Editorial: Burden of proof

Jan 30 2014, 03:13 IST
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SummaryMaruti needs to show Suzukiís plans will benefit it

Though Maruti Suzuki India Limitedís shares have recovered most of the 8% value they lost on Tuesday when it announced that its parent Suzuki Motor Corporation (SMC), and not it, would set up the new automobile plant at Mehsana in Gujarat, the companyís management still has a lot of explaining to do. On the face of it, the deal looks a win-win: Suzuki gets to invest the money it is earning no interest on in Japanese banks while Maruti gets to conserve the R3,000 crore or thereabouts that the plant will cost, and Suzuki has said it will sell the cars it assembles in Gujarat to Maruti on a cost-basis. But itís precisely because the deal looks so good that analysts have almost uniformly panned itóthere are too many unanswered questions. And while it may be true that Suzuki is sitting on piles of cash, itís not as if Maruti is short of cash eitheróit has around R7,500 crore of cash reserves that it cannot possibly invest in upgrading its dealer network or on R&D and product development, so why prevent Maruti from investing in a new plant? More important, what measures will be taken to ensure there is no over-pricing when SMC-Gujarat sells automobiles to Maruti? In case of an excess demand situation, will Marutiís capacity utilisation be cut or will it be SMC-Gujaratís? Does Maruti earn more margins as a distributor or as a produceróif all goes according to plan, SMC-Gujarat will eventually produce 1.5 million cars which is roughly the same capacity that Maruti has in its facilities across Gurgaon and Manesar.

Given the suspicion with which MNC practices are looked uponóMarutiís royalty payments to Suzuki adding up to 47% of the latterís 2013 profits after tax only fuels thisóMaruti has done well to try and begin to address these issues. Maruti chairman RC Bhargava has told this newspaper that his company will remain in charge of all sourcing, including that for SMC-Gujarat. Given that outsourced components add up to around 80% of the value of a final car, Bhargavaís argument appears to be, Maruti will always have a fairly good idea of whether it is being charged the right price by SMC-Gujarat. Over the next few months, Bhargava has said a raft of agreements will be signed between the companies which will clarify matters. Whether the Street will be satisfied with what it hears is not

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