MUMBAI – The 34-year-old joint venture between Indian manufacturer Maruti and Japanese automaker Suzuki takes a complicated twist as a new company wholly owned by Suzuki proceeds with construction of two large assembly plants.
Suzuki Motor Gujarat (SMG) has invested Rs30 billion ($460 million) in the plants in Hansalpur and Vithalapur in northern Gujarat state. Eventual investment in the plants, each with projected annual capacity of 750,000, may reach Rs185 billion ($3 billion).
The new Suzuki-owned plants’ eventual capacity of 1.5 million units would match that of the Maruti Suzuki JV and raise the automakers’ combined capacity to 3 million light vehicles by 2020. Maruti Suzuki is far and away India’s biggest automaker with 1.15 million LV deliveries in 2014, according to WardsAuto data. The JV has set a goal of 2 million sales by 2020 and is targeting 3 million by 2025.
This robust growth comes despite an internal dispute that has left SMG neither owning nor leasing the land on which the new plants are being built.
The Gujarat government had refused to allow Maruti Suzuki to transfer the land to SMG without the approval of two-thirds of Maruti Suzuki’s minority shareholders. Believing a large number of Indian institutional shareholders were unwilling or hesitant to sign off on the transfer, Maruti Suzuki officials traveled to major cities such as Delhi, Mumbai, Chennai, Singapore and Hong Kong, as well as to the U.K. to seek the minority shareholders’ favor.
In an even more significant lobbying effort, Maruti Suzuki persuaded the government and Securities and Exchange Board of India to lower the required approval of the minority shareholders to 50%. That has cleared the way for likely approval of the land transfer in balloting ending Dec. 17.
Without waiting to obtain legal ownership of the land, SMG is proceeding with construction of the two plants that will make cars and SUVs exclusively for Maruti Suzuki in accordance with the JV’s specifications and designs. SMG says it will supply the vehicles to Maruti at cost, but the companies have not disclosed how the deal will be structured.
Capacity Crunch
Maruti Suzuki is coming under pressure because of its success. Light-vehicle sales were up 11.9% for the year’s first 10 months from like-2014, WardsAuto data shows, and the nearly 1.1 million vehicles produced during that period nudge the automaker closer to its maximum capacity of 1.5 million units.
In addition, exports increased more than 20% to 120,701 units in the year ending in March 2015.
By establishing its SMG subsidiary, Suzuki appears to be distancing itself from Maruti Suzuki, even though it holds a 56% stake in the JV. The Japanese manufacturer’s interest earnings on cash reserves of Rs250 billion ($4 billion) last year were higher than its revenues from its car business.
Suzuki, also a major producer of motorcycles, engines, all-terrain vehicles and outboard motors, is staking out its own ground in the automotive business in India, investing its cash reserves in the new plants with an eye toward substantial earnings from the cars it will make for Maruti Suzuki in Gujarat.
Part of Suzuki’s push for stand-alone production stems from its failure to integrate Japanese work culture into its Indian plants, as evidenced by recurring labor problems and violent protests at Maruti Suzuki’s Gurgaon and Manesar plants. The Japanese automaker also believes it can build cars more economically than Maruti Suzuki.
Suzuki has begun branding new Maruti Suzuki cars simply with the “S” logo used on other Suzuki vehicles with nothing identifying cars built since 1983 as Maruti Suzukis. The JV’s upmarket Nexa retail network that launched in July also downplays Maruti Suzuki branding.
Nexa and SMG embody the approach taken by many other multinational corporations in India: the most-profitable businesses are fully owned subsidiaries and the less-profitable businesses operate as Indian-minority joint ventures.
With Suzuki not saying how the cost of cars made at the SMG plants and sold to Maruti Suzuki will be calculated, the Japanese automaker also has been silent on retail prices. When that information is disclosed, Maruti Suzuki can be expected to go along.
