[Aditya]

From this financial year, Maruti Suzuki will start paying royalty to Suzuki in Rupees instead of Yen on new models starting with the Vitara Brezza. The step is expected to protect the company from foreign exchange fluctuations. The move to pay royalty in Rupees is part of an agreement between Maruti and Suzuki, which was signed in September 2015.

The Yen has appreciated 10.31% against the Rupee since the start of 2016. Every time there is an appreciation of 1% in the Yen, it impacts Maruti’s Ebitda (earnings before interest, tax, depreciation and amortization) by 1.2%.

The Vitara Brezza, which was launched earlier this year, is the first model for which the firm will pay royalty in Rupees. For older models, royalty will be continued to be paid in Yen. With new models being introduced, and old ones getting phased out, Maruti will look to eliminate the risk of being affected by foreign exchange fluctuations.

Maruti is also attempting to increase local content in its cars. Around 98% of the parts used in the Vitara Brezza and Baleno are locally sourced. This will help in reducing imports or raw materials and along with the move to pay royalty in Rupees, it will reduce the company's exposure to Yen.

At present, Maruti’s exposure to Yen is 21-22% of its revenue. The move to pay royalty in Rupees is expected to bring this down to 15-17%. In FY 2014-15, Maruti's imports as a percentage of net sales stood at 16%, while royalty was 5.7%.

Source: Live Mint

[pamiboy]

I thought the Vitara Brezza was the first car being designed completely by Maruti. Then why pay royalty to Suzuki.

Okay, forgot about the engine, transmission and chassis :

[GTO]

They had to. Maruti's stock price has taken a hammering in the recent past, from a high of 4,700 down to 3,600 currently!

I agree with the move. It's only fair that the reimbursement be in the same currency that the local company makes its $$$ in.

Originally Posted by pamiboy

I thought the Vitara Brezza was the first car being designed completely by Maruti. Then why pay royalty to Suzuki.

Okay, forgot about the engine, transmission and chassis :

Well said! The engine is anyway from Fiat and there's nothing ground-breaking with the design of the car that Suzuki Japan's help would be required for.

[shortbread]

Originally Posted by GTO

Well said! The engine is anyway from Fiat and there's nothing ground-breaking with the design of the car that Suzuki Japan's help would be required for.

Can Maruti design and make a car on their own, of course they can.

But then how exactly will Suzuki and its Japanese operations survive. All of their eggs are in one basket....i.e. India.

[alpha1]

Originally Posted by GTO

It's only fair that the reimbursement be in the same currency that the local company makes its $$$ in.

It also means that Suzuki is now very dependent on 'Maruti' and that it is Maruti dictating the terms rather than the parent Suzuki!

I mean this has to be the first case that I know where the Indian subsidiary/arm/firm is paying in Indian currency to the parent.