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Business Insight

Suzuki's India boost to test 'first-come, first-served' strategy

Core local unit to have 2.25m output capacity by 2020

Since Suzuki first entered India in the 1980s, the automaker has grown to capture a 50% share of the country's auto market.

Suzuki Motor plans to boost its automobile production capacity in India to 2.25 million units per year in 2020 in a bid to further solidify its presence in the world's fourth largest auto market.

Suzuki, ranked fourth in Japan's auto industry, made a market advance into India in the 1980s when few rivals showed an interest in the South Asian country. Suzuki has since grown to capture a 50% share of the Indian market.

The huge success achieved by Suzuki in India suggests that its "first-come, first-served" strategy is effective in tapping an emerging market. But Suzuki has failed to repeat the feat in China, which it entered ahead of many other automakers, prompting analysts to wonder what made the difference. 

In January, Suzuki began operating the second plant of its Indian subsidiary Suzuki Motor Gujarat. The combined capacity of the two plants is 500,000 vehicles and the third factory, to start operating in 2020, will increase the number to 750,000, according to Suzuki. 

As Maruti Suzuki India, Suzuki's core Indian unit, is capable of rolling out 1.5 million vehicles a year, the Japanese automaker will have an output capacity of 2.25 million in 2020. 

While new car sales in India are forecast to total 4.5 million to 5 million units in 2020, Suzuki is expected to retain a local market share of 40% to 50%.

With annual auto sales topping 4 million units, India is the world's fourth biggest market after China, the U.S. and Japan. Amid the presence of leading Japanese, U.S. and European automakers in India, Suzuki, which mainly produces small vehicles, has maintained half of the market largely because of its much earlier entry into the country than other automakers.

In 1983, Suzuki set up a joint venture in India, which later became Maruti Suzuki, and began local production. India was a planned economy at that time. 

A sales network established by Suzuki ahead of other automakers has enabled the Japanese car maker to ward off challenges by bigger rivals and retain its leading position in India.

There are two strategies for developing an emerging market, regardless of industry.

The first is "the early bird gets the worm" strategy, as in the case of Suzuki. This means an advance into an emerging nation that has yet to achieve full economic development. Though the market is still small, the pioneer makes its brand recognizable to potential buyers. The strategy may be workable for second-tier businesses that are struggling in advanced economies and wish to go on an offensive in emerging or developing markets.

The other strategy is to enter when the emerging market has grown into maturity. While an emerging nation is unstable politically and economically, manufacturing and marketing operations tend to be disrupted. The number of consumers who can afford to buy high-priced goods, such as imports from advanced economies, is also limited.

This strategy thus calls for companies to wait until an emerging nation grows enough to make production and distribution stable. Companies with technological and financial prowess prefer this strategy because they can release competitive products when the time is right and boost their market share at a stroke.

Volkswagen's advance into China is a good example of the first strategy. The German carmaker began producing its entry-level Santana passenger car in China in 1984 and established its brand in the country. China has since grown to be the world's largest auto market, with sales totaling 28 million vehicles in 2018, and Volkswagen group enjoys a 15% share. The success in China has enabled Volkswagen to compete with Toyota Motor for the status of the world's largest automaker in terms of unit sales.

Volkswagen's experience in China may testify to the importance of the first strategy for emerging markets. But pundits question it because Suzuki has stumbled in China despite its early market entry.

Suzuki entered China ahead of other Japanese automakers, launching local production at two joint venture companies in 1995. At that time, gross domestic product per capita in China was only $600 and Suzuki's small cars aroused strong demand as in the case of India.

Suzuki sold nearly 300,000 vehicles in China in 2011 but saw its sales decrease starting in 2012. As sales dropped to 105,000 units in 2017, Suzuki decided to pull the plug on production in China in 2018.

Analysts point to various reasons for Suzuki's tumble in China, such as deteriorating relations with joint venture partners. But the biggest reason is that Suzuki fell behind its competitors. When China's per capita GDP topped $1,000 in 2001, rivals started production there. Its bigger Japanese competitors Toyota, Nissan Motor and Honda Motor opened plants in the country at that time and began to close in on early comers Suzuki, Volkswagen and General Motors.

China's GDP exceeded $5,000 for the first time in 2011 when Suzuki's sales peaked. The average price of a new car in 2006 stood at 70,000 yuan, equivalent to $10,500 at present, and rose above 110,000 yuan in 2011.

The average price in China is now higher than 140,000 yuan, reflecting the increased popularity of midsize and bigger cars among Chinese consumers. Toyota and other Japanese automakers, larger than Suzuki, released high-end sedans and sport utility vehicles, as did Volkswagen.

As a maker of small cars, however, Suzuki has not been able to respond to the new demand trends in China, the People's Daily Online said.

A frontrunner in an emerging market loses its competitive edge unless it changes its product lineup along with the growth of the country. This stark development is a trap frontrunning companies tend to fall into.

Suzuki expects the Indian auto market to grow to 10 million vehicles in 2030. "To maintain a 50% share, we work out a (production) plan on the basis of backward calculation," said Osamu Suzuki, chairman of the automaker.

Carmakers mainly supplies small vehicles priced at around 400,000 rupees ($5,620) to the Indian market at present. As in the case of China, however, demand for a wide variety of models will increase in India sooner or later. Suzuki therefore has expanded its product lineup to more than 30 models from 16, the company said.

Per capita GDP of India is expected to top $5,000 in 2030, up from about $2,000 at present. Suzuki will then see if its upfront investment strategy succeeds or fails.

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