I have to say I’m somewhat intrigued by today’s news from India and Japan: Suzuki will build a new car plant of its own to supply Indian affiliate Maruti Suzuki with 100,000 cars a year.
Danged if I can think of another deal quite like it. Today, especially in Japan, it’s not unusual for minicar (Kei-class) specialists – including Suzuki – to supply other domestic automakers lightly restyled and rebadged variations ‘on an OEM basis’.
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Similar arrangements have sometimes extended to larger models – Suzuki’s Vitara rebadged for Mazda; a Nissan station wagon reworked for Mazda, for example. And, here in Europe, we’ve had Hungarian Suzukis rebranded as the Subaru Justy.
When the Japanese were making their first serious export forays in the ’60s and ’70s, it was not uncommon for them to appoint an independent, locally-owned importer/distributor to start with and, if market requirements dictated local assembly, said local firm would either assemble vehicles from knocked-down kits in its own plant, if it had one, or was willing to build one – or simply contract manufacturing out. If sales grew to plan, over time, the Japanese automaker likely would buy into and, eventually, buy out the local distributor plus, where practicable, the local assembly plant(s), establishing wholly-owned local subsidiaries.
This deal is different. Maruti Suzuki, which operates its own assembly and engine plants, is much like one of those early export market independent distributors, though Suzuki Motor of Japan does have a majority (56%) shareholding.
I suspect the Japanese firm – rewarded with a dominant 43% share last fiscal quarter and healthy Q3 and nine-month net profits in a toughening ’emerging’ market – operates in India much as I have seen in other markets: with a relatively light touch. Most management, including chairman RC Bhargava, is local but there are a few expatriate Japanese executives (such as MD and CEO Kenichi Ayukawa) in what are often referred to as ‘liaison’ roles.
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By GlobalDataWhat will make this new factory different is it is the first I can think of that will be built and owned 100% by the overseas-owned parent company, supplying finished cars ‘on an OEM basis’ to its local distributor, Maruti, which, we were told by Suzuki, “will play a role as seller of the vehicles including export from India” thus (according to a local Reuters report) “allowing the Indian affiliate to focus more on product development and marketing”.
Hmmm. I can’t help wondering if Suzuki is more concerned than it has let on by the awful industrial relations at Manesar, one of Maruti’s two existing assembly plants in India. You may recall our numerous reports of the violent rioting, which left one executive dead, and strikes throught the summer of 2012, costing the company over US$250m in lost output, following the breakdown of negotiations over increased pay and Maruti’s widespread use of contract workers. The carmaker sacked 500 people and said it would cease hiring contract workers after the riot.
It also lost US$500m in production during 2011 because of labour unrest, damaging its dominant position in the Indian car market and leading to an 11% fall in annual sales.
Nonetheless, after things quietened down, Suzuki Motor chief executive officer Osamu Suzuki insisted: “We have no intention of leaving just because the incident occurred. India is our second home, after Japan.” He revealed plans to continue expanding production of the highly popular Swift subcompact – which is exported widely – and other vehicles.
It’s possible Suzuki thinks controlling its own plant – albeit still with local workers – using management and production techniques proven in its other domestic and overseas plants, such as the one in Hungary, might work better and avoid a repeat of the 2012 nastiness. Alternately, it might simply be wanting to help Maruti with its ambitious expansion plans, largely on hold since the domestic market tanked, by shouldering the high cost of a new 100,000-unit plant.
Maruti’s board, for its part, said in a statement that “the time was now appropriate to expand production facilities in Gujarat. It approved implementing the expansion through a 100% Suzuki subsidiary because it would result in substantial financial benefits to MSIL, and its minority shareholders.”
Maruti would receive all production, the price of the vehicles would include only the cost of production actually incurred by the subsidiary plus just adequate cash “to cover incremental capital expenditure requirements” and “the return on this investment for SMC would be realised only through the growth and expansion of [Maruti]’s business. [Maruti] would financially benefit from the interest earnings resulting from not investing its money in this project [and] would also benefit because the vehicles would be sold to MSIL by the Suzuki subsidiary without any return on capital employed.”
In addition: “[Maruti] would be able to avoid all risk inherent in any investment [and] would also retain the option of investing its own funds for strengthening its marketing network, product development, R&D and any other opportunity of growth or building strength for market leadership.”
Whatever the reasons behind this strategic move, it’ll be interesting to see how it all works out. Getting sales back on track, while avoiding any repeat of 2012’s factory nastiness, is sure worth a try.
