Team-BHP - Maruti-Suzuki to source cars from Suzuki's Gujarat Plant

Today Maruti Suzuki announced that the company has decided to source cars from a new company which will be Indian subsidiary of Suzuki Motor Corporation (SMC). I'm reproducing a gist of the company's press release which was out today noon.

Maruti Suzuki would enter into a contract with this subsidiary (of SMC) under which all production in the subsidiary would be in accordance with the requirements of MSIL and the vehicles would be sold to Maruti Suzuki.

Maruti Suzuki has decided to pursue Gujarat expansion through a 100% Suzuki subsidiary. The subsidiary would be a manufacturing company with Maruti as its only customer.

Suzuki (SMC) will build the plant and sell cars to Maruti Suzuki. Unique arrangement which is not heard before as Maruti Suzuki is already manufacturing cars in India.

For team bhpians who are actively involved personally / professionally in financial markets, this move is seen as negative for Maruti Suzuki as it will only earn distribution margins on all future growth in volumes.

Moderators , Kindly move this thread to any other thread already covering topics similar to this.

Quote:

Originally Posted by saket77 (Post 3356056)

Does this also mean an end to ever boiling issues at the Maruti plant in Gurgaon? Has this reason compelled Maruti Suzuki to take this decision?

Maruti Suzuki acquired around 1200 acres land in Gujarat for this expansion. Gujarat is perceived as better place to do expansion after many untoward events in Haryana plant in last few years. But the surprise is Suzuki (SMC) building cars and selling it to Maruti Suzuki.

As the opening post says too, the markets have perceived this move negatively. The MSIL shares have plunged by good 10% against a flat Nifty.
Wonder what has prompted MSIL to disturb a winning combination/ arrangement. May be Suzuki gains more than Maruti in this arrangement.

I really do not understand the whole thing clearly. If Maruti Suzuki has to source cars from Suzuki Motors Corporation (SMC) then what happens to the existing set up. Will they still continue to manufacture cars under MSIL umbrella in Gurgaon and Manesar or go for a change in name by leasing the existing facilities to SMC.

There could be a chance that they may source cars from SMC either for pure exports or to cater to the western and southern region of India.

The press release is perhaps silent on the above issues that I have mentioned.

Link to the press release:
http://www.bseindia.com/xml-data/cor...td1_280114.pdf

Quote:

Does this also mean an end to ever boiling issues at the Maruti plant in Gurgaon? Has this reason compelled Maruti Suzuki to take this decision?

I don't think that this means an end to the boiling issues or we can't say for sure that SMC will never encounter these in future. Moreover, this can not be seen a compelling reason. It is pure financial. Any financial expert in the forum can throw more light on the benefits of such arrangements.

It would be interesting to see how things shape up in future.

Seems to be just a technical arrangement. Sizable amount of MarutiSuzuki shares are publicly held. One way to expand and set up a new plant is to infuse additional funds, with additional preferential shares to Suzuki. This would've meant that even the new plant will come under partial public control, even though with a lesser percentage. Perhaps Suzuki wanted complete control, owing to recent incidents. Someone may clarify on the excise duty part. If the cars are directly taken to dealers from the Gujarat plant, where is Cenvat charged!? Technically, Suzuki-Gujarat is now just a supplier to MarutiSuzuki! Or, will they take the product all the way to Manesar??

I think this doesn't read as good for MSIL as it does for Suzuki Motor Corporation in the long term.

Why would a cash rich company like MSIL not invest in a new plant to make cars but buy products made by another firm?

MSIL Chairman Bhargava says SMC will supply cars at cost price to MSIL. Hope that arrangement is honored. Else, it will be a sophisticated way of siphoning money and control from MSIL to SMC.

Through this move, SMC, has put the writing on the wall for the Haryana State Government. It is not a surprise, that this is coming shortly after the Tata Nano project also went to Gujarat.
Perhaps, a pointer to States to do more for industry rather than just offer land , subsidized power and roads.

Quote:

Originally Posted by deetjohn (Post 3356688)

MSIL Chairman Bhargava says SMC will supply cars at cost price to MSIL. Hope that arrangement is honored. Else, it will be a sophisticated way of siphoning money and control from MSIL to SMC.

From the other Maruti Suzuki plant in Gujarat thread, the below will be interesting to note..

Quote:

Originally Posted by volkman10 (Post 3356675)

Excerpts from Reuters on the deal.

............................
-The new plant will sell cars only to Maruti under the deal at a price that will include production costs plus enough cash to cover further capital expenditure requirements
-Profit on the sale of the cars( from SMC) would be exactly the same as it would have been if we (Maruti) had made the cars

Cheers!

Also from the press release,

"MSIL would financially benefit from the interest earnings resulting from not investing its money in this project. It would also benefit because the vehicles would be sold to MSIL by the Suzuki subsidiary without any return on capital employed."

What's in it for SMC, then? Financial and taxation experts could comment, I suppose. The press release states that Maruti received this attractive proposal from SMC.

My personal feeling is that this is the begining of a well calibrated, slow burner exercise to slowly putting SMC in charge here in India. It may not happen overnight but I won't be surprised if someday in future I find that MSIL is shutting shop by selling itself off to SMC.

Fact is that even after 10 long years of manufacturing the same models in India MSIL continued to depend on SMC for the crucial technologies as the latter always liked to keep a vice like grip on MSIL. One of the reasons (technology transfers) they had a tiff with GOI and finally some negotiations that led to GOI coming out of the JV leaving SMC as the largest partner. SMC may now be readying up for the endgame, that of converting MSIL into SMC.

If SMC had infused the funds for the new plant it could have increased its stake in MSIL?
How does this current arrangement offer more control from management point of view?

If they want to control what they want to give (technology etc) then its what it could be.

Is this in any way linked to Royalty payments by Maruti to Suzuki ? My feeling is even royalty for some models have a limited life like say 5 years or 10 years after which royalty will not be payable to Suzuki. Now Suzuki making cars will solve this issue of royalty payments. Anyways a regressive step for Indian manufacturing.

There will be some funds / revenue to be generated for SMC to operate by selling to MSIL.
Does this mean, there could be a cost disadvantage, rather cost increase in the current customer pricing.

Like, the Market price of a MSIL product = CP for MSIL + Profit + SP of SMC + Profit at SMC?

Trying to figure out, what would be the revenue generation model and how much is the end customer getting effected.
Will we have the cost advantage of MSIL what we have?
Atleast in some models.

Regards,
Maverick79

Quote:

Originally Posted by lurker (Post 3356834)

Maruti doesn't pay any royalty to Suzuki. Maruti or the Government of India is a minor stake holder and Suzuki is the major stake holder in MSIL. Profits and dividends are distributed according to the number of shares.

Also, royalties are paid when copyrights and patents are used by a second party. The issue of royalty as per my understanding doesn't exist between Suzuki and Maruti.