Introduction
The purpose of this paper is to assess Suzuki’s key strategic decisions surrounding its entrance into the Indian market.
For the purpose of this paper an outlook and analysis of the four wheel segment will be undertaken. The two wheel segment, which constitutes a large portion of sales in India, will not be analysed in this report.
The paper will discuss the automobile industry in general in the Indian market with some relevant facts; it will then narrow the focus on to Maruti-Suzuki and discuss the Joint venture between the Indian government and the Japanese car maker Suzuki.
An emerging market, India has much to offer on the stance of complex regulatory, economically, socially and politically motivated aspects of any business entrance. Those influencing factors will be discussed in detail with a final connection to adaptation of this framework by the Japanese car maker.
Analyses of the successes and the failures Suzuki made in its operations in India will be undertaken. How successful are its successes, how deep are its failures and how did it reconcile its periods of ugliness it became famous for at some point.
Throughout the paper conclusions surrounding the organisation’s entry into the Indian market place will be derived from the factors discussed, had it chosen the right entry method? Had it leveraged its government connections? and how is it viewed by its stakeholders and are those views conducive to substantial negative or positive impact on the organisation’s profits or market share.
The Automotive Industry today - India
In a country with a large manufacturing sector, the automotive industry is one of the largest and fastest growing with vehicle production almost doubling in the five years leading to fiscal year 2010/2011 (Bardalai & Nicholls 2012, p.3).
The opportunities presented in this segment are enormous for the automotive industry especially with the increasing wealth in India and economic downturn in other parts of the world. The liberalisation of the economy in the 90’s drove the country to a market-based economy where FDI started flooding in to serve the second most populous country in the world. These market characteristics eventually led to India’s ranking as the fourth largest world economy by GDP measured by purchasing power parity following EU,US, China (The World Fact Book, 2012). The automaker represented a high spillover effect and hence represented a compelling case for government support, hence licensing was lifted and foreign car manufactures where then able to enter India as wholly owned subsidiaries. Foreign car manufacturers increased in India not only to serve the growing demand in the Indian market but they soon realised the merit in exporting out of India to Asia, middle east due to geographical location and then to Europe due to lower manufacturing costs utilised in India.
The three dominant car firms in the passenger car segment are Maruti-Suzuki India, Hyundai motor India (a wholly owned subsidiary of Hyundai of South Korea) and TATA Motors. Combined, these three firms control around 90% of the passenger car market share (Bardalai & Nicholls 2012, p.5).
Suzuki’s Entrance into the Indian market
“By partnering with Maruti Udyog Ltd, founded by Indira Gandhi’s son Sanjay, Suzuki not only understood the importance of elite government relationships but the opportunity the Indian market provided” (Masanori, 2012 p. 7).
Maruti Udyog Limited (MUL) was formed in 1981 to meet the nation’s rising demand for personal transportation amidst failing public transport systems. MUL looked to partner with a reputed foreign automaker in order to leverage the partner’s technological and management skills. After considering a few competitors the Indian government decided to partner with Suzuki the Japanese automaker on account of its track record and capabilities in the small car segment as well as its ability in transferring Japanese management style which frequently is attributed to the success of many companies (Moon & Kwon 2010 p.610). The small car segment was of particular interest for the government as small cars are fuel efficient, but the government also looked for cars that have the ability to handle the Indian roads and hence had this as a key evaluating factor.
Suzuki’s motivation in entering as a joint venture into the Indian market rather than waiting until it was able to enter as a wholly owned subsidiary can surround the fact that the Indian market is complex to navigate especially with differing political arena than that of Japan with a large cultural distance between the Japanese and Indians. Furthermore Suzuki was small comparatively and lacked the vast amount of manpower and resources required to enter India as a WOS hence a joint venture was inevitable. The Indian government saw Suzuki size as advantageous as they were able to engage in more aggressive negotiations with the Japanese car maker.
Suzuki, like many Japanese firms or indeed foreign firms entering new markets may have taken a complex analysis when entering the Indian market in terms of level of ownership. Typically Japanese firms entering foreign market take an incremental approach starting with exporting to the target market, however since this was not an option due to the heavy duties imposed by the Indian government on imports of cars, Suzuki forewent this stage and proceeded to a Joint venture; However in typical Japanese manner, they increased their commitment to the venture incrementally starting with a 26% of equity to ownership to 40% five years later and 50% 9 years later (Malhotra & Sinharay 2013 p.1). This incremental entrance into the market alleviated Suzuki’s risk concerns; however, it may not have been the right strategy had Suzuki entered into the Indian market at a later stage. According to research done by Masanori (2012 p.3&4) one success factors for entering the Indian market is making large investments at entry, something Korean companies have been more aggressive with than the Japanese. Hence, the joint venture of Suzuki with MUL had a profound effect in raising the profile of the organisation in India without the risk of a majority or equal equity investment. Other foreign firms committed large sums in order to gain governmental support.
Furthermore, the entrance choice likely undertook what many academics term as transaction cost approach where by strategies look to devise the best outcome possible where by the cost of exploiting proprietary assets is minimised whilst maximising the rent generation revenue of those assets (Meyer, Wright & Pruthi, 2009 p.570). The Japanese may have felt that partnering with the highest levels in the India would aid in protecting their proprietary assets far more than partnering with a private firm.
The Japanese firm’s contractual ability to increase its ownership in the firm clearly demonstrates that they intended to control the joint venture as much as possible. Their planned entry hence can be identified as one that exploits the advantages of partnering with an entity that would serve to reduce the liability of foreignness (LOF) which impacts “…all elements of the international business environment…” (Sethi & Guisinger 2002, p.223) whilst maintaining the control needed to operate as they see fit, leveraging their knowledge and skills acquired in their home country.
We can conclude that Suzuki Japan entered in a joint venture with the Indian government in order to navigate a complex market with harsh operating environment in a relatively seamless manner, yet it strived to control the operations and planned to do so in the long term. The Indian government saw the merits and skills that Suzuki had and therefore were more concerned with providing the nation with personal transport than with controlling the company. They acted in an encouraging manner and did not have a profit generation agenda but a political one. Serving the people would make them more politically resilient in future elections.
Political Environment
The Indian political environment, although the world’s largest democracy is extremely bureaucratic in nature where trade is concerned. The government has often acted with a protectionist view in order to serve its local companies and fend away foreign entities. Foreign firms where kept from bidding on projects that may impact national security which could be viewed tolerable, however they also were kept away from less sensitive projects by the government failing to disclose important requirements for the bid or by only publishing the bids in small local outlets were foreign firms are unlikely to see them (Shenkar & Luo 200, p.46).
In the automotive industry things were no different, prior to the lifting of heavy duties in 1983 (Malhotra & Sinharay 2013 p.1) the market was only represented by the local players, the duties that increased the cost of the unit significantly were too large for most foreign car makers to enter the market whilst remaining profitable. Furthermore, protocol barriers to the Indian market are highly criticised and impose undue pressure on foreign car makers (Reed, 2012). These protocols (in the form of endless licenses and needless tests on car horns for example) may have in fact been a key motivator for Suzuki to choose to partner with the government rather than a private entity. It is presumed that protocols would have been easier to navigate within the government if the government had a stake in developing the business.
Further problems faced by the government protectionist approach is the world marketplace isolation which restricted investment and entrance of new technologies needed in modern car manufacturing (Kumar et. al., 1996 p.176) this impacted entrance of foreign component manufacturing firms which directly raised the cost of automakers wishing to assemble cars in India. The lack of availability of components places a need for imports which can be subjected to heavy duties and transportation costs cancelling out the benefits of cheap labour market.
Suzuki’s early entrance to the market meant that it set up its operations transferring vital success factors such as technology and management styles in time for the liberalisation benefitting for substantial first mover advantages. Suzuki very possibly had, through informal channels of communication understood that whilst at first certain government policies may limit production range but in the long term liberalisation (which came about in the 1990’s) was an aspect to look forward to. Whilst competitors scatter to set up in India Suzuki was already there, ready to take the next course of action and develop its business to the next level in production. In this instance tariffs and protectionism served the venture well in the sense it gave Suzuki a significant head start when liberalisation took place.
Economical Liberalisation
Economic liberalisation in the early 90’s transformed many sectors within the Indian market (Sáez 2009, p.1137). Among those sectors affected by the liberalisation was the financial sector which had a profound impact on purchasing power in general and effectively revolutionised the auto loans segment of the business. Owning a car became within reach of many who benefitted from the gradual increased competition in this segment and the liberalisation of the manufacturing sector (Malhotra & Sinharay 2013 p.3). This also had a positive impact on the automotive industry in the view of increased sales, partly as the GDP increased with more people employed in these sectors as foreign players entered the market and partly due to the increased competition in this sector that encouraged aggressive pricing and more tailor made cars for the new emerging urbanised middle class, once unseen in a country previously offering little other than agriculture for the majority of its people.
India’s membership of the world trade organisation grants it lower tariffs in certain developed countries through the generalised system of preferences (GSP); this with the liberalisation of the market compounded with low cost of labour makes it an attractive manufacturing and exporting hub. Maruti Suzuki, enjoys these privileges, with over 30% of the company’s exports reaching the European Union at an average of 3.5% less tax it’s in an enviable position (Banergee, 2013). If Suzuki exported the same cars from Japan it would incur a sizeable cost difference to its operation that may impact its competitiveness. However, having enjoyed the privileges of GSP in Europe for many years the system is due to change in January 2014 and the organisation is likely to face challenges in its pricing strategy, were a balance between profitability margins and consumers perception of value are likely to be questioned. Furthermore the change will cast a shadow on foreign manufacturers who need to revaluate the cost benefit of operating in India.
Currency Fluctuation
The Indian rupee has seen severe weakening against the dollar in the past twelve months impacting negatively on the auto industry that relies heavily on imported fuel. The fuel subsidies given by the government are gradually lifting making running a car far more expensive than previous years. The high interest rates that the government have implemented in bid to defend the declining the currency and combat inflation are further agitating the situation. It is estimated that approximately 80% of all car purchases are financed (Reuters 2013); hence not only running a car has become more expensive but also buying one.
Cultural differences
Navigating host country culture is imperative to the success of any foreign entity. The high cultural distance between the Japanese and Indian culture in the form of language, religion, attitude towards work whereby the Japanese have an extreme devotion to the organisation above that of the family and vice versa for Indians leads Japanese organisations to take a stringent cultural risk assessment. It is of utmost importance for any organisation to be accepted socially and have the capability to adapt within its environment and although local hire bridges some of the distance, effective communication with head office is conducive to success (Shenkar & Luo 2007, p.281). Further to the impact of culture on entry strategy, a comprehensive understanding of society and its requirements induces creativity and hence enables an organisation to anticipate the needs of consumers prior to competition and reap favourable returns.
The Japanese and Indians share common cultural traits and indeed differences. Both societies are high on power distance, which may have aided in the negotiation stage of Suzuki and MUL as everyone is likely to have been somewhat polite and not blunt like for example the Anglo-Saxons who were also in the run for the partnership. The view of collectivism is commonly shared, although the Japanese are the most individualistic in Asia they do rank low in comparison to most of the world, so do the Indians. However the loyalty in each culture differs, the Japanese are devoted to their organisation and place it at the top of their priority list whilst the Indians place more priority on family and friendship relationships. None the less the understanding of Japanese companies that people are not merely motivated by their salary and relationships bring about satisfaction is a critical factor that many European and American companies struggle with. Japanese organisations are loyal to their employees; many Japanese believe a job is a job for life so much so that they have no compulsory retirement age. The organisations place much emphasis on training and ensuring that they derive the best result out of each employee regardless of position and they work loosely with job descriptions. Team work is of an imperative attribute for both the Indians and Japanese, they both arguably dislike attracting individual attention and prefer being assigned tasks and rewarded as a group. Nepotism is rare in the Japanese culture yet widely accepted in India, especially since most companies retain some family control and hence nepotism is expected. Suzuki’s assumption of management may have created conflicts in this regard, especially if the management recognised under performing workforce was onboard and lacking the technical skills needed to realise the company’s vision for efficiency.
Maruti-Suzuki suffered ugly conflicts with the trade unions; the firm recognised one union and refused to recognise a second one. Employees at the company’s Manesar plant demanded a separate union to the one that was already in place, The Maruti Udyog Kamgar Unioun (MUKU) which was dominated by those who work at the Gurgaon plant (Sen, 2011 p.192). Employees at the Menesar plant went on a wild cat strike were some were dismissed. As typical Indian cultural collectivism and loyalty is ingrained in social and family relationships, workers in competitor automaker plants threatened to strike if their organisations did not interfere favourably, hence the problem became an industry problem rather than a company problem.
The government backed the organisations and ruled in favour of ‘no strike’ policy. The trade unions demand for collective bargaining could have been better understood if the organisation took a cultural perspective of the problem. In fact there was no demand other than to form a union where the workers felt that they could participate as their distance from the other plant unioun was large and their grievances differed. In fact Honda motorcycles and Scooters in 2005 faced a similar demand which resulted in a strike, and so did Rico Auto in 2009 (Sen, 2011 p.196).
Better understanding of the social needs fulfilled by the union could have alleviated a recurring problem for Maruti-Suzuki. The Japanese company failed to be culturally savvy with the Indian employee and acted with horror at the fact that they merely wanted a second union, as in Japan unionism is low and strikes are extremely rare, the devotion to the organisation far outweighs the benefits of unionism.
The recurring problem with the unions is rarely forgotten, it started in the 2000s and continuous to be a topic discussed today, the MD & CEO of Maruti-Suzuki India in a recent interview referred to the problem as a “…sad case of mis-communication with our workforce led to such perennial problems in the past two years.” (Ayukawa, 2013 p. 4). This indicates that the company is still struggling to bridge the cultural gap between management and workforce.
Maruti-Suzuki, despite all its problems with the workforce, seems to have finally understood the importance of the community ties to its blue collar workers and has leveraged this connection by offering them the opportunity to contribute to the company’s corporate social responsibility (CSR) projects by volunteering in projects the organisation is active in such as education in local schools.
Such tasks were previously only undertaken by management and professionals (e.g. engineers). Having the CSR involve the workshop staff not only increases the company’s internal public relations stance but allows them to proudly represent their company in a manner in line with cultural expectations and hence induces more loyalty to the company. The organisation initiated its CSR assignments four years ago (Bhattacharyya, 2013) which arguably is considerably later than some would expect given over two decades of operation in India.
A problem infiltrating culture, politics and even the economical spheres of India is corruption and the system that sometimes seems to be built on bribery. Corruption is essentially a barrier to trade, organisations that cannot be involved in bribery from a legislative, ethical or cultural stance, may find it extremely difficult to operate effectively in India. With a low CPI index of 3.4 (Coleman, 2013 p.172) entering and operating in India causes an abundance of problems for foreign organisations especially those that come from less corrupt countries such as Japan which has a CPI index of 7.7 (Coleman, 2013 p.170). Corruption in India and the culture of bribery is well understood and utilized by local firms although not publicly condoned it often goes unpunished. This increases the entry risk to India and the costs that companies entail which some believe could be equivalent to more than 20% tax burden on organisations coming from a low corruption country (Shenkar & Luo 2007, 522).
In Suzuki’s case, partnering with the government and access to the highest levels could have mitigated the problem substantially, as no one realistically would have had the audacity to ask for bribes when they know that the government are involved and can utilize the laws that punish such behavior. The laws that are in place to fight this economically draining cultural trait although present are hardly used because the reporting of corruption is low attributing to the level of acceptance and the stance of ‘that’s how people do business in India.
Expatriates In India
There is a substantial bureaucracy to entering and exiting India for expats which act as a hindrance for foreign entities wishing to bring some skilled, talented experts. This hindrance although does not stop those people from coming it does discourage them from returning. Returning expats can have a profound benefit to foreign entities as they possess the knowledge to navigate the Indian environment from their previous assignment yet may have updated their knowledge and technical expertise in more technologically developed countries, hence instead of them passing through the stages of culture shock and acceptance prior to contributing to the organisation’s progress, they can dissipate their knowledge immediately. Those who have a good experience in a country are likely to return and those who like many foreigners feel somewhat entrapped by the bureaucracy normally do not wish to do so.
Many expats feel the need to present a set of documents prior to departing India is an infringement on their civil rights, as they should (provided they have remained on the right side of the law) be able to leave anytime they want to their home country, with only presenting their passports. The renewal of an expat visa which must be done yearly can take up to two months in which time expats are not permitted to leave. In some cases this causes irreversible emotional consequences due to a sick relative dying without the expat being able to return home.
In fact bureaucracy and the need for excessive information by both local and foreign companies in India is said to leave a ‘bad taste’ for many expats. Banks, even international banks require a history status before opening an account and can debate the procedure endlessly, house wives are rarely able to open an account easily as they cannot provide a stable income, which most people cannot comprehend since they have accounts in their home countries sometimes with the same bank. Furthermore the bureaucracy in transferring funds out of India cause endless problems whereby expats have to apply for special permission each time they want to transfer money out of the country. Some expats have to go through the ordeal on monthly basis since they maybe supporting family members or paying child support (in cases of divorce).
Conclusion
Entering the Indian market as a minority equity holder whilst maintaining a long term view of eventually becoming a majority holder and assuming full management control Suzuki was able to study, learn and navigate the Indian market in a structured manner an opportunity most competitors dream about in a market complex to enter. Suzuki’s solid political backing enabled it to overcome the hurdles that even local companies are challenged by. The government stood by Suzuki in times of trade union turmoil and ruled in favour of the industry in general indicating their commitment to the foreign entities. Although culturally the two countries differ considerably Suzuki’s ability to overcome those differences is evident as the company is operating successfully in India more than two decades after the initial entry. Figures show that Maruti-Suzuki continuously dominated the market of passenger cars with around 45% of the market share (Moon & Kwon 2010, p.606). Furthermore, although Maruti-Suzuki at times was challenged in its ability to handle matters relating to comprehensive understanding of its employees, it is clearly turning the page with its increased community ties and further understanding of its work force. Such measures should induce a more motivated, loyal workforce.
The opportunities offered to the company as an early entrant may arguably be central to the organisation’s success, not only did it make a company relatively small grow to a level envied by its competitors but also enabled it to enter a market it may have otherwise missed out on. Suzuki possibly could not have stood the fierce competition that it would have faced had it entered after liberalization as wholly owned subsidiary, with its size and human resources too small for the Indian market. Yet Suzuki, learnt, made mistakes, developed new models to serve the Indians all while its competition were at bay. The organisation was solidly ingrained in India and demonstrated high resilience by the time the competition flooded in.
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