Suzuki set for foray onto Maruti’s turf3 min read . Updated: 28 Nov 2015, 11:10 AM IST
Investors are worried that Suzuki's plan to set up a wholly owned factory will turn Maruti into a shell company
Mumbai/Tokyo: After trust issues doomed Suzuki Motor Corp.’s alliance with Volkswagen AG, the Japanese car maker now has to win over shareholders sceptical of plans for its crucial partnership with India’s largest car maker.
Suzuki wants to set up a wholly owned factory in India and supply cars and components to its 56%-owned unit Maruti Suzuki India Ltd. It’ll have to win over Maruti minority shareholders concerned that plans to have Suzuki focus on production and Maruti concentrate on sales and distribution will sideline the Indian unit.
By investing directly in more production capacity for India, Suzuki is seeking to become a bigger player in its largest market while freeing up Maruti to expand its sales network and build a new premium brand. To pull this off, Suzuki has to build trust after failing to do so with Volkswagen in an alliance originally aimed at expanding their presence in India. The two companies parted ways after a four-year-long dispute ended in September.
“I sense a long-term agenda here of bringing the bulk of production under full control of Suzuki eventually," said Ashvin Chotai, managing director of researcher Intelligence Automotive Asia. “One of the motives for setting up a wholly owned production operation would be to take full control of exports and bypass Maruti completely."
Suzuki expects the bulk of its growth to come from India, which IHS Automotive projects will overtake Japan and Germany by 2020 to become the world’s third-biggest market after China and the US. Suzuki’s confidence stems in part from 45% market share that Maruti commands in the country.
As many as 16 of Maruti’s institutional shareholders protested when Suzuki first put forward plans in January 2014 to set up a wholly owned subsidiary that would build a factory in Gujarat. The plan would convert Maruti “into a shell company" over time, investors including HDFC Asset Management Co., Franklin Templeton Investment Management Ltd and Reliance Mutual Fund said in the letter. The three firms didn’t respond to requests for comment.
The plan has split two of India’s governance advisers, with Institutional Investor Advisory Services India Ltd recommending inventors vote against the deal and Stakeholders Empowerment Services saying its in favour. Balloting results are due on 17 December.
“Suzuki is currently dependent on Maruti, but allowing Suzuki to own the Gujarat plant will shift the balance of power in favour of Suzuki," IiAS said on its website. “If the transaction is approved, Maruti will lose all control over its own destiny, and Maruti’s shareholders will always remain subservient to the interest of Suzuki’s shareholders."
Deven Choksey, managing director of brokerage K.R. Choksey, which owns Maruti shares, disagrees, saying the Suzuki plan has merits and plans to vote in favour of the agreement.
“Some investors are only looking at short-term gain. In the long run, this move makes sense," he said. “This move will help Maruti expand its sales network as competition increases in India."
The plan for Maruti to enter the contract manufacturing agreement with Suzuki is required by Indian law to be backed by 51% of minority shareholders.
Suzuki has said it would invest 50 billion yen ($406 million) in the Gujarat factory that will have an initial annual capacity of 100,000 vehicles, with production starting in 2017. The plant will eventually have capacity to make 1.5 million vehicles after investing 185 billion rupees ($2.8 billion), according to Maruti.
Maruti has tried to assuage shareholder concerns. Chairman R.C. Bhargava said in a telephone interview that “this way, we get a plant for free from Suzuki." The Gujarat factory will produce for Maruti without making a profit or loss, with the additional capacity coming at no cost because Suzuki is providing up the capital investment, he said.
Suzuki will refrain from commenting further on the proposal and wait for the result of the vote, said Ei Mochizuki, a spokesman. The company has said the ultimate goal of its investment is to increase earnings for both companies.
“Suzuki’s direct investment shows how the company is trying to make a breakthrough in India," said Takahiro Kusakari, a fund manager at Sawakami Asset Management, which holds about 450,000 Suzuki shares. “We see it as a new step forward." Bloomberg