate. Strictly from Graham's investment style point of view, TM may not pass the test due to high levarages etc. But if you consider from Buffet's investment style, I think it fullfills at least some of his criterion.Its a cheap distress business with future uncertainity that is why the price is so down. Otherwise TM would never be available at 150 level. And regarding the leverage part, TM is not going to bust anytime soon as long as it is within the Tata Group. As Rohit said, somehow they will manage the liverage part. Regarding Nano, I personally do not have much expectation from Nano for TM from balance sheet point of view. But one thing Nano has definitely done for TM is that now all over the world, everybody knows TM. As Rohit told rightly, if TM can play the game well, they can make it big !

Rajesh said...

Clayton M. Christensen is a director on board of TCS - A TATA Company... will not be surprised if he has advised Mr Ratan Tata