Suzuki, Honda get the royalty treatment

Suzuki, Honda get the royalty treatment
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First Published: Tue, May 05 2009. 10 07 PM IST
Mumbai: Record sales at Maruti Suzuki India Ltd and Hero Honda Motors Ltd have led to windfall royalty earnings for their parent firms in Japan.
India’s top car maker Maruti Suzuki, which sold 792,167 cars in the fiscal to 31 March, paid Rs685 crore in royalties to Suzuki Motor Corp., 38% more than the Rs495 crore it paid a year earlier.
The country’s largest two-wheeler maker Hero Honda, which sold 3.72 million units, paid Rs324 crore to Honda Motor Co. Ltd, up 17.3% from the previous fiscal’s Rs276.6 crore.
Of the auto makers in the Indian market, only Hero Honda, Maruti Suzuki, Tata Motors Ltd, Hindustan Motors Ltd and Mahindra and Mahindra Ltd are listed entities and disclose royalty information.
In an emailed response, Soni Shrivastav, spokeswoman for Hindustan Motors, said, “We cannot disclose the internal arrangements.” Tata Motors’ spokesman Debasis Ray said his company doesn’t pay any royalty.
According to its annual report for fiscal 2008, Mahindra and Mahindra’s royalty payments came to Rs6 lakh. It has not yet readied its figures for 2008-09, a spokesperson said.
“All car makers in India pay royalties to the companies they are sourcing technologies from within the regulatory framework,” said Gurgaon-based Pankaj Chadha, director, automotive practice, at consulting firm Ernst and Young. “The amount is ascertained by the level of technical assistance sought for a particular model introduced in the Indian market.”
Indian law does not allow the royalty fee to exceed 5% of net sales.
Royalty payments also depend on volumes and product mix, since royalty rates differ by product models.
Higher sales of a model that has a lower royalty percentage will drag down overall payments to the principal, and vice-versa, said Ravi Sud,chief financial officer at Hero Honda.
I.V. Rao, Delhi-based chief executive, research and development, Maruti Suzuki, said a change in the product mix and newer models contributing more to overall sales had pushed up its royalty payments. Maruti Suzuki launched a new sedan, Swift DZire, and a hatchback, A-Star, in fiscal 2009. Mint could not ascertain how much these two models contributed to the total royalty paid.
While royalties are built into the retail price, Indian partners typically do not mind the 4-5% as technology fee as it helps them reduce lead time on new models. “It helps them pursue the aggressive sales push with new models in a very short span of time,” said S. Ramnath, vice-president, research, at Mumbai-based brokerage IDFC-SSKI Securities Ltd. As companies try to diversify offerings with models that use the latest technologies, such payments will likely only increase.
“This is because of the necessity to launch new models coupled with lack of local technical capabilities,” said Chadha. “If you look at the technology outflows today, a larger chunk of it continues to be shared between the US, Japan and Germany. This will continue till the time you have more Nanos (developed by Tata Motors) or locally developed technologies.”
For example, in the just-concluded fiscal year, Hero Honda’s highest selling model was the 100cc Splendor, which has the lowest royalty fee. So, while such payments increased in rupee terms, they declined marginally as a percentage of net sales.
For the year, Hero Honda’s royalty as percentage of net sales was 2.62%, or 0.5% less than the previous fiscal. Maruti Suzuki’s was 3.3%, about 0.5% more than the preceding accounting year.
shally.s@livemint.com
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First Published: Tue, May 05 2009. 10 07 PM IST