New Delhi: Maruti Suzuki India Ltd plans to tap its cash reserves of more than ₹30,000 crore to absorb the bulk of capital costs of its dealers as the nation’s largest carmaker moves to maintain dealer profitability, crucial for preserving its pole position in the world’s fastest growing major car market.
Some of Maruti’s new showrooms would be owned by the firm and leased out to dealer partners, three people aware of the development said, requesting anonymity. The auto maker would incur the capital expenditure for establishing them, while the dealers would bear the operational expenses, the people said.
Maruti Suzuki cars are retailed via Arena and Nexa dealerships across India.
Dealer margins on cars across India have been squeezed as modern vehicles need less frequent repairs and servicing. The new plan aims to boost the financial strength of Maruti’s dealer partners as competition is expected to intensify from existing and new companies.
Maruti plans to gradually grow the number of such dealerships. An internal study by the company has forecast the need for more than 100 new dealer partners for Maruti to sustain its 50% share of the Indian market by 2030. Each dealer partner typically runs more than one showroom.
This is because existing dealers may not have the financial muscle to sustain large capital investments. Real estate and other establishment costs in most of the metro and Tier I cities have become inordinately expensive, said the people cited earlier.
Suzuki Motor Corp.’s most profitable unit also planned to own real estate for its regional offices similar to its headquarters in New Delhi, the people said.
Maruti spokespersons did not respond to emailed queries sent last week.
At present, expenses incurred by dealers include rentals, creating showroom interiors and vehicle workshop. Excluding rentals, it costs ₹5-6 crore in major cities to open a dealership. Maruti currently has about 2,400 dealerships or showrooms.
“The huge cash reserve of the company cannot be used in a better way than acquiring prime real estate, whose value usually never comes down. Maruti has also invested in buying land parcels across the country for building stockyards and dealerships," said one of the three people.
Maruti, the only cash-rich four-wheeler maker in India, first announced in FY17 its plans to buy land for expanding its dealer network and for other purposes. In FY18 as well, the company earmarked a portion of its capital expenditure (capex) for buying land.
Maruti now plans to alter its strategy and invest in setting up dealerships instead of just purchasing land, as dealers, especially in big cities, often complain about the rising costs of operations.
Avik Chattopadhayay, founder of brand consultancy firm Expereal, said investing in real estate is an efficient way to build wealth.
“For a company with cash reserves like Maruti, investing in real estate makes sense and this has been the strategy for quite sometime now," he said. “Also, they need to expand dealerships if they have to remain the dominant player since the competition is going to be intense in the next decade. Owning their own office spaces has always been on the agenda of the top management and that’s the reason why the company decided to shift to the Vasant Kunj-based headquarters."
The third person cited earlier said Maruti’s decision would please its dealers. “For an individual dealer, in any of the major cities, ₹5-6 crore is the minimum investment. So Maruti’s model is a win-win for both the company and the dealers," added the person.