FINANCIAL SCENE
A just settlement?
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The controversy over Suzuki's future plans has ended for now. But is the solution right for Maruti and its stakeholders?
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FOR THE time being the controversy in the wake of Suzuki Motor Company's surprise announcement of September 14 has died down after the top Suzuki officials agreed last week to a significant role for Maruti Udyog (MUL) in its new projects. The Japanese company had said earlier that it would invest $291 million in two new undertakings — a diesel engine plant and a 2.50 lakh car assembly line. The core of the controversy related to the structure that Suzuki proposed for undertaking the new ventures — not MUL but an existing subsidiary called Suzuki Metals (to be renamed Suzuki Engineering India Limited) would spearhead the Japanese company's expansion in India. At that time Suzuki had made a vague reference to accommodating MUL in the new ventures, as a minority partner.
Point of contention
A minority role for MUL was unacceptable to the Union Government, already stung by the Japanese company's unilateral announcement. Suzuki has a controlling 54.21 per cent interest in MUL. The Government, the co-promoter and at one time an equal shareholder, now holds 18.28 per cent.
The public shareholding is 4.90 per cent and the balance is distributed among institutional investors, Indian and foreign, non-resident Indians and mutual funds.
The Government, which disinvested a large chunk of its equity last year, had then announced its intention to move out of MUL completely. Selling its remaining stake to Suzuki has always been one option, although in the aftermath of the latter's unilateral decision various government spokespersons seemed to suggest that the Government would retain its stake in the foreseeable future.
Even though the issue has been apparently resolved to the satisfaction of both parties for the present, it is worth noting the underlying messages.
Over the years the relationship between the two promoters has not been as smooth as the success of the joint venture would seem to indicate. There have been public spats over the transfer of technology and even over the appointment of a chairman and senior executives.
However, with the big success of the initial public offering that made MUL a star in the capital market, it was believed that all previous acrimony between the partners would be forgotten. After all Suzuki has got into the driver's seat ever so firmly: its nominees are calling the shots in the MUL board and Suzuki could play the technology card more subtly than it did in the past. All these on top of a sterling performance by MUL in the increasingly competitive Indian car market.
A plausible reason
It is only logical to expect that new investments by Suzuki to augment car production or create new capacities for automobile engines would be routed through MUL. The reasons as to why Suzuki thought differently will perhaps be unclear for a long time. Among the theories making the rounds one, having to do with work culture, is intriguing but looks plausible.
By this theory, the Japanese company wants to start greenfield ventures to usher in a new work culture. MUL has had in the past a troubled industrial relations record. During the NDA Government, the company management gained the upper hand and claimed to have introduced new productivity standards.
The proposed new plants will start on a clean slate. Automation, that is increasingly becoming the norm across assembly lines, is possible only when the employees are co-opted into the process.
Even after last Thursday's clarifications, it is evident that Suzuki has stuck to its original proposal in one crucial respect. Its new investments will be routed through Suzuki Metals (Suzuki Engineering).
MUL will get a 70 per cent stake in the car assembly plant and a 49 per cent stake in the diesel engines plant. Should the Government and MUL be satisfied with this? For good measure, Suzuki has thrown in additional sops: a substantially higher figure of Rs. 6,000 crores under fresh investments has been mentioned. That will include investments for a new gearbox plant and an aluminium foundry. All these will be strictly outside MUL's fold. However it is surmised that given the shareholding pattern in the new ventures, MUL may be asked to mobilise large resources.
Constraint on Maruti?
The expectation is that the synergies between MUL and the new operations will be to the mutual benefit. However, it is clarified that MUL will concentrate on small cars while the new assembly line will produce the bigger cars.
Although small cars have been the strength of MUL, it has become clear that it cannot ignore the fast growing C and D segments. Maruti has had a long presence in the C segment through the Esteem but competition here is extremely fierce. Baleno, its other big and more recent car, has not made the expected impact. A big car contributes more to profitability.
Indian buyers are now graduating from the A and B segments to the C segment.
Hence it is intriguing that MUL should be confined to smaller cars. Although definitions on car size may vary, they depend on the price points too; it does not make much sense for Maruti to remain just a small car player.
C. R. L. Narasimhan
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