The new subsidiary, called Suzuki Motor Gujarat (SMG) Pvt Ltd will limit itself to production of cars and engine components, while Maruti Suzuki will be entrusted to sell these cars both in the domestic and export markets and earn the profits.
R C Bhargava, chairman of Maruti Suzuki said that both Maruti and parent Suzuki will gain from this new business model. “Our funds will not be invested in Gujarat and will now be available for other things like marketing spends and for research and development. We can also invest these funds and earn 8.5-9% returns. We will also not take the risks associated with making large capital investments,” he said. Maruti has cash reserves of about Rs 7,500 crore, while parent SMC has about Rs 25,000 crore of cash reserves.
“Why Suzuki is doing this is because Maruti has become an extremely important part of its profits and volumes, and it sees strong future potential in India. Suzuki wants to be involved because in Japan there is a lack of opportunities to invest and interest rates are also very low. By investing here they gain from the increased sales of Maruti Suzuki as they get 56% of the profits,” he added. SMC has a 56% stake in Maruti.
SMG, the new Suzuki subsidiary, will sell cars to Maruti at a price that includes no profits but just the cost of production and “adequate cash (net of tax) to cover incremental capital expenditure requirements”. The return of investment for SMC would be realised through growth of Maruti's business. “We expect the benefits to start coming by 2018. We will double our return on capital - while Maruti's own production capacity will stay at 1.5 million, we will actually sell 3 million cars without having to bother about the manufacturing of the other half,” Bhargava said.
Osamu Suzuki, SMC chairman said that all three partners (SMG, SMC and Maruti) are expected to work together in a way that derives common benefits, while adding that SMC has no plans to increase stake in Maruti Suzuki. “Maruti has reached 1 million annual sales and has to double its network now. In my experience, volumes are manageable till this point after which you need a new company. Instead of SMC officials helping in expansion, I believe our Indian managers can do it best,” he said.
Headquartered at Ahmedabad, SMG will be set up by April this year with a starting share capital of Rs 100 crore. It will be headed by N Aizawa, a senior Suzuki executive who will be deputed from Japan, while other senior managers will likely be deputed from Maruti Suzuki itself.
Production at Gujarat is expected to start by end-2016, where SMG will initially invest Rs 3,000 crore for a 2.5 lakh unit per annum production line, though at start the output will be 1 lakh cars a year. In total, the two facilities in Gujarat – 640 acres in Becharaji and 550 acres in Vithalpur, can accommodate seven production lines producing almost 18 lakh cars a year. Till date, Maruti has already invested Rs 250 crore in purchasing the two plots of land, which will now be leased to SMG on an arms' length basis.