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Pricing Strategy and its Success of Automobile Manufacturers in India

Prepared by

Pratyusha

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Date Submitted

Word Count
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Contents

Abstract 4

1: Introduction 4

1.1 Background to the research 4

1.2 Relevance of the topic for management study 5

1.3 Purpose of Research and Aims 6

1.4 Structure of the Rest of the Report 6

2: Literature Review 6

2.1 Theory 7

2.2 Results of Various Empirical Researches 14

Chapter 3: Economy 16

3.1: Indian Economy & Auto Sector 17

3.2: Indian Auto Industry 24

Chapter 4: Methodology 25

4.1 Types of Research 25

4.2: The Research Problem & Style Chosen 25

4.3 Hypothesis 26

4.4 Research Question 26

4.5 methods of Analysis 26

4.6 Data Sources 28

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5. Analysis and Findings 28

5.1 Critical Appraisal of Literature 28

5.2 Study through Statistical analysis (Analysis of Data)

Graphical Appreciation 32

5.3: 5.3: Study through theoretical models 46

6. Discussion 47

6.1 Interpretation of results and answer to the research question 50

6.2 Evaluation of answer with existing

theory and previous empirical research 51

7. Conclusion 52

7.1 Conclusion, evaluation of hypothesis 53

7.2 Reflection on the work 55

7.3 Limitations of Current Research 55

7.4 Recommendations for the further work 56

8. Appendices 57

8. List of References 82
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Abstract:

The problem that is addressed in this paper is about profitability of Indian auto market and
the way the firms are framing a pricing strategy as well as the products to maintain profits.
The paper explores the growth and changes in Indian auto market as well as in component
industry that made the automobile manufacturing more local than in the past. The literature
review finds the changes that made Indian Auto market capable of producing and selling
more thus breaking the thresholds of the past. The financial performance of five companies
in five years starting from 2005 to 2009 is used to find the performance of the firms and the
demand in Indian market. This needed a solution because, the Indian market is price sensitive
and the pricing strategies of the firms are important in marketing as well as production. The
proposed achievement is to establish the linkage between prices, production, marketing as
well as supply chain as these aspects decide the course of pricing strategy of the company
regarding its products. Ratio analysis and correlation are used to obtain the details of
profitability and financial performance of different companies and the correlation between
profits for five years for each company are used to decide the profitability even in the period
of decrease of sales for the companies like Hindustan Motors. The result of the paper is to
know the pricing strategy is crucial as well as the design of the product and target customers
for an automobile company to increase its performance as well as profitability.

Chapter 1: Introduction

1.1 Background to the Research

The current interest in the problem mentioned in this paper is due to price sensitiveness
of Indian market, which has large customer base that consider price before trying a car.
Coming to the commercial activities in a developing country in India, there are activities
that offer large profits as well as small margins. The customers who afford for luxury
vehicles are also present but less in number. However, both economy and luxury models
find market but the strategy of targeting the customers in luxury models and pricing the
products and offering margins to the dealers is crucial in the context of economy models.
The more retail counters the more the sales and the more servicing centers, the more the
reputation and increase of sales in the future. These aspects of more retain counters and
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servicing centers and the way Maruti and Tata Motors used to increase their sales and
thus profitability are reviewed. This complex background that makes the strategic
thinking of automobile firms a complex activity is a reason to select this aspect for the
research. The aspect that finds relevance for management study is the review of the
emergence of automobile market in India, which is full of management strategies used by
Multinational Companies to produce their cars in Indian Market. These strategies served
as background for the managements’ designing capabilities so that they can produce
small cars and light commercial vehicles for Indian Auto Market. Though the pricing
strategy is paramount for Indian automobile companies to find success in the market,
Tata Motors did not overcome Maruti’s sales even with the cheapest car in the world;
Nano. However, Maruti’s cars are not costly but still the company offers different models
and more service points than any other company. Even in this context of competition
from Maruti, the way Tata Motors dominates the overall Indian Automobile Market with
the diversity in its products ranging from small cars via LCVs to heavy automobiles is
also suitable for study that gives information about success strategies in auto market like
country in India.

1.2 Relevance of the topic for management study

The topic being studied is related to the management subject because; the management of
automobile firms should integrate production, marketing and designing activities before
deciding the price of the product. The efficient management of supply chain of the
company also is crucial and this whole aspect receives the attention necessary as a
management subject. The ratio analysis in the paper indicates the profitability and the
capability of the Indian automobile companies in using their assets to increase sales. The
topics relevant to management in this aspect are about managing assets to increase sales
without decrease in profit. Though the profit margin is less, the management aspect in
this context is to increase the magnitude of sales to get more magnitude of profit, even in
the presence of lesser margins.

Purpose of the research and aims

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As the pricing strategy is important in Indian automobile market, the success of different
pricing strategies can be explored even in the presence of cheaper and cheapest cars in
the market. The presence of diversified customer base also provides a complex situation
to study. The aim is to find the effect of pricing strategy on the performance of the firm
and its profitability. The aspects like reducing the capacity of the car to minimize the
price for Indian market and the plans of Maruti and Tata Motors regarding that aspect are
discussed. The aim of this review and discussion is to evaluate the way the Indian
automobile manufacturers are using their capabilities to offer four wheelers at affordable
price to middle class customers. The purpose of the research is to analyze and evaluate
the financial and sales activities in order to find the extent of profitability the Indian
automobile companies are achieving.

1.3 Structure of the rest of the report

The further structure of the paper is as follows:

Chapter 2: Reviews the literature linking the relation.

Chapter 3: Economy

Chapter 4: Methodology

Chapter 5: Analysis of Findings

Chapter 6: Discussion

Chapter 7: Conclusion

Chapter 2: Literature Review

Chapter 8: References.

The paper deals with profitability and pricing strategy of Indian Auto Market. The literature
review starts with reviewing the role of cost effective nature of purchasing activities as well as
supply chain management in auto industry. This is because; the collaboration between
automotive manufacturers and auto parts supplies is necessary in auto industry to produce
automotives.
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2.1: Theory

The literature review of this paper is about pricing strategy and profitability of Indian auto
industry. The profitability depends on pricing strategy and to frame it the managements depend
on the cost effective methods if the market is price sensitive. Cost of purchasing the raw
materials is one of the factors that decide the pricing strategy as well as the profitability. The
purchasing involves the components of the vehicle also in the context of auto industry. In this
regard, Chia-MinWei., Chia-Yon Chen (2008, p.974) quote the statistics of Volkswagen that the
cost of purchasing cost is 70 percent of the operating income. As automotive industry can be
divided into; automotive companies, auto parts suppliers and automotive sales, the profitability
of Indian auto industry also can be divided into three parts. They are the profitability of
automotive companies, auto parts suppliers and that of the dealers who sell the automotives to
end consumers. Coming to the theoretical perspective the collaboration between the automotive
manufacturers, suppliers and sellers is necessary to produce and sell an automotive. Hence, the
relationship between the automotive companies, auto parts suppliers is crucial to make
manufacturing of automotives cost effective. This makes the automotive manufacturers to
manufacture crucial components and to rely on suppliers for other components. As all the
suppliers may not be present nearer to the company, the supply chain management and the costs
incurred due to it play a major role in deciding the profitability of the auto market. Particularly n
the context of India, it is crucial to be cost effective as the majority market is cost sensitive.
Consequently, the purchasing department’s major decisions should be based on cost and risk
factors. Regarding cost factors, cost of parts and cost of managing the long supply chains as well
as transaction costs are important. Regarding these aspects, the authors cite Hammer and
Champy (1993) about business reengineering that emphasizes the significance of workflow as
well as external business integration. The business reengineering proposes that the monitoring of
transaction cost is necessary by the management if it tries to reduce the internal costs and
external transacting costs. There will be cost for external communication also and that too needs
monitoring. However, the costs can be distinguished to make the process of monitoring accurate.
The external costs are two types. The first types are regarding searching, negotiating and
contracting. The second types constitute maladaptive cost, haggling cost, set up and running
costs. The monitoring cost also is included in this type. These costs are a result of business value
activities. To enhance the business value, it is essential for the automotive firms to maintain the
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collaborative relationship forever. They have to select the behavior models to maintain that
relationship. The cost effective nature of these activities affect profitability. Regarding this,
authors quote Gordon and Laura (1991) about profit centre strategy. One such strategy is to
invest in new technologies of production. The existence of competition between suppliers
decides the minimization effect of transaction cost. However, if the firms are leading in their
technology and quality, may not give more importance to pricing strategy as they do not give
much importance to transaction cost. Even then, the supplier management in automotive industry
demonstrates the aspects that affect the transaction cost. Hence, it is important for automotive
companies to select appropriate partners in supply chain. The transaction costs and pricing
strategy can be affected seriously by supplies in the presence of exists oligopoly market. In this
context, the considerations of contracts can stabilize price and preserves long term market for
both suppliers and firms. However, if the market is monopolistic, there exists no competition and
the aspect depends on production behavior (Chia-MinWei., Chia-Yon Chen, 2008, p.973-980).

While considering the production behavior, it is crucial to consider the significant component of
Indian economy that turned global from 1991. The auto industry also found demand in the global
market by supplying components to the countries in Asia and Africa thus increasing the
prospects of profitability. Regarding this aspect Singh, Garg, Deshmukh (2008, p.24) mention
the business environment that depends more on knowledge rather than the tangible resources.
The industry does not deny the necessity of tangible resources, but the knowledge base it is
highly relying guides the industry in making optimal use of them. As the topic of review is auto
industry, the component industry finding place in domestic as well as global market affects the
firms in India. The better quality components produced by the component manufacturing firms in
India are capable of producing quality automotives in India thus increasing the export
opportunities. Though the constraints for growth and lack of support from government stay, but
the demand from the domestic and global market is driving the Indian auto industry. In the
environment of only minimal support from the side of government, the strategies of
manufacturers are important. The authors quote the value of components shipped from India at
$177 million in 2002 and that is far less than Mexico and Brazil as well as China. Though there
is much to achieve in exporting, the present exports are better than before. The component and
automotive manufacturers in India are investing more money in research to develop the
knowledge base. This will be helpful in competing with the quality of competitors in
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international market. One such area the manufacturers have to concentrate is on identity niches
that happen by the development of new products. The new products should have quality
standards also more than the international and domestic competitors. While doing this, it is
essential for the manufacturers to have a two pronged strategy. One is for the domestic market
and the other for international market. As the domestic market is price sensitive, the components
as well as the automotives also should attract customers with competitive prices. This
competitive pricing strategy will be useful for the developing countries like India in Asia and
Africa. Regarding the other prong of the strategy, it is important to concentrate on quality aspect,
even the price is not competitive. In this strategy, the establishment of identity niche is
necessary. The quality also important for Indian auto components industry as the countries like
US made clear that they consider the quality of the products while importing them. As US is the
biggest business partner for India to which the country is exporting majority of its exports, it is
crucial for the Indian government to encourage the manufacturers to concentrate on quality. This
increases international business for the auto industry thus increasing the profitability. The
increase in the quality reduces the rate of rejection and the authors quote Munial Shows Ltd.,
which produces shockers for Hero Honda and Maruti that set the target of reducing the rejection
rate from 1000ppm to 500ppm. In a similar manner, when the remaining companies also do the
same thing, the auto industry gets two benefits. The first one is that the domestic automotive
manufacturers get the spares at the cheaper rate than before and the component manufacturers
can bag export opportunities due to their quality in their products (Rajesh K. Singh, Suresh K.
Garg and S.G. Deshmukh, 2008, p.24-25).

While considering the effect and development of component industry in India, it is crucial to
consider its beginning as it is after 1960.The short history of development is filled with the needs
of the indigenous vehicle assembly, which is not in line with the international competition.
However, the changes after 1991, which comprise of abolishment of licensing requirements as
well as promotion of exports also resulted in relaxation of MRTP and liberalization of economy.
Regarding this aspect, Rajesh K Singh, Suresh K Garg and S.G. Deshmukh (2007, p.286) quotes
the collaborations of the component sectors with the foreign companies for growth. The
liberalized economy and collaboration with foreign companies resulted in growth of domestic
market by 26.5 percent and the international market by 11 percent for Indian component
industry. However, the bulk of exports are targeted at Asia and Africa but not to developed
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countries in Europe or to USA. Even then, this can be considered as the remarkable development
for Indian component sector when compared to its sluggish growth in past. However, the
component sector also eyed the market in developed countries and the companies like Sundaram
Fasteners are supplying radiator caps to GM, Caterpillar and others. The castings used in Lucas
Industries in Germany are supplied by Brakes India. The shock absorbers used by Yamaha-SOQI
are from Gabriel India. The Rockwell Company imports axle systems from Bharat forge. These
suppliers have entered into market of development countries by developing quality in their
products. Along with this, the component industry concentrated on volume capacities to make
the production cost effective. Even then the component industry as well as automotive industry
in India is small in turnover and production when compared to global firms. For example, the
component industry is smaller than the annual turnover of Visteon, whose global revenue is US
$20 billion in 2002. Moreover, the Indian auto component manufacturing firms can be
considered as SMEs when compared to global level component manufacturers. However, the
liberalization of economies at global level offered opportunities to Indian component Industry as
the companies like Ford, GM, Suzuki, Honda, Mercedes, and Daewoo in car segment and
Piaggio, Suzuki, Honda, Yamana, Kawasaki in motorcycle segment have started procurement of
spares through international operations. Though these operations offered large customer base in
which Indian component vendors can rely on; the research and development, testing and
validation involved in the supplies to the international automotive makers made it difficult to
them to grab the opportunity. The reason is that the domestic manufacturers used to give them
the specifications of the spares necessary for them. Hence, the R&D part of the work used to be
carried by the automotive assembling companies. There is very little pressure on component
sector to do so in the past. However, the international market that is luring the Indian component
sector is putting the responsibilities of research, development and validation of the products on
vendors. They international companies want full service suppliers, whom they term as FSS at
lowest cost. This is in sharp contrast to the market they faced in the past, which required only the
manufacturers. As a result, the Indian component manufacturers are forced to develop forward
strategies with the above challenges in mind. In this context, the strategies of competitiveness
need to be more polished. The production activities of the component manufacturers are
demanding more knowledge intensive strategies that are complex in an uncertain environment.
The uncertainty can be reduced or minimized with high quality in components speedy delivery of
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them to the companies, low price and bigger volume as well as product flexibility. The important
of all these things are knowledge and technology regarding manufacturing of components.
Consequently, in sustaining competitiveness in the uncertain and competitive market, the Indian
component manufacturers faced pressures and constraints due to their limited resources to
knowledge and technology as they are not used up to research and development. Hence, the
strategies that nullify the negative effects of changing environment are being delayed and this
hampers growth of the sector. However the growth of Indian automotive industry is offering
enough resources to overcome the just mentioned constraints to some extent (Rajesh K. Singh,
Suresh K. Garg and S.G. Deshmukh, 2007, p. 285-287).

Hence, need of the Indian automotive component manufacturers is to capture a value for their
product in international market. They have to offer a wide array of products to diverse industrial
applications, so that they can act as facilitating goods that enable the quality outcome for the end
product. The first aspect is to achieve quality along with substantial plant load factor, so that
large batches can be delivered when manufacturers are satisfied. The achievement of quality and
plant load factor by the component supplier should be supported by good logistic support by the
administration to transport the goods to customers. Before exploring these two activities of
quality-plant load factor and logistics, the company has to study its market to decide the nature
of the product it can supply. Regarding this aspect, Paul Matthyssens, Koen Vandenbempt,
Caroline Goubau (2007, p.57) quotes an European based firm that supplies materials to
automobiles, service centers, packaging, construction industries. However, the component
suppliers from India, whom the paper mentioned till now are not producing the materials of such
a wide array. This implies that their technological knowledge base is limited and that may result
in hampering the business. The first task of the Indian auto component manufacturers is to
manufacture two or more types of automotive spares, so that the automotive manufacturers
prefer them. In this context, it is essential for the component manufacturers to keep in view the
types of applications of their spares that decide the pricing level, which eventually decides the
profit. They have to offer tactical or opportunistic pricing in the international market, when there
is presence of new customer in the market. First of all, they have to enter the market with
penetration price and impress the automotive manufacturers with their quality. When the
customer’s product depends on the supplier’s spares, then the component manufacturer can
decide the price that offers higher profit than in the past. However, the component manufacturers
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need to consider the competition in international market, which decides the price leverage of the
component manufacturer and automotive assembler. The point that is being emphasized here is
that the component manufacturer should enter into the group of the suppliers who are capable of
deciding the value-based pricing. As there is not straight forward method to decide the value of
the component manufactured, the acceptance of the automotive assembler is crucial here.

However, the review emphasizes the regional nature of Indian automotive manufacturers that is
confined to India and such developing countries. Hence, in this context, it is realistic to mention
the regional nature of different parts of the world. Regarding this regional nature, Alain Verbeke
& Paul Brugman (2005, p.97) cites Rugman’s demonstration about vast majority of the world
that is regional in nature. Hence, as per Rugman’s conclusion, there is no global automotive firm
and the companies entered into Indian auto market realized that aspect and collaborated with
Indian companies to manufacture vehicles according to the needs and affordability of Indian
customers. Hence, the MNCs that entered into Indian auto market acted as ‘the regional
multinationals’ mentioned by Rugman. The reason is that the firms tried to find a region to
expand their business without disturbing their businesses in their respective countries. Hence, a
separate management entity is necessary that can act according to the regional conditions in
India. This resulted in selecting a partner in Indian automobile market so that the partner can take
care of design of the products as well as its marketing. The MNCs have offered technological
advances and helped in supply chain management as the Indian companies need to import some
components. However, the entry of MNCs into Indian market has also developed the component
industry in India so that the necessity of importing them has decreased for Indian automobile
manufacturers. This resulted in inter-regional expansion for all the companies and this further
resulted in inter-regional completion thus decreasing prices of the vehicles in Indian market.
However, the competition in Indian market is not as strong as it is in North America, Europe and
Japan and there are investment opportunities as well. Hence, the Indian automotive
manufacturers have concentrated on pricing strategies to capture the auto market in the country.
The reason is that though the prices are less in the Indian auto market, the companies are
adopting lean manufacturing technologies that are even reducing the capacities of the vehicles
according to the affordability of the targeted customer base. However, the strategy has paid
dividends to the Indian automobile companies that are collaborated with the foreign ones as they
have sold large number of vehicles (Alain Verbeke & Paul Brugman, 2005, p. 97-113). In
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contrast to that the company Hindustan Motors is not able to get profits as it failed to increase its
sales by decreasing the prices as well as the capacities of the vehicles. Hence, it is crucial to have
components at lesser prices to manufacture vehicles and get profit in Indian profit as HM did not
concentrate on that aspect. Regarding this aspect, it will be germane to mention the state of Guru
Prakash Prabhakar (2010, p. 1010-1011) that what is right in France may not click in India and
vice versa. The reason is cultural differences and in the context of automotives, the reason may
be the price and model of the cars and other vehicles. The research concludes that the pricing
strategy is crucial in India due to the emergence of middle class population and it was taped by
Tata, Maruti and Mahindra. Tata Motors even launched the world’s cheapest car for Rs. 1,00,000
(approx $2600) to capture the customer base of middle class. Hence, the common type of
pressure that is encountered by the automotive firms in India is about pricing and then the design
that enables the affordable price for the customer. Regarding this aspect the author cites the fact
that the company Fiat, which is successful in Western countries is facing stiff competition from
Maruti and Tata as well as Mahindra as these companies are releasing vehicles with lesser price
and they designed them so. However, the companies like Fiat are not successful in doing so and
failed to attract the middle class customer base in India (Guru Prakash Prabhakar, 2010, p. 1010-
1020). However, there is potentiality in Indian market even in the context of low pricing.
Carmaker Renault entered into the Indian market with the product ‘Logan’ with a price of
$10,000 (5,000 GBP). Though the price is less when compared to the prices in Western
countries, the company with its Indian partner is planning to release still cheaper version.
Though there is chance of decreasing profit for a single vehicle, the forecasting of increase of
Indian auto market by 50 percent by 2010 prompted that company to release the cheaper
products. Hence, the Indian automobile manufacturers are planning to sell low price and low
profitable vehicles more in number to get a huge profit. In this context, The Company might be
prompted from the words of Tata Motors MD Ravi Kant who says that the company releases
Nano for the people who carry their families on two wheelers. Hence, Renault-Nissan is still far
away from the strategies of Tata Motors coming to the point of designing the cheapest
automobiles and planning the pricing strategies in that manner. However, the foreign companies
are not giving up and there is news that Toyota is planning an even more low cost car that
reflects the changes in design as well as sourcing and production. These companies are framing
strategies regarding design and pricing mixed with supply chain management keeping in view
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the emerging markets in countries like India. Hence, the review of empirical researches
regarding India can help in further research for the paper.

2.2: Results of Various Empirical Researches

The empirical study about Indian auto component industry by Chia-MinWei., Chia-Yon Chen
(2008, p.982) gives the result based on coefficient and t-value of explanatory variables including
monopoly power, specialty of auto parts. The auto parts are the ones in which the companies
considered the electro mechanism. The researchers observed that the monopoly power is highly
considerable for CMC/Mitsubishi and as a result coefficient is consistent. Thus the expected
influence is consistent. The empirical results for Ford/Leo Ho are as follows:

Explanatory variables Coefficient t-value

Constant -14.0380 -1.8825

Monopoly power 37.0347 8.5852

Specialty of 14.8056 2.4844

automotive part

R&D intensity 1.1475 -1.1977

Foreign purchasing 0.0066

Engine System -15.5731 1.1566

Sheet Metals system -24.7439 1.0519

Air conditioning 22.9758 -1.1908

system

Steering system -1.0608 1.9157

Electro mechanism -5.1892 2.2944

Other parts -8.1703 1.7124

Log likelihood -2.7726

Restricted log -24.9803

likelihood
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The above table is adapted from Chia-MinWei., Chia-Yon Chen. (2008). “An Empirical Study of
Purchasing Strategy in Automotive Industry” in Industrial Management & Data Systems, 108(7).
Pp.982.

Similarly the empirical results for CMC/Mitsubishi are as follows

Explanatory variables Coefficient t-value

Constant -9.2675 -1.1032

Monopoly power 27.4959 9.1305

Specialty of 7.4472 0.8679

automotive part

R&D intensity 1.2176 0.0966

Foreign purchasing -10.1223 -0.5724

Engine System -10.8786 0.6246

Sheet Metals system -10.7870 1.2949

Air conditioning -11.7589 -1.3189

system

Steering system -0.4683 1.2183

Electro mechanism -0.6369 1.7039

Other parts -0.6833 1.4180

Log likelihood -3.9894

Restricted log -28.1134

likelihood

The above table is adapted from Chia-MinWei., Chia-Yon Chen. (2008). “An Empirical Study of
Purchasing Strategy in Automotive Industry” in Industrial Management & Data Systems, 108(7).
Pp.982.
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It is clear from the tables that the Leo Ho/Ford has significance in electro mechanism spares and
CMC/Mitsubishi has highly significant monopoly variable.

Chapter 3: Economy

The economy that finds consideration in this paper is a large developing economy and it has
increasing market for automotives. In that economy there is necessity for auto industries as well
as the firms that produce components for the domestic and foreign automotive companies. This
needs a good supply chain management as the markets in developing economies are price
sensitive. Though the country considered in this paper is resource based, the technology
intensive suppliers are necessary. The automotive industry can gain from exports when they
contain more quality than their competitors. The developing country like India needs technology
intensive suppliers for its automotive firms and knowledge based companies that rely on quality.
However, when concentrating on domestic market, the supply chain is also important make the
production cost effective. Hence, a structural change is necessary for the Indian economy,
particularly to automotive industry. The automotive firms need to have the components suppliers
to be situated nearby areas to reduce the supply costs from components to suppliers. It is
essential for a developing economy like India to build technological capabilities and to spread
them to various activities in economy. However, it is not simple and is a complex process. The
technological capabilities of the companies refer to their resources in terms of knowledge
regarding the technology they need. To gain it, some automotive companies in India entered into
collaboration with the foreign companies and launched vehicles into Indian Market. The best
example of them is ‘Maruti’. Some other companies are taking help from other companies in
their research activities, but still are manufacturing the automotives on their own. In place of
collaboration, they are trying to acquire the companies that had the required technology. The best
example for this type of companies is ‘Tata Motors’ (Carlos Torres-Fuchslocher, 2010, p.269).

3.1: Indian Economy & Auto Sector

The restrictions of Indian economy on industries have been relaxed in the last two decades. This
resulted in removing the technical inefficiency existed in era of restricted production. The reason
is due to the increase of competitive pressure and freedom in production and marketing activities
of automobile and component manufacturers. This resulted in adoption of best practice
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technology as there is more number of ways available for the manufacturers regarding the
technology and the spares. The product lines, capital stocks and imports of goods as well as
technology changed rapidly paving the way for the development of production and increasing of
market for every sector and industry. This resulted in increase of levels of output that resulted in
decreasing the cost of any product thus resulting in attracting more customers as the products and
services are available at competitive price than in the past. This resulted in productivity gains
making them profitable. The restructuring of manufacturing resulted in estimation of long run
cost function that maintained the long run equilibrium levels of the stocks. The reforms made a
change in the structure of Indian economy as it is moribund in the era of pre-liberalization and
government used to regulate the production and imports. The reforms resulted in flow of foreign
exchange into the domestic market paving the way for imports and this further resulted in
strategies of joint venture firms formed by domestic and international players in India, which
made Indian industry competitive of producing products on larger scale. This is made possible
by removing the technical inefficiencies with the introduction of technology that is new for
Indian market as well as for the markets of developing countries like India. Thus after the
liberalization of trade the capital in Indian auto market entered as a regressor in the short run cost
function. Hence, it is evident that there exists the reason for the success of this capital to result in
profits. For this, the firms used the input usage according to the expected output levels. Hence,
the overall effect of capital in the liberalization era in Indian market is according to the scale of
the investment in the industry. Previously, the return to scale used to be low, but after the
liberalization of trade restrictions, the production restrictions on the firms are relaxed and this
resulted in increase of return to scale, though the percentage of profit is decreased. This implies
that the magnitude of overall profit due to the increase of production happened in Indian market
after the liberalization of the restrictions on imports and exports. However, the firms recognized
that the returns will be sustained for long term strategies as the market in India is in growing
stage and short term strategies may result in situations for any company to lose the future market
share. Even in short run there should be some profits that make possible the long term growth.
The competition in the liberalized market is making the firms to hire inputs in expectation for
achieving growth in future. Hence, the investments in establishment of plants and providing
equipments are on increasing spree to increase production of various models. Consequently,
there exists a situation to transport and store the produced goods according to the marketing
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needs (Brian Fikkert., Rana Hasan, 1998: 51-62). Hence, the industrial firms in developing
countries like India should compete with a freight transportation system that is not cost effective.
According to Sumila Gulyani (2001, p.1157) the reason is weak physical infrastructure. The
ports, airports and road as well as rail networks are not well connected or not much useful to the
industry to make its supply chain management a well structured network. The weak
infrastructure makes the public as well as private sector transport operators to exhibit limited
range of expertise in transportation. Consequently, though the automotive industries are able to
compete on domestic market, they are not capable to compete with the firms in industrialized
countries. To remove this weakness, it is crucial for the administrations in developing countries
to focus on quality linkages between transportation infrastructures. Gulyani (2001, p. 1158)
quotes the logistics costs borne by India’s largest auto assembler ‘Maruti’ to analyze the
transport solutions put forth by Maruti as well as the companies like Ford. The analysis finds that
though the transportation in India is not much expensive, but the poor transportation system
results in damages incurred in transit and that increases the cost of inventories of the assemblers.
Though the analysis of the Gulyani (2001) quantified the firm specific costs of transportation, the
transportation created costs are beyond a particular organization and cannot be generalized. Thus
the quantification of transportation costs in Indian auto market do not shed light on the way
individual firms’ perceptions about transportation problems. In this type of situation it is
essential for the auto assemblers in Indian market to frame strategies that reduce the impacts of
poor transportation. As a result Indian auto Industry moved towards lean production, which is
cost effective. However, this is helpful after Indian government deregulated its economy after
1993 and allowed auto components with reduced import tariffs. Thus it resulted in entry of
internationally competitive assemblers into the Indian passenger car market. The Indian market
contains 12 world class firms that include Ford, General Motors, Hyundai, Daewoo, Honda,
Toyota, Fiat and Mercedes-Benz. Even then Maruti is still India’s largest car assembler by
holding 63 percent of Indian car market. This is due to the presence of its service centers in
abundance all over India. The competition between these firms resulted in production exceeding
the demand for cars in the country. It further resulted in restructuring to cut costs and enhance
quality of passenger cars assembled by them. One of the important aspects of that restructuring is
lean assembling or manufacturing. The manufacturers who follow lean manufacturing ask their
suppliers to deliver several times a day with accurate schedule (Sumila Gulyani, 2001, p.1160).
 19

Hence, the suppliers who are component manufacturers have growth opportunities along with
their customers who are automotive manufacturers. Hence, both automotive manufacturers and
component supplies for them are the ones who have substantial growth opportunities. According
to Rajesh K. Pillania (2008, p.1453), Indian component sector dominated by SMEs, though far
lesser than world class firms of similar type registered a growth rate of 17 percent in the period
1998-2003. In addition to that the author quotes that the Auto Components Manufacturing
Association (ACMA) forecasted 15 percent growth per annum till 2012. This is in line with
growing exports at the rate of 24 percent. Hence, knowledge management is necessary in SMEs
of automotive industry, which are component manufacturing units. As these SMEs are less
mature in the use of knowledge regarding mechanical aspects of the technology, the knowledge
management needs categorization. As knowledge is about know-how and there is difference
between tacit and explicit knowledge, the categorization is crucial. In this context, Rajesh K.
Pillania (2008, p.1454) quotes that the categorization of tacit and explicit knowledge as know-
how and know-that. Regarding explicit knowledge, the organization of information about
customers is essential as it helps not only in marketing the product but also in product designing.
The Indian component manufacturers of automotives do not have this categorization till the
liberalization of automobile trade activities. Hence, it resulted in a situation of depending on the
research and development activities of automotive manufacturers, so that they decide the
parameters of the components. The dependence is necessary for them as long as they create a
knowledge base and get that quality for their products, so that the manufacturers design their
vehicles accordingly. To act according to the needs of the manufacturers, component
manufacturers should have enough research and development on their own, independent to that
of the automotive manufacturers. It is essential to get the position of supplying the same
component to more than one manufacturer, if an auto component firm wants to transform into a
world class one. This situation demands innovation that is recognized by CEOs Indian
Automobile companies. According to knowledge management, a national caliber of converting
knowledge into wealth and social utility is key for its future and innovation plays a crucial role in
that aspect. Hence, along with research and development the Indian auto component
manufacturers need innovative and motivation provocative mechanisms to use the knowledge
provided by R&D units according to the profitability of the company. The emphasis on
innovation is because, the Rajesh K. Pillania (2008, p.1455) quotes that India is not only lagging
 20

behind in innovation when compared to US, Germany and Japan but also with Brazil, China and
Russia in various parameters when focused on big firms. The difference is that even SMEs in
Europe spend on R&D despite their limited budgets, but that is not the same in case of India. In
this regard, the author quotes small businesses in Taiwan, which consider R&D as grass roots for
development. The R&D activities of Taiwanese SMEs are regarding increasing quality and
productivity of the product. This is due to the fact the company with technological advantage
gains over the competitors in the presence of ever changing market. Coming to the Indian studies
regarding the knowledge of the auto component industry, various researches in India state that
the post liberalization era has witnessed the decrease of innovation output barring a small
number of exceptions. The author cites PRDC (1999), which states that the high level of
innovation and IPR management associated with strategic manufacturing as well as aggressive
marketing strategies are necessary for the growth of industry in India. It can be understood that
some exceptional companies mentioned above about the innovation follow this rule to be
innovative in producing quality products. The reason for lack of innovation and knowledge base
is due to the absence of institutional ecosystem for creation in India. The eco system results in
lack of acquisition as well of assimilation of knowledge by SMEs (Rajesh K. Pillania (2008, p.
1452-1455).

As a result, it is important to cite Alain Verbeke and Paul Brugman (2005-p.97-98), regarding he
firm specific and region specific advantages and differences and the strategies that need to follow
for performance of the organizations. Regarding these differences, the authors cite Kenichi
Ohmae (1985) who released a classic ‘Triad Power’ for international business activities.
According to that book, the world is not global and it is instead regional triad comprising of
United States, Europe and Japan as the powers. The same thing has been recognized by Rugman
as he identified the fact that the majority of trade and business has been and is being taking place
in North America, European countries rather instead of being international. Hence, the authors
quote Rugman’s ‘The End of Globalization’ that states that there is no global firms and all the
firms that are termed as global are in fact regional. These include automotive firms also. While
explaining the regional nature of the firms, the authors cite Rugman (2005) about the issues that
are related to regional sales distribution in the automotive industry. These issues are linked with
the performance of the firm that is under consideration. However, the authors disagree with
Rugman regarding sales regional nature of the automotive firms is having probability to turn
 21

really global in the near future. To explain this, authors bring to the fore the argument that the
profit for a single unit needs consideration rather than overall sales and that depends on the
regional factors and may change from place to place. Hence, if the company is having different
profits in different regions per single unit of its product, still having profit in total revenues, then
the global or regional nature of the firm can be appraised on the basis of sales. The restructuring
of Indian automobile industry is due to introduction of capital and technology of Japanese
industries that shaped the structure of the industry. The first step in that direction is formation of
Maruthi Udyog Limited (MUL), which is a joint venture between Suzuki Motors and the
Government of India. The structuring of the Indian Automobile industry continued when the
local manufacturers in India resorted to collaboration with other foreign companies who can
provide matching technology. This happened due to the dismantling of the regulations regarding
automobile business in India. Further this restructuring is in line with the restructuring and value
capturing of component industry and that resulted in growth of automobile as well as component
sectors that resulted in mutual sustenance of the development. This resulted in increase of
consumer choice in the automobile market, particularly in passenger car market. However, the
just mentioned restructuring did not result in substantial increase of production in volumes of
manufacturing and market fragmentation continued. According to Anthony P. D’Costa. (1995,
486), the involvement of middle class as the customer base is important for growth of any
industry including automobile. The situation in India post liberalization of economy resulted in
the same situation that increased the purchasing capacity of middle class. This resulted in
increased customer base prompting the companies to produce more and to compete in domestic
as well as international market. However, in the course of these happenings, the private
investments wanted protection from international environment and that situation is comprised of
bailouts for public sector, which are a resultant of being sick due to competition from private
industries. Further restricting is about manufacturing of different models of vehicles by a same
manufacturer introducing the concept of broad banding that is a different form, which offers a
choice of models for the customers. This situation has been made possible as the component
manufacturers responded in the same way as the automobile manufacturers due to assistance in
capital and technology from foreign investors. For example, a vehicle manufacturer produced
three wheelers, four wheelers, two wheelers thus demanding wide range of components from the
suppliers. The lack of certain components in domestic market has been compensated as the
 22

government of India allowed the vehicle manufacturers to import the required components. This
is due to the availability of foreign exchange, which is not available in the past and the imports
are restricted due to that reason. This resulted in upgrading of technology of component
manufacturers as well as automobile companies as the imports and exports resulted in exchange
of technology along with capital. Thus the internationalization of the production and marketing
of automobile industry resulted in restructuring. The main components of the restructuring are
due to change in activities of production, collaboration and market shares. In this context, again
the joint venture of Suzuki Motors Corporation (SMC) with Maruti Udyog Limited comes to the
fore as it is first transnational company and paved way for other such ventures. Taking cue from
this venture, the Indian companies like TELCO, Ashok-Leyland and Bajaj increased the
production of commercial vehicles as MUL increased the profit by producing more. Taking the
same tempo into the future, the Japanese companies Toyota, Nissan, Mitsubishi and Mazda in
collaboration with the domestic companies in India, increased the production light commercial
vehicles thus bringing down the price of LCVs. The increase of production of the LCVs can be
observed from the following table.
 23

The above table is adapted from Anthony P. D’Costa. (1995). “The Restructuring of the
Indian Automobile Industry: Indian State and Japanese Capital”. In World Development, 23(3).
Pp.488

Thus it can be understood that though, the Japanese companies are not completely responsible
for the restructuring of the Indian automobile industry; they contributed a lot by leading the joint
ventures and collaboration units as well. By introducing the concept of producing more, using
liberalized policies of government of India earlier than their competitors they increased the
production and offered competitive price for the customers thus resulting in increase of market.
Though there are number of players in the market, the major share of the passenger car market in
India is of MUL (now completely acquired by Suzuki), which rose from zero percent to 53
percent of the market share (Anthony P. D’Costa, 1995, Pp.485-490).

3.2: Indian Auto Industry

 24

The Auto Industry after liberalization in India, followed lean manufacturing techniques to make
use of the liberal policies in India when compared to the past. The time India liberalized its
market coincided with the time that Japanese firms looking for the new markets. The reason is
that the costs of manufacturing in Japan are on rise due to appreciation of Japanese currency.
That resulted in Japanese companies to invest in developing countries like India. The entry
started with Suzuki Motors Corporation (SMC) teaming up with public sector Maruti Udyog
Limited, which in later years has been privatized as the former acquired the company. This
period also resulted in doubling the commercial vehicle production due to the activities of
TELCO, Ashok-Leyland, Bajaj, Toyota, Nissan, Mitsubishi and Mazda. There are joint ventures
between foreign automobile companies and Indian ones. They are between Hindustan Motors
(HM) and Isuzu, Premier Automobile (PAL) and Nissan for technology transfer and the Indian
companies paid their foreign partners for transfer of technology. In the later period, the foreign
partners got equity in their Indian firms. The most significant aspect of the just-mentioned
changes is that the HM and PAL lost their market to Maruti as their market share fell from 51
percent and 26 percent respectively to 12 percent and 20 percent respectively. However, the
automotive parts and components segment remained highly concentrated even after the presence
of competitive environment between assemblers. The reason is that the competition in
components segment is far less when compared to that in the assemblers sector. However, the
setup of Japanese assembling units resulted in lowering the concentration rations in components
segment (Anthony P. D’Costa (1995, p.485-489).

Chapter 4: Methodology

The paper involves both inductive and deductive researches so that both ‘research before theory’
and ‘theory before research’ can be presented. The inductive research will be done by getting
annual reports from the companies and the deductive research will be done according to the
theory followed for the research.

4.1: Types of Research

4.1.1 The first type of research chosen in the paper is inductive research and the annual reports of
the companies and the responses of the employees are used for the study of the research
question. The research done using annual reports and the responses of employees and executives
 25

as well as the customers of the companies considered are used to compare the pricing strategy
and profitability of the firms. The important points that are followed in this research are: 1. The
importance of topic and question and its meaning in commercial and market conditions, 2. The
findings in literature review are used in analysis, 3. Finding appropriate persons to interview, 4.
Framing relevant questions to interview the concerned persons, 5. Conducting person-to-person
interviews if necessary, 6. Organizing and analyzing the data (Clark E. Moustakas, 1994:103-
105).

4.1.2 The second type of research followed in the paper is about deductive research and this has
been done according to the theory followed for pricing strategy and profitability. The literature
review and discussion in the paper finds this type of research, which involves theory before
research.

4.2: The Research Problem & Style Chosen

The research problem involved in this research paper is how the pricing strategies of the Indian
Automobile companies are resulting in profitability for them. The style of analysis is a mix of
qualitative and quantitative analysis as ratio analysis and correlation between different ratio
values of companies help analyzing their performance.

4.3: Hypothesis

Price is the most important element in strategy for the profits of the company.

The appropriate pricing strategy that works on the target customers results in profitability when
that strategy is relevant to the customers’ needs as well as the production strategies. The pricing
strategies of Indian Automobile Companies are connected to their profitability in domestic and
international markets. Thus the pricing strategy will be different for various companies
depending on the target customers and the production strategies. Hence the pricing strategy
depends on the models the automobile companies make and sell as they decide the target
customers. However, again the emphasis will be on pricing strategy as that decides the model
that manufacturer intend to make. When the manufacturer intends to remove the restrictions on
price, then the firm can proceed to make a luxury model of the car. If the manufacturer’s
intention is to produce different models from basic to luxury cars, the pricing strategy is
 26

significant and in turn it is related with profitability. The number of models and the vastness of
the customer base the company targets decides the course of pricing strategy of an automobile
manufacturer. The success and efficiency of pricing strategy also depends on supply chain of the
company as it helps in cost effective production as well as timely delivery. The influence of the
company on the retailers and the network of the company regarding the services it offers to its
customers further decide the company’s extent of freedom in fixing a price a little more than its
competitors. Thus the paper establishes the relation of pricing strategy with various aspects like
production, profitability, marketing and supply chain management of the company and the way
they affect the strategy.

4.4: Research Question

How important is pricing strategy for Indian Automobile Companies, when profitability and
marketing of the product is concerned?

4.5: Methods of Analysis

The methods of analysis followed in this paper are inductive and deductive methods.

Inductive Method:

As inductive method is referred to scientific methods that use observations, it has been followed
in this paper to decide the performance and profitability of Indian automobile companies. The
observations gathered here are regarding five years from 2005 to 2009 and the period is 2006-10
for Hindustan Motors (HM). Based on the values and information given by the firms in their
annual reports, various rations are calculated that decide the performance and profitability of the
company as well as the benefits for the investors who are shareholders of the companies. The
observations found in the analysis are used to generalization of the research topic and the theory
in it. The qualitative analysis in the paper inherently have inductive research and explicit
deductive research.

Deductive Method:

In addition to inductive research, the deductive research is used as data from the operations of
the companies is used to support the theory involved in research question about pricing strategy.
 27

The annual reports of five companies are used to draw the data to support the theory involved in
supporting the significance of pricing strategy in a country like India. The statistical analysis that
involves rations and correlation is used to deduce the hypothesis. Normally the deductive
methods begin with a general concept or rule intending to move towards a particular conclusion.
However, in some circumstances the research may result in the conclusion that is opposite in
nature. In this paper, the conclusion is the same as the hypothesis as Indian automobile
companies are successful in earning more profits with narrow margins on each unit by selling
more number of units. As the deductive reasoning is method of reaching conclusion that is
supposed before the research, the outcome depends on the evidence we collected. In this paper,
the evidence collected, supported the hypothesis that pricing strategy is crucial for Indian auto
market. Hence, the statistical evidence and findings of analysis are used to conclude that the
companies who follow a definite pricing strategy for Indian auto market in the era of removal of
licenses on production are successful. This conclusion has been deduced by analyzing the
evidence qualitatively. In this case according to the evidence and the prices of products of
different companies, the conclusion has been drawn.

4.6: Data Sources

The fundamental sources for data are the annual reports of the companies involved and the
relevant literature about Indian auto industry and its techniques about production. The other data
sources involve different researches conducted on the topic of the paper.

Chapter 5: Analysis and Findings

The correlation is used to calculate the relation between the data in the annual reports and the
findings are analyzed according to the pricing strategies and profitability in Indian market. The
profitability will be analyzed separately if the companies are selling their automobiles in both
domestic and international markets. The difference in pricing strategies and profitability of the
companies in domestic and international markets will be a part of the analysis and findings.

5.1: Critical Appraisal of Literature

From the annual report of MUL in 2006 one can find that the company is ahead of its
competitors by its introduction of premium car model ‘Swift’. The growth is significant as the
 28

company achieved it despite the decline in automobile market. This indicates the company’s
decision making about timely intervention of the various car models. Normally, the overall
demand for passenger cars decrease when there is decrease in demand for basic models and mid
range cars. The demand for premium models may not suffer much for minor decreases in
demand for passenger cars. Keeping in view this aspect, the company released the premium
model ‘Swift’. The network of service centers of the company and the comparatively cheaper
price with other premium models may be the reason for the success of the model in 2006 (Maruti
Udyog Limited, 2006: 20).

MUL is now Maruti Suzuki India Limited increased its sales and profitability by the end of 2008
by 23.4 percent and 20.9 percent. This indicates that though the profitability increased with the
increase of sales it is not proportionate to the increase of sales as the rate of profit is lesser than
the rate of sales growth. However, as the company is maintaining a regular growth in both sales
and profit. The small changes are not affecting the company’s performance.
 29

The above graphs are adapted from annual report 2008-09 of Maruti Suzuki India Limited.

The first graph indicates that the average return on equity increased from 2003 to 2008, though
there is a decrease when compared to 2006. However, the operational productivity of the
company increased as direct pass increased from 2001 to 2008 and the in-house rejection of the
products have been decreased. Moreover, both domestic sales and exports increased from 2003
to 2008,the share of exports is more than the domestic sales, indicating that the company is
performing well in overseas small cars segment (Maruti Suzuki India Limited, 2008).

As per the company’s annual report released in 2003, Bajaj Auto has achieved its highest ever
sales in 2002-03 as the sales increased by 15 percent. The sales revenues increased from Rs.
41.26 billion to Rs. 47.44 billion. There is increase in profitability also as the increase in
operating profit is highest. This further resulted in increase in earnings before taxes also. The
 30

company is capable of increasing EBITDA margins from 9.8 to 16.8 percent, which is a sign of
increase of profitability. The increase of pre tax returns indicates the healthy economic status of
the company. These changes are sign for the positive results that are shown by the bajaj auto
company’s change it has shown in its products. The company changed its products from scooters
to bikes and these two wheelers contribute major revenues for the company. The company’s
annual report indicates that the company’s sales grew continuously from 1994 to 2003.
Moreover, the company increased the sales of motorcycles, which is less when compared to the
all two wheelers in 1994. This change indicates that the company is successful in understanding
the aspirations of the customers and is changing accordingly to manufacture more motorbikes. In
1994, the share of motorbikes is 21.6 percent in the overall sales of the company. When it comes
to 2003, the share increased to 74.3 percent thus indicating the change in production as well as
marketing strategies of the company. As the prices of bajaj motorbikes are lesser than their
competitors and even the profitability is increasing the pricing strategy can be analyzed while
doing the ratio analysis. Moreover, the basic models are priced at a maximum price of Rs. 37,000
and their premium category bikes are priced at a maximum of Rs. 45,000. This resulted in
attracting the middle class customers. As middle class customers are more in number in India,
when compared to remaining class, it can be understood that the company’s strategies are
successful in attracting the customer base, which are in larger number in the country (Bajaj Auto,
2003).

Regarding the annual report of HM, the one released in 2010 is 68 th report and it reveals that the
company’s revenue increased from 736 crores to Rs. 771 crores. There is no profit after taxation
this year and the loss stood at Rs. 51.10 crores. If the debt balance of previous years is added to
the present year’s loss, the total loss stands at Rs. 132.28 crores. The company finds that its 50%
of its net worth has been eroded in the last four financial years and it informs that it takes
necessary steps to prevent further erosion. However, the situation of the company is to inform
the Board of Industrial and Financial Reconstruction in India as it is a sick unit according to
section 23 of the sick industrial companies act 1985. Hence, when we compare the information
from the competitors like Maruti Suzuki, Bajaj, Mahindra and Tata Motors, the HM is not in par
with their growth and the reason is that the company has not changed according to the need of
the hour. All the other companies in Indian Market have changed their products according to the
need of the customers and framed pricing strategy accordingly to attract more number of
 31

customers and recorded growth in both sales and profits. However, these strategies are not
followed by HM and thus resulted in the company losing its net worth and turning to be a sick
unit. However, as the company is focusing on automobile as well as auto component business,
there is a chance of reviving its growth and profitability. The company is focusing on forgings,
castings and stampings for other automobile companies and for the vehicles like Ambassador,
Lancer, Cedia, SUVs like Pajero, Montero and Outlander. However, if the company is successful
in recording the growth in sales of above mentioned vehicles, the profitability can be revived
(HM, 2010).

After critical appraisal of the automobile manufacturers’ details of performance, the overall
pricing strategy necessary for the market comes to the fore. The companies decide the pricing
strategy according to the interactions among automakers, dealers and buyers. The important
question is about the dealer margins that deal with sales and profits of the new car market.
Regarding this, Pinelopi Koujianou Goldberg (1996, p.623) cites Bresnahan and Reiss (1985)
about the questions related to the rent distribution between dealers and automakers. However, the
disappearance of monopoly model in Indian auto market, the explaining the dealer markups and
differential treatment received by buyers from the dealers is important. Hence, in this context,
the authors cite Ayres (1991) and Ayres and Siegelman (1995) that focus on relationship
between dealer prices and buyer attitudes as well as the other attributes like the type of the
customer base. As the Indian market is price sensitive, the customers wait for the quality
products that are available at competitive prices. Hence, price discrimination depends on
consumer characteristics and companies need to consider that aspect while describing the
markups associated with realized purchases. However, the environment in which the company
sells its automobiles is not controlled one in the existence of enough competition. Even in the
presence of competition, the availability of diverse range of customers offer Indian automobile
companies to bank on different products ranging from basic models to luxury models. The
pricing strategy for basic models or economy models considers profit for the dealer as well as the
price offered to the customer. In contrast the customers of luxury models may prefer quality and
in this context the manufacturer has to consider only the profit of the dealer and the price offered
to the customer depends on the quality and the price offered by the competitor, but not as much
as in the case of the price of economy models. In addition to that the estimations of mean
discount distribution that is necessary to compete with the strategies of the competitors are
 32

important while framing pricing strategy. Hence, while framing pricing strategies, the price
decided should be in a manner to offer discounts when competitors offer competitive prices than
expected. However, the capability of the dealer to negotiate also decides the attraction of
customer groups and when the company wants to sell more vehicles with less margin, the dealers
should be offered reasonable profit percentage so that they work for marketing the products in
their area. Hence, the company should offer the dealer a variety of models of vehicles, so that
when they sell a vehicle for lesser margin, they have to be confident that they can get it in
another model. Hence, while choosing the retail counters or getting the dealers, the company
should have diversified products from economy models to luxury vehicles (Pinelopi Koujianou
Goldberg, 1996. pp.622-630).

While considering the automobile market, the market base for bikes cannot be ignored and the
present situation in India resulted in almost disappearance of scooters and the motorbikes
replaced them. Though there are some vehicles that are named as scooties, the motorcycles are
dominant products in two wheeler markets. Not only in the four wheeler segment, has even the
segment of motor cycles offered diversity in products for the customers. However, this does not
resulted in fall of prices as it was the case of the prices of economy models in four wheelers.

5.2: Study through Statistical analysis (Analysis of Data) Graphical Appreciation

Asset
Maruti ROE ROCE OM TO
- -
0.1424 0.4945
ROE 1 -0.4734 2 9
-
0.6050
ROCe -0.4734 1 1 0.1108
- - -
0.1424 0.6050 0.1962
OM 2 1 1 4
- -
Asset 0.4945 0.1962
TO 9 0.1108 4 1
 33

1
0.8
0.6
0.4 ROE
0.2
ROCE
0
-0.2 OM
-0.4 Asset TO
-0.6
ROE ROCE OM Asset
TO

The negative relationship between ROE and ROCE indicates that the debts of the company affect
profitability. Though the relation is same type between ROE and OM it is better when compared
to that exists between ROE and ROCE. That means the profit is increasing with increase of sales.
The negative relationship between ROE and Asset Turnover indicates that the company’s
efficiency does not match with the assets it possesses. Though the company’s profit is increasing
with sales, it is not up to the standards of the assets it have. However, the positive relationship
between ROCE and Asset Turnover indicates the presence of relationship between sales and
operating profit.

Asset
Bajaj ROE ROCE OM TO
0.8056 0.6351
ROE 1 0.9869 3 6
ROCE 0.9869 1 0.8844 0.9993
OM 0.3577 0.8841 1 0.868
Asset
TO 0.6351 0.9983 0.868 1
 34

0.8

0.6 ROE

0.4 ROCE
OM
0.2
Asset TO
0
ROE ROCe OM Asset
TO

Bajaj Auto has positive correlation between ROE and ROCE and this indicates the increase of
profit even in the context of increase of debts. Moreover, the company’s profit after tax is in
tandem with its operating profit as the correlation between ROE and OM is around 0.8.
However, the ROE and Asset Turnover relation is not that much stronger as that exists with
ROCE and OM. That means the contribution of equity and assets to sales and profit does not
have much relation.

Asset
HM ROE ROCE OM TO
- - -
0.0989 0.7170 0.2627
ROE 1 9 5 2
- -
0.0989 0.3941 0.9276
ROCE 9 1 8 3
- -
0.7170 0.3941 0.1522
OM 5 8 1 5
- - -
Asset 0.2627 0.9276 0.1522
TO 2 3 5 1
 35

0.8

0.6 ROE
ROCE
0.4
OM
0.2
Asset TO
0
ROE ROCE OM Asset
TO

In the context of Hindustan Motors, the negative relationship between ROE and ROCE suggests
that the company is not able to increase its profit with the money accrued from debts and hence
may not have the capability to repay them in the near future. However, as the relationship
between ROCE and OM is positive, one can understand that there is a relation between the
capital employed and the sales. However, the relation is not nearer to 1, the profitability is not in
line with the sales and capital of the company. The status of the company cannot be termed as
good as it is incurring losses even in the context of increasing sales. This indicates the inefficient
use of the debts or the long term investments the company is planning. However, the data
suggests that HM is lagging back when compared to its competitors even in the magnitude of
sales. Hence, the performance or the profitability of the company does not match to other
companies like Maruti, Bajaj, Mahindra and Tata Motors.

Asset
Mahindra ROE ROCE OM TO
- - -
0.3474 0.6321 0.3972
ROE 1 1 9 7
-
0.3474 0.6688
ROCE 1 1 3 0.7421
-
0.6321 0.6688 0.5045
OM 9 3 1 8
Asset TO - 0.7421 0.5045 1
0.3972 8
 36

0.8

0.6 ROE
ROCE
0.4
OM
0.2
Asset TO
0
ROE ROCe Om Asset
TO

Another automobile company ‘Mahindra & Mahindra’ considered in this paper is having positive
relationship between ROCE and OM as well as OM and Asset Turnover. The correlations
between other rations are negative indicating that the debts and capital are not increasing the
sales as expected. However, the positive relationship between OM and ROCE indicates the
relationship between operating profit increases with the increase of capital and assets. However,
as the relation is not nearer to 1, the profit is not up to the standard of the assets the company has.
The reason may be due to the fact that the firm concentrates on commercial and luxury vehicles
but not on economy vehicles that have a larger customer base in India.

Asset
Tata ROE ROCE OM TO
-
0.5261 0.5055 0.9299
ROE 1 6 8 4
- - -
0.5261 0.2777 0.7877
ROCE 6 1 8 8
-
0.5055 0.2777 0.3847
OM 8 8 1 3
-
0.9299 0.7877 0.3847
Asset TO 4 8 3 1
 37

0.8

0.6 ROE

0.4 ROCE
OM
0.2
Asset TO
0
ROE ROCE OM Asset
TO

The company Tata Motors has strong correlation between ROE and Asset Turnover, which
indicates that the profit after tax has a good relationship with the usage of assets by the company.
Moreover, the correlation between ROCE and Asset Turnover also is better than other ratios
indicating that the operating profit is increasing with assets and capital employed through debts
and equity of the company. The overall positive correlation between different ratios of the
company indicates the better profitability of the company.

Ratio Analysis and Graphical Representation

 Year ROC TOTGE
s ROE E OM GM ATO CR LR AR LNTA LNS PER
2.80417E+ 38
109,108,000,0
Maruti 2005 6.3 6.8 0.08 0.8 2.8 0.08 0.09 0.6 12 00 14.23
351970000
2006 7.67 7.8 0.1 0.8 2.1 1.2 1.21 0.2 00 1.20877E+11 22.17
513900000
2007 4.2 5.9 0.1 0.1 1.9 1.55 1.48 0.17 00 1.47217E+11 16.82
666700000
2008 22.1 0.2 0.1 1.22 1.88 1.09 0.9 0.001 00 1.78603E+11 13.68
576100000
2009 3.2 0.7 0.12 0.91 2.57 0.66 0.5 2 00 2.03583E+11 34.84
(6,770,005,
Bajaj 2005 0.16 0.13 0.1 0.9 7.2 0.97 0.36 0.46 188 65416000000 14.8
-
1.5352E+1
2006 0.9 2.89 0.18 0.87 212.6 0.75 0.75 0.01 1 74742000000 36.8
6.8153769
2007 0.005 0.17 0.14 0.19 0.48 1.36 1.36 0.03 68 1.0076E+11 19.87
-
1.1216E+1
2008 0.09 0.11 0.1 0.14 1.57 0.09 0.085 0.22 0 89323000000 13.2
-
1.1216E+1
2009 0.08 0.1 0.1 0.15 1.54 0.08 0.087 0.23 0 89323000000 14.2
- - - -
0.083 0.025 0.0018 0.109 197250000
HM 2006 0.004 58 62 22 155.1 0.98 71 0.56 0 5530400000 2.1
- - -
0.073 0.034 289150000
2007 0.003 67 51 0.0017 140.1 0.88 -0.18 0.45 0 8060000000 2
-
378040000
2008 0.04 -0.05 -0.02 0.01 80 0.9 -0.1 0.4 0 8530000000 5000
-
467930000
2009 0.05 -0.06 -0.03 0.009 99 0.8 -0.2 0.5 0 56500000 -7000
-
556820000
2010 3.5 -0.07 -0.04 -0.01 101 0.9 -0.25 0.4 0 2053047 -7500
Mahin 770846160 95,384,889,00
dra 2005 39.5 1.35 0.1 1.11 1.008 0.32 -0.09 901 00 0 8.86
1.36154E+ 13,848,036,40
2006 3.6 0.82 1 9.09 1.01 1.33 1.08 1.07 13 0,000 11.8
 39

Graphical Representation Maruti Suzuki India Limited’s Ratios

35
ROE
30 ROCE
25 OM
20 GM
15 ATO

10 CR
LR
5
TOTGear
0
2005 2006 2007 2008 2009 PER

The graphical representation of Maruti Suzuki India Limited indicates that the PER is on
increasing mode indicating that the investors are not getting the earnings per share in tandem
with the book value of the share they hold. Hence, it can be understood that the share of the
company has been overvalued and that overvalue is increasing from 2005 to 2009 regardless of
some exceptions in the middle.

Concerning operating profit and profit after tax, the latter is not well when compared to the
former as the ROE is not always having a bigger value when compared with OM and ROCE. In
2008 the exceptional greater value of ROCE may be due to the surge in the sales of the cars
produce by the company without having exceptional increase in debts and capital employed.
However, in the next year 2009, the ROE decreased and PER increased indicating the
remarkable decrease in profit after tax and earnings per share for the investors when compared
with the book value of the share. However, the profitability is increasing with sales from 2005 to
2009 and this indicates the stability of such a big company having a reasonable market share in
India in small cars segment. The reason for the profitability may be due to the fact that the
company did not forayed into commercial vehicles segment and is concentrating on the domestic
cars segment.

Graphical Representation of Bajaj Auto Limited’s Ratios

 40

250 ROE
ROCE
200
OM
150 GM

100 ATO
CR
50
LR
0 TOTGEAR
2005 2006 2007 2008 2009 PER

The graphical representation of ratios of Bajaj Auto Limited indicates the lesser value of PER,
which is an indicator of reasonable returns for the investors when compared to the book value of
the share. When the returns are matching to the book value, the investors keep the shares and
will not sell them. This results in further increase in the value of share as long as the company is
showing good performance regarding profitability and offering dividends. As Bajaj Auto limited
is doing the same, one can observe that the investors are earning reasonably for the book value of
the shares they hold. However, when it comes to the ROE and ROCE, the values are less and this
indicates the close relationship between profits and capital employed in the form of assets, debts
and equity. When the profit gained by the company is nearer to the capital employed, the values
of ROE and ROCE will be less and offer more earnings for a lesser book value of price with
more profitability for the company thus attracting more number of investors.

Graphical Representation of Hindustan Motors Ratios

6000 ROE
4000 ROCE
2000 OM
0 GM
-2000 ATO
-4000 CR
-6000 LR
-8000 TOT gear
2006 2007 2008 2009 2010 PER

In contrast to the case of the first two companies; Maruti and Bajaj, the Hindustan Motors
company is not able to pay the dividend and PER is exceptionally high indicating that the
 41

company is facing huge losses and not able to pay the dividend. Various rations and correlations
between them are negative indicating the losses faced by the company due to less production and
lack of demand for the products in the market. When compared to the revenues accrued through
different activities by its competitors, Hindustan Motors is getting far less in sales as well as the
revenues from other activities. The company is facing heavy losses due to inability in using its
assets and capital available to increase production and sales. However, the firm is planned a new
manufacturing plant in the recent years, the management is trying to increase the production as
well as sales. As a whole, the company’s profitability in Indian auto market as well as in the
export sectors is not satisfactory and its activities are not profitable.

Graphical Representation of M&M’s Ratios

1000 ROE
ROCE
800
OM
600
GM
400
ATO
200 CR
0 LR
-200 TOTGear
2005 2006 2007 2008 2009 PER

The graphical representation of the rations of Mahindra & Mahindra Company indicates that in
2005, the company has drawn more loans using its assets. This resulted in larger value of Total
Gearing that year. However, in the consecutive years, the total gearing is not that much high
indicating that the loans taken by the company using its assets decreased substantially.
Moreover, the maintenance of small PER states that the investors invested in the shares of the
company have reasonable income in the form of dividend and that income is justified when
compared to the book value of the firm in the Indian Stock Market (BSE). This results in
investors not selling the share and thus the demand for the share increases in the market and the
book value remains in tandem with the earnings per share and PER also remains low as long as
the company maintains profitability and the dividend it offered in the last five years from 2005 to
2009. After securing more loans in 2005, the total gearing as well as other rations are in their
limits and still are indicating the profitability of the company when the correlation between them
 42

is calculated. The correlation between different ratios of the company indicates the profitability
in tandem with the capital employed, equity and assets possessed by the company. However, the
market share cannot be compared to that of Maruti despite M&M also releasing a diverse range
of products in the form of domestic and commercial vehicles. However, the majority of them are
luxury vehicles and that did not attract the customer base equal to Maruti and Tata

Graphical Representation of Tata Motors Ratios

ROE
6
5 ROCe

4 OM

3 GM
2 ATO
1 CR
0 LR
-1 TOTGear
2005 2006 2007 2008 2009
PER

The graphical representation of ratios of Tata Motors indicate that there is no much difference
between ROE and ROCE indicating good profit after tax with a strong operating profit as well as
gross profit. This fact is due to the observation that except for the year 2006, the company has
ROE, ROCE, OM and GM are nearer to each other. This indicates that the firm is making good
use of assets, equity, debts to increase sales as well as profitability. Even in the period of
introducing Nano; the cheapest car in the world, the company maintained the profitability and
growth in its sales activities. When coming to the sales of the company it maintains regular
growth in it due to its diversified products as well as the prices of vehicles. Majority of the Tata
vehicles come cheaper than the products of their competitors and that made the company to
maintain growth and profitability in price sensitive Indian market.

Further analysis of the data involves the correlation of the profitability of a particular company in
different years and then the comparison of them with other companies. The companies
considered in this paper are Maruti Udyog Limited, Bajaj Auto, Hindustan Motors, Mahindra &
Mahindra and Tata Motors. These are leading passenger car and commercial vehicle
manufacturers in India. The analysis is comparing the profitability of the company in relation
with its sales in different years using correlation coefficient.
 43

For Maruti Udyog Limited, the correlation between profit and sales in 2004-05 and 2005-06 is 1
indicating that there is extreme positive relationship between its profitability and sales
consecutively for two years.

The correlation is same between profitability and sales of the company for the years 2005-06 and
2006-07.

The same correlation exists between profitability and sales of the company for the years 2006-07
and 2007-08. This indicates that the profit is increasing with increase of sales from 2004 to 2008
that is consecutively for five years, which can be termed as a major achievement. However, in
the next stage, the profitability is compared with that of other companies. In addition to that, the
changes in profitability of different companies and their changes in market share are also
considered for analysis.

For Bajaj Auto, the correlation between profit and sales in 2000-01 and 2001-02 is 1 indicating
that there is extreme positive relationship between its profitability and sales consecutively for
two years.

The correlation is same between profitability and sales of the company for the years 2001-02 and
2002-03.

For Hindustan Motors, the correlation between profit and sales in 2004-05 and 2005-06 is 1
indicating that there is extreme positive relationship between its profitability and sales
consecutively for two years.

The correlation is not same between profitability and sales of the company for the years 2005-06
and 2006-07 and is extremely negative as -1. This indicates that the profit decreased drastically
from 2005 to 2007 and this indicates the importance of pricing strategy as mentioned in the
research question to assess the profitability of a product.

The correlation between profit and sales of HM for years 2006-07 and 2007-08 is again 1
indicating normal relationship between sales profit as the latter increases with increase of the
former, which is absent in the previous year.
 44

The correlation between profit and sales of HM for years 2007-08 and 2008-09 again changed to
negative but this time is not due to decrease in profit but due to decrease in sales. The correlation
is again -1 after it was same for the years 2005-07. Though the correlation is same, the for the
periods 2005-07 and 2007-09, the profitability is not same as in the case of former the profit
decreased with the increase of the sales and in the period 2007-09 profit increased with the
decrease of sales. This indicates the profitability of the company is due to sales of luxury
vehicles of which the market is not price sensitive and the competition might be less.

The correlation is consecutively -1 for 2008-09 and 2009-10. In this context, the profit is not
decreased, but loss increased for the corresponding period with the increase of sales. This
indicates that the profitability of the company is not at par with the current marketing strategies
or the pricing strategy is not in tandem with the production strategies. The facts can be found out
after the ratio analysis of the company and its comparison with other companies.

The next company that is considered for analysis in this paper is Mahindra & Mahindra Ltd. The
company starts with a positive correlation of 1 in the years 2001-02 and 2002-03. That is the
company started with a perfect positive correlation between its sales and profitability in the first
two years of this century.

The correlation for 2002-03 and 2003-04 is again +1 and this indicates that the profit is
increasing with the increase of sales for three consecutive years.

The correlation for 2003-04 and 2004-05 is again +1 and this indicates that the profit is
increasing with the increase of sales for four consecutive years.

The correlation for 2004-05 and 2005-06 is again +1 and this indicates that the profit is
increasing with the increase of sales for six consecutive years.

The correlation for 2005-06 and 2006-07 is again +1 and this indicates that the profit is
increasing with the increase of sales for eight consecutive years.

The correlation for 2006-07 and 2007-08 is again +1 and this indicates that the profit is
increasing with the increase of sales for eight consecutive years.
 45

The correlation for 2007-08 and 2008-09 is negative and is -1 and also a stark contrast from the
past eight years. This indicates that the profit decreased with the increase of sales after nine
years. The reason will be clear in the context of ration analysis.

The correlation for 2008-09 and 2008-09 is again +1 and this indicates that the profit is
increasing with the increase of sales in the 10th year from 2001 after break of that run in ninth
year.

The next company that is under consideration is Tata Motors.

The correlation for 2001-02 and 2002-03 is +1 and this indicates that the profit is increasing with
the increase of sales in the years from 2001-03.

The correlation for 2002-03 and 2003-04 is +1 and this indicates that the profit is increasing with
the increase of sales in the years 2001-04.

The correlation for 2003-04 and 2004-05 is +1 and this indicates that the profit is increasing with
the increase of sales in the years 2001-05.

The correlation for 2004-05 and 2005-06 is +1 and this indicates that the profit is increasing with
the increase of sales in the years 2001-06.

The correlation for 2005-06 and 2006-07 is +1 and this indicates that the profit is increasing with
the increase of sales in the years 2001-07.

The correlation for 2006-07 and 2007-08 is +1 and this indicates that the profit is increasing with
the increase of sales in the years 2001-08.

The correlation for 2007-08 and 2008-09 is +1 and the indication is not the same as in the above
years. The sales decreased and thus the profit also decreased. However, it is clear that the
profitability is increasing with the increase of sales for this company. Though the profit
decreased in the year 2008-09 when compared to the previous year, the reason is decrease in
sales. Hence, the profitability is not affected.

The correlation for 2008-09 and 2009-10 is +1 and this indicates that the profit increased with
the increase of sales. The profitability is directly proportionate to the sales in the period 2001-10.
 46

Consequently, as per the details and information in the annual report 2009-10 of the Tata Motors,
the company’s turnover increased. Moreover, the successful launch of new products and variants
in commercial vehicles resulted in 34.3 percent of growth when compared to the previous year.
The company reveals that the profit after tax also increased by 123.7 percent, which is more than
the growth recorded over the previous year. This indicates that the increase in profitability is
more than the increase in sales thus indicating that the production strategies are in tandem with
pricing strategies, which are resulting in growth of sales as well as profitability. Considering the
vehicles sales the company recorded a sale of 633,862 vehicles, which can be termed as a growth
of 34 percent when compared with 472,885 vehicles in the previous year. However, in sharp
contrast to the growth of the Maruti Udyog Limited, the Tata Motors increased its sales of
commercial vehicles as the passenger sales are dominated by MUL in Indian Market. Even then,
the diversity in products of the company resulted in better performance by showing growth
continuously for ten years that has been considered in this paper. This can be understood from
the point that the market share of Tata in small car segment is 13.3 percent and it is 64.2 percent
in commercial vehicle segment. Thus it can be understood that the Tata Motors is dominating the
Indian market in commercial vehicles segment and MUL is dominating in passenger and small
cars segments. In motorbikes segment, the Bajaj Auto has the lion’s share in the market and
Mahindra & Mahindra competes successfully with its competitors in multi utility vehicles and
luxury vehicles.

5.3: Study through theoretical model

Theoretical Models: The theoretical model that is used in this paper for above discussion is “A
Behavioral Theory of Firm” from Gordon R. Foxall. (2007, p236). The theory explains the
complex activities of modern companies that attempt to maximize profit by advocating price
levels using pricing strategy. Explaining the theory, Gordon R. Foxall (2007) cites an example to
explain the pricing strategy. He talks about the financial department of a company intending to
maximize the profit. This he explains that the company’s behavior leads to maximize sales even
in the presence of less margins on each unit. That means the behavior of the company is to
increase sales to increase revenue. In the next step, the pricing strategy of the company decides
the profitability from the revenues accrued. The frame a pricing strategy, the total cost of
production and marketing has to be considered and at times the managements may find the
 47

necessity to minimize them. Regarding these aspects, the author cites Cyert-March model, which
states “that neither side optimizes but each satisfies” (Gordon R. Foxall, 2007, p.237).that means
the pricing strategy according to the infrastructure of the company and the supply chain
efficiency as well as marketing strategies and production cost, decides the price. This may be
different in various companies working in the same environment like India. For example, Maruti
concentrates only on small car segment and offers competitive price for a better service and this
is the behavior of that company. However, Tata Motors releases more number of products than
any other company to maximize its sales and decides the least price possible. Though the
strategy is to offer affordable price to Indian middle class customers, one can observe the change
in strategy of the above mentioned companies in fixing price for their vehicles depending
manufacturing and production strategies (Gordon R. Foxall, 2007, p.235-237).

Chapter 6: Discussion

As per the review and analysis, it can be termed that the Indian automobile industry has
increased its profitability and potentiality after 1990 and the development is remarkable after
2000. This can be evident from the increasing of the profits of the important automobile
companies in India with increase of their sales. This indicates that though the pricing strategies
of different companies are different, they are according to the production and in tandem with the
marketing strategies, as the profitability is continuously increasing with the increase of sales,
except in the context of HM. Regarding this aspect, one can find enough information in the
research of Aya Okada. (2004, p. 1266) mentions one of the skills acquired by Indian automobile
manufacturers due to globalization; the lean manufacturing. This can be termed as the one
reasonable for the cost effectiveness of the production activities, which can give enough freedom
to the management while deciding the price and profit margin for the dealers. Moreover, another
aspect that resulted in freehand for the management in deciding the prices is about the local
suppliers, who are not competitive before globalization and the firms are forced to import the
components from other countries thus increasing the cost of production of an automobile.
However, the increase of manufacturing of components in India and the relaxation of import
norms that made the imports cheaper than before further reduced the production costs and
resulted in less prices that are necessary for marketing the automobiles in Indian Industry. Aya
Okada. (2004, p. 1267) mentions about inter firm linkage and human capital theory that involves
 48

investment in education and training, which in future increases the availability of human
resources for the company. Thus, when the human resources availability is present, the chances
of obstructions in production and marketing activities can be minimized resulting in quick
production of the designed product. This in turn saves the pricing strategy for a product from
being outdated as the time between designing the product according to customers’ aspirations
and the release of it into the market can be minimized. The knowledge dissemination is
significant and has turned to be key element in the organizational learning as the firms
recognized it to be valuable to examine the process of learning. This can be observed when Tata
Motors designed Nano; the cheapest car in the world. The knowledge dissemination is necessary
in this context as the management of the firm designed the production strategies that are cheapest
in the world. One such example that reflects the knowledge dissemination is the proposal of
tubeless tyres, which can be termed as a new concept. The company succeeded in manufacturing
them cheaper than the present type of tires and thus it helped in the pre-decided pricing strategy
of the company regarding Nano. Moreover, the companies like Maruti Suzuki India and Tata
Motors developed the internal mechanisms that decide the allocation and pricing of employees.
As the payments to the employees effect the pricing strategy, the recruitment, promotion,
transfer, wages and training resulted in comparatively cheap personnel and labor for the
companies. Hence, all the automobile companies in India now have the training combined with
recruitment to have employees at less price thus enabling themselves to frame a affordable
pricing strategy while designing the passenger cars of basic models and the commercial vehicles.
However, the pricing strategy of the companies like Mahindra & Mahindra may be different
from that of Maruti and Tata as the majority of their products are luxury vehicles for Indian
market and those customers are not price sensitive. Another aspect that affects the production
cost of the firm is continuous supply and linkages with suppliers determine that continuity. This
has been made possible as the automobile manufacturers in India developed their local supplier
base thus making the production of automobiles much cheaper than in the past as the complete
knock down of the customs duties and avoiding the countervailing duty as the components are
not imported. Moreover, little number of imports that are necessary even after the development
of local supplier base are made comparatively cheaper than in the past and hence, the imports
does not affect the cost effective production of the automobile manufacturers. When the example
of Maruti Suzuki India Limited, which is formerly MUL; competing with this company
 49

regarding the prices of passenger cars is very difficult for new entrants in the market as they have
to rely on imports for the required components. As the company has setup its own subsidiaries to
get supplies of the components continuously, it has reduced the competition as well as the
production costs. The same strategy has been implemented by Tata Motors in a different way
when it provided space for the important suppliers of the components in the manufacturing site
thus reducing the transportation cost and time from supplier to the firm. Thus the companies
Maruti and Tata increased their effectiveness of the price of their products by upgrading the
production capabilities of their suppliers and manufacturing some components on their own. For
example, the gear box used in Maruti passenger cars is manufactured by the company and it
reduced the dependency on suppliers thus enabling a more affordable pricing strategy. Moreover,
the Indian companies reduced the prices of the components and supplier network by maintaining
the long term relation with their suppliers. However, they emphasized on quality and on time
delivery that are necessary for lean production activities. The pricing strategies of Maruti and
Tata are also affected by following inter firm collaborative problem solving instead of dominant
‘arm’s length’ the Indian companies used to follow in the past. This is against to the strategy that
prefers the supplier who offers the lowest price though it is for a short period. In the context of
inter firm collaborative problem solving, the companies prefer for long term relationship that
ensures continuous supply and reasonable price even in the adverse situations. This continuous
supply of the required components enables the companies to maintain brand value that helps the
managements to decide a higher price for the models that are time tested for their quality and
performance (Aya Okada, 2004, p.1266-1276).

In addition to the above activities of lean production, the Indian automobile manufacturers have
maintained retail supply chain also to ensure that their products available to the customers
readily at as much number of places as possible. According to Santanu Sinha., S.P.Sarmah.
(2010, p. 280) the retailer should be able to replenish the inventory from the supplier, who is
manufacturer or the dealer. Hence, in this context again a supply chain that is to be maintained
from the side of the company is necessary to ensure the supply of the product to the retailer
whenever it is needed. However, this is different from internal optimization that is mentioned till
now in the discussion and this can be termed as external optimization, which is maintained
through dealers and retailers with the customers. The fruits of lean production manufacturing end
here and the necessity to maintain the inventory for the company according to the needs of the
 50

market arises. The maintenance of the inventory by an automobile manufacturer ensures the
retail counter its business and thus exists in competition when it comes to sell the product. The
price competition also comes to the fore at this point as there is chance of occurrence of non
coordinated equilibrium when various vendors are selling different products through a common
retailer. In this context, the automobile manufacturers should take care that their retailer will not
sell the competitors product. Hence, each automobile manufacturer in India is having unique
retailer in a particular area. At this context, the pricing strategy of the company is crucial as each
seller predicts the wholesale price of his competitor and sets his own wholesale price. Hence, not
only the price offered to the customer, the price offered to the retailer and the service charges
offered to the servicing centers should be considered while deciding the price given to the dealer
and offered to the customer. If the price offered to the customer is less as well as the profit of the
dealer or the retailer when compared to the competitor, the company may not have enough
retailers for it in different areas to promote the product; in this case the automobile. Regarding
this, the pricing strategy of Maruti can be considered as it has more retail counters than any other
company. Though, one of its competitor Tata Motors offers some cars lesser than the price of the
Maruti, the retailer counters play a crucial role in attracting the customers. Hence, in this context,
the profit margin offered to the retailer also is crucial in exploiting the market. Consequently,
while framing the pricing strategies, it is important to note that the company has to consider the
prices at two points. The price of the automobile at dealer and the price of it offered to the
customer. Both should be in a balanced manner as well as the number of retail counters to attract
the customers. Regarding these aspects it should be understood that one company’s whole sale
price can influence the demand of the competitor’s product. The seller will adjust the wholesale
price according to the change in other’s wholesale price. This type of price adjustment is
significant in framing pricing strategies and the company should consider the adjustment of the
wholesale price if there no equilibrium is reached between the prices of the competitors (Santanu
Sinha., S.P.Sarmah, 2010, Pp. 280-285).

6.1: Interpretation of results and answer to the research question

As per the statistical and qualitative analysis, in this paper it is clear that the price offered to the
customers and the margin given to the dealers is crucial in deciding the market for automobiles
which offer reasonable quality. In addition to that the service offered by the companies to their
 51

products sold also decides the demand for the vehicles. Regarding price, the Tata Motors offers
competitive price for their customers when they buy the company’s vehicles. However, the
major market share in small cars segment in Indian market is of Maruti’s as it offers competitive
price along with the service centers more than in number than its competitors. However, Tata
Motors captures sufficient market as the company’s products are diversified in nature and have
more products than its competitors including Maruti. Regarding this aspect, the pricing strategy
combined with diversified products is capable of increasing sales and profitability. However, the
pricing strategy does not solely depend on diversified products only and lean or cost effective
production decides the extent of discount the management manages to give for the customers.
When the production is cost effective the company can also offer more margins to the dealers
and can have more number of retail outlets to make the product more popular. However, the
supply chain management also plays a crucial role in deciding the price as Tata Motors initiated
a new aspect to provide space for component suppliers units within the premises of the
assembling unit to reduce transportation charges involved in supply chain. Hence, cost effective
production, and cost effective supply chain management decides the pricing strategy of the
company when it intends to offer a competitive price than its competitors. In addition to that the
pricing strategy is different if the company targets the customers who buy luxury cars. For
example, Mahindra & Mahindra targets this type of customers and have a freehand in deciding
the price well as the margin to the dealers. However, the luxury vehicles need less retail counters
and naturally the dealers’ profit will be more than those of the economy models, the company
finds much easier to frame a pricing strategy. However, it has to keep in view the products of
Tata Motors while deciding the price. Maruti also cannot be ignored as it has a counterpart for
every product of its competitors; from basic to luxury models.

6.2: Evaluation of answer with existing theory and previous empirical research

The previous empirical researches mentioned in this paper suggest that the Indian automobile
industry gained momentum after 1990 and the company that provided guidance for this activity
is Maruti Udyog Limited, which is now Maruti Suzuki India Limited. After the success of Maruti
and removal of licenses for production, the automobile companies India started manufacturing
vehicles on larger scale than in the past and that triggered competition as well as the necessity for
components. This resulted in development of component industry and the resultant competition
 52

for vehicles and components paved way for lower prices of vehicles in the market. As a result,
pricing strategies of Indian Automobile companies gained significance as it decides the way of
marketing the product as well as the production design and the services offered. Hence, the price
and the pricing strategy that offers the customers competitive price along with reasonable quality
in the product helped the companies to capture the Market. As the Maruti and Tata Motors have
mastered this type of pricing strategy, Maruti had the majority share in the domestic or small car
market and Tata Motors have overall majority share as it has diversity of products ranging from
small cars, luxury cars as well as commercial vehicles. This resulted in increase of competency
as Maruti is making some of the components with the help of its parent company and Tata also
doing so. However, Tata Motors evolved tubeless tyres for its cheapest car Nano. In addition to
that the company mastered the lean manufacturing policies by allowing its suppliers to establish
units in the manufacturing place. As mentioned in the discussion and analysis this helped the
company to offer four wheelers at more affordable price than before. This resulted in further rise
in competition and that decreased the profitability in the absence of pricing, marketing as well as
lean production strategies. The case of Hindustan Motors is an example for it as the company is
facing losses from 2006 to 2010 due to the absence lean manufacturing policies and the
necessary pricing strategies. However, that is not the case with Mahindra & Mahindra and the
company is targeting the customer who can afford luxury cars and concentrating on
manufacturing them. Of all these aspects, the important aspect is that the pricing strategies of
Indian automobile companies are regional in nature and they may not be applicable to
international market that concentrates quality and difference rather than price. Though the
international market also witnesses low cost cars, the pricing strategies of those manufacturers
are not constrained as that of the Indian automobile manufacturers.

Chapter 7: Conclusion

It can be concluded that the pricing strategy of Indian Automobile manufacturers is constrained
when compared to their counterparts in Western countries. This aspect hampers the growth of the
industry and may slowdown the process of entering into international market. Though the
companies like Tata and Maruti forayed into international market, they are selling their products
in developing countries only. Moreover, the Tata Motors have bought international brands like
Jaguar to enter into international market and not with their successful own brands. This reflects
 53

the affect the pricing strategy and lean production technologies used by Indian automobile
companies show on their quality and development.

7.1: Conclusion, evaluation of hypothesis

According to hypothesis, the pricing strategy is related with production as well as the efficiency
of supply chain management. This can be understood from the fact the statistical analysis has
revealed. The companies which used their assets to increase sales are also successful in
increasing their profits. This means they are able to produce the products more cost effectively
sot that the lesser prices and greater margins offered to customers and dealers respectively do not
hamper the profitability. This can be justified as the Hindustan Motors is not able to do so even it
is having enough assets and brands of cars in its inventory. The cars like ambassador
manufactured by HM are more costly than the version released by its competitors. Moreover, the
competitors of HM; Maruti, Tata, Mahindra are releasing the models that are attracting the
customers of all fields and ages. However, it is not the case of HM and that lack of designing
capabilities to attract the customers also has shown affect on sales and profitability. Hence, it can
be concluded that pricing strategy combined with lean manufacturing technologies, efficient
supply chain management and timely assessment of market is necessary for the success in the
liberalized economy. Even the two wheeler maker Bajaj followed the same strategy to withstand
the competition and stood as number one in market capture of two wheelers. Previously, the
company is popular for its scooter and the appreciable aspect is that the company adopted itself
to manufacture motor bikes that are more popular in India at present. Though there is market for
scooters, their shape has changed much and the company is manufacturing them also with a
changed design and technology that offers the product at lesser price than competitors and gives
more mileage. The aspects of ruggedness and mileage, which are appreciated by Indian
customers, are well displayed by Bajaj in their bikes and that resulted in success of their products
in two wheeler market of India. Out of all the Indian automobile companies evaluated in this
paper, the Hindustan Motors only has shown decrease in sales as well as profit and the remaining
companies have shown growth in sales as well as profitability. This is reflected in the fact that
their assets are increasing and the sales as well as profits are also growing in the same manner.
The PER also is in the limits for the companies other than HM as the investors are getting returns
in tandem with the book value of share. This can be understood from the fact that the book value
 54

of the shares of companies other than HM are on rise in all the five years considered in this
research. Hence, it can be understood that despite the economic recession that existed
internationally, the Indian auto market has exhibited enough growth necessary for the sector. The
aspect that the pricing strategy is crucial for Indian Auto market is significant as the majority of
successful companies; Maruti, Bajaj and Tata are successful for the competitive prices they offer
for their vehicles. For example, the bikes produced by Bajaj are less in price when compared to
the bikes produced by Hero Honda in India and still offer reasonable quality. In a similar
manner, the small cars produced by Maruti are pricing lesser than the luxury cars of HM and
Mahindra. If the cars of Maruti are equal in price with the products of the competitors mentioned
just now, the services offered through the company’s service centers are superior to its
competitors. This is due to the fact that the company has more number of service centers in more
number of places when compared to its competitors. Hence, it can be understood that as
mentioned in hypothesis, the pricing strategy of the companies depend on their supply chain
network as well as the price of the components they get from suppliers. The comparative lower
price the Maruti and Tata get their components from their suppliers is crucial in the capacity of
those companies offering competitive prices. Another mode of manufacturing that is followed by
various companies mentioned in the paper that emphasizes the importance of pricing strategies is
production of Light Commercial Vehicles by them. To attract more number of customers the
companies have to reduce the price, but it is not possible after a certain extent. At that context,
the design of the vehicle that may even reduce the capacity but is capable of decreasing price is
important for Indian automobile companies. One example of such LCV in Indian Market is
Tata’s Ace that is being offered at lesser price than the ones offered by its competitors. The
company is successful in selling more number of this models when compared to the sales of the
similar vehicles of the competitors. Hence, pricing strategy is crucial in Indian market and for
Indian automobile manufacturers even in the context of commercial vehicles as the profits of
transportation is limited due to the costlier fuels for the standards of Indian economy. The way
various foreign companies entered into the Indian auto market with the collaboration with the
local companies. Moreover, one can understand that the MNCs are collaborating with the local
companies to use their brand value even though they are technologically superior to them. The
reason is that the Indian companies know best the way to use the technology of the MNCs in a
price sensitive Indian market. For example, the basic model cars produced by Maruti are not
 55

exported to Japan but only find market in India. Similarly the LCV of Tata Ace finds market in
India or in the developing countries like India. Tata Motors has acquired some international
brands and companies. It can be understood that the collaborations and acquisitions have resulted
in Tata Motors getting access to technology of those companies. However, the company used the
same technology in the form of Tata Ace and thus Indian companies are more efficient to design
the vehicles that cost less when compared to their competitors. Hence, the companies in India
can be termed as regional companies instead though they offer their products in other developing
countries as majority of them did not foray into the markets of Western countries.

7.2: Reflection on the work

After the completion of this paper, my communications improved a lot and I am able to
understand the strategies of the entrepreneurs better than before. While doing the review of
literature necessary for the paper I understood that the Indian auto market forced the
multinational companies to frame cost effective production as well as pricing strategies and
production designs that suit the price sensitive Indian Market.

7.3: Limitations of the current research

The significant limitation of the current research is that it is confined to Indian auto market and
the nature of the market in other countries is not taken into consideration. The profitability and
pricing strategy of the companies that operate from India are only analyzed. Hence, the
research is insulated from the changes that took place in auto markets of other countries. The
advantages of this research are about the relationship between profitability and pricing strategy.
The qualitative analysis contains cost effective production strategies of the companies.
However, the quantitative analysis is limited to profitability of a company compared to its sales
in different years and between different companies. Though this gives the account of necessary
changes of the pricing strategy for companies to achieve profitability, the option of operating in
markets other than India is not considered in the paper. This is because, it is not part of the
research question and the research topic is the relation between pricing strategy and
profitability of Indian automobile companies.

7.4: Recommendations for the further work

 56

The further work for this topic is to consider the options for Indian auto companies to export
their products and the probability of profitability in that context. The pricing strategy as well as
the other strategies necessary for Indian automobile companies to export their vehicles should
find place in further research works.
 57

Appendices

Maruti Udyog Limited

2005
 58

2006

2007
 59

2008
 60

2009
 61

Bajaj

2005
 62

2006
 63

2007
 64

2008
 65

2009
 66

HM

2006
 67

2007
 68

2008
 69

2009
 70

2010
 71

Mahindra & Mahindra

2005
 72

2006
 73

2007
 74

2008
 75

2009
 76

Tata

2005
 77

2006
 78

2007
 79

2008
 80

2009
81
 82

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