Maruti Suzuki India Ltd. (MSIL) had announced on Tuesday that Suzuki Motor Corporation would invest USD 485 million (Rs 3,041.5 crore) to build a manufacturing facility in Gujarat.The facility would be wholly owned subsidiary of the Japanese parent, Suzuki Motor Gujarat Pvt. Ltd. (SMGPL) and the products manufactured would be sold to Maruti on a cost basis. Suzuki’s profits would be derived only through the stake it holds in Maruti.
The complexity of this arrangement had shocked the investors, which led to the fall in stock prices of Maruti Suzuki by as much as 9.5 per cent. Maruti Chairman RC Bhargava discussed the rationale behind the movein an interview with a television channel.
Despite investing in the facility alone, it seemed as if Suzuki was not going to get any kind of returns from this. But Bhargava says that as Suzuki owns 56 percent of Maruti, Suzuki's returns will come through Maruti. The company will buy the cars without any profit margins being taken by the Gujarat company. In short, Suzuki will just be a contract manufacturer.Hence the margin that could have been taken by the Gujarat unit would actually be realised by MSIL. So instead of Suzuki getting 100 percent of the profit in Gujarat, it will get 56 percent of the profit and the rest 44 percent of the remaining profit will go to the minority shareholders.
When asked about the complexity of the issue, when Maruti could’ve directly invested the money for the plant, Bhargava said that doing it this way was a more profitable way. Maruti would’ve lost the initial returns on the invested money as the facility usually takes three years to be set up. Instead, the money invested being Suzuki’s, Maruti doesn’t lose any of the investors’ money and gets to taste the profit, once they start coming.
With Maruti currently earning 17 per cent return on capital (RoC), Bhargava is confident that this trend would continue with the Gujurat unit. Bhargava added that despite this arrangement, there would be no change in the cost of production. Due to the similarity in the process across its production units in the country, the production cost wouldn’t vary from that of the other manufacturing units in India.
As of now, Maruti-Suzuki has a combined production capacity of 14,50,000 vehicles annually at its two plants in Gurgaon, Haryana and Sanand, Gujarat. The Gurgaon Facilities currently manufactures the 800, Alto, WagonR, Estilo, Omni, Gypsy, and Eeco while the Manesar Plant produces the A-Star, Swift, Swift DZire, SX4, Ertiga and Ritz.