Royalty rates paid by Maruti Suzuki to its global parent Suzuki Motor will fall from 5% today to around 4% for new models, the first of which will be a compact SUV likely to be introduced early next year. Moreover, with the rates to be denominated in rupees, the exchange rate pressure (see graphic) will also be eliminated. According to Maruti Suzuki chairman RC Bhargava, while the actual royalty rate was fixed at 5%, the numbers go up and down depending on the exchange rate.
Bhargava told FE that since the company has done substantial R&D for the compact SUV, the royalty for it would be lower. “It has not been finalised yet, but going by the work done by us here, our estimate is that it (royalty) on the vehicle will be either 4% or below it.”
“On all future models the royalty will be expressed in rupees…and not (in) the yen so that we are not exposed to the variation in the exchange rate which has been happening in the past,” Bhargava said.
For instance, between FY09 and FY15, Maruti’s royalty payment to Suzuki increased from 3.3% to 5.7%, which is an increase of 1.7 times. However, the rupee depreciated against the yen during this period by 1.2 times, which also contributed to the rise in payment. In future, as Maruti increases R&D for vehicles in the country, not only will it pay a lower royalty on it but its outgo will be free from forex fluctuations.
“More and more R&D work will be done in India and royalty calculation would be based on work done here and our expenditures on R&D will be rewarded in the form of reduced royalty,” Bhargava said. While Maruti’s R&D is still around Rs 600-700 crore a year, with the establishment of a test track at the new Manesar plant, R&D activity is expected to go up sharply in the future.
Maruti, in which Suzuki Motor holds a 56% stake, pays royalty on a per-car basis in yen for use of technical know-how and use of the parent’s brand name. The company has faced flak for this from investor advisory group IIAS, but as FE pointed out in its story “As Maruti and HUL show, royalty is a small price to pay” on Thursday, institutional investors continue to hike their stake in the company since it stock has been an outperformer.