Suzuki Creating Sibling to Market-Leading Indian JV

The Maruti Suzuki joint venture’s strategy to regain dominance in the stagnant Indian auto market may be frustrated by an unexpected move by the senior partner, Suzuki itself.

The Japanese automaker is setting up a new, wholly owned subsidiary to make cars on 1,190 acres (482 ha) of prime land equally divided into 25-mile (40-km) sections allotted to the JV by the government of Gujarat state. The new venture, called Suzuki Motors Gujarat (SGML), would be unlisted on the stock exchange.

The announcement was made jointly by Suzuki Chairman Osamu Suzuki and Maruti Suzuki Chairman R C Bhargava in late January.

Suzuki plans to launch the new venture this month with an initial investment of Rs1 billion ($16 million) and manufacturing capacity of 100,000 units annually. A further investment of Rs30 billion ($485 million) is to increase capacity to 250,000 units.

Maruti Suzuki’s present worth is estimated at Rs500 billion ($80 billion).

The project aims to give each company annual capacity of 1.5 million light vehicles in three to four years. Suzuki Motors Gujarat will make cars and supply them exclusively to Maruti Suzuki at a price based on cost of production and a portion of capital expenditure. Maruti Suzuki then will sell them to buyers, effectively becoming the distribution agent for Suzuki Motors Gujarat.

Sources of funding for the new venture, production at each plant and pricing of the new subsidiary’s cars have not been disclosed. Also unanswered are questions about sharing R&D resources, tax implications, depreciation, import and/or local manufacture of assemblies and parts, and the issue of royalty payments that appear to be the impetus for Suzuki’s plan.

In addition, it is unclear whether the Gujarat government can or will offer incentives and whether the concessions it currently is giving Maruti Suzuki will continue to be given to a nonresident unlisted company.

In December, Bhargava said Maruti Suzuki was not aware of plans by Suzuki to raise its stake in the existing JV. But Maruti Suzuki clearly would have been aware of Suzuki’s attempt earlier last year to increase its holding to 70%, only to be rebuffed by the government.

Maruti Suzuki’s royalty payments to Suzuki in 2012-13 exceeded Rs24 billion ($387 million), roughly 5% of the JV’s net profits. Other multinational companies receive royalties of 2.5%; tax authorities reportedly have asked Maruti Suzuki to regularize the percentages of past royalty payments.

The royalty dispute appears to be at the heart of Suzuki’s plan to develop a fully owned subsidiary.

Stakeholders ranging from minority shareholders to institutional investors such as Public Sector Life Insurance Corp. of India have raised questions about the plan. In addition to demanding “clarity and transparency on these issues” in a letter to Bhargava, they have notified the Securities and Exchange Board of India about Suzuki’s plans.

In the absence of specific answers, the executive says it is a win-win situation for all investors, noting it allows Suzuki to put its Rs250 billion ($4 billion) in surplus cash to productive use and frees Rs70 billion ($1.1 billion) of surplus Maruti Suzuki funds to earn interest.

“As time goes by gradually, these concerns will get resolved,” Bhargava says. “When something is inherently beneficial, it may take time to be appreciated.”

Maruti Suzuki commands a 40% share of the Indian market and accounts for almost half of Suzuki’s global volume and one-quarter of its sales revenues. It has a wide range of top-selling models, excellent small engines and a highly competent R&D wing.

This puts Indian investors in a commanding position to see that the Indian government scrutinize the plan before approving a foreign company’s new, wholly owned subsidiary.