Suzuki Motor has announced plans to spend JPY50bn ($486.3m) on a new 100,000-unit car plant in India to supply Maruti Suzuki India on an OEM contract basis, allowing the Indian affiliate to focus more on product development and marketing.
The project will create Suzuki’s first wholly owned car plant in India and output could be expanded beyond the initial planned 100,000, Suzuki said in a statement. It owns 56% of Maruti, India’s biggest carmaker, which had a market share of around 43% at the end of December.
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Start of production will be during 2017. “Capacity will be increased gradually. SMG will enter into a contract manufacturing agreement with Maruti Suzuki India (MSIL) and MSIL will play a role as seller of the vehicles including export from India,” the statement said.
The plant will be built in Gujarat where Maruti purchased land in 2012 to expand its own facilities. As just-auto reported last August, Maruti decided to delay construction, citing a slowdown in the local market.
The proposed new factory, which was to have been erected in Mehsana, would have been Maruti’s third wholly owned car manufacturing complex. Its Gurgaon and Manesar plants are in the northern state of Haryana.
“It is unlikely we would commission the unit in Gujarat by the end of 2015-16. The slowdown in the automobile sector is very acute,” Maruti chairman RC Bhargava said at the time.
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By GlobalDataMaruti will benefit from not having to make the investment itself and thus avoiding “all risk inherent in any investment”, a Reuters report said.
Analysts told the news agency the move was unusual for Maruti and expressed some concerns that sourcing vehicles through the Suzuki unit instead of making them itself would hurt Maruti’s margins.
The news reduced Maruti’s stock price 8%, its biggest fall in a year and a half, while the main Mumbai market fell 0.1%.
“It’s positive in the near term for Maruti Suzuki because cash is getting conserved,” Rohan Korde, an analyst with Anand Rathi Securities, told Reuters.
“But in the longer term once the plant’s operations start, then EBITDA (earnings before interest, tax, depreciation and amortisation) margins may be hurt because this is contract manufacturing being done by Suzuki’s subsidiary.”
The new plant will sell cars only to Maruti under the deal at a price that will include production costs plus enough cash to cover further capital expenditure requirements, Maruti said.
The company sought to allay worries over the impact on its margins from the Suzuki deal.
“The fact is that when Suzuki puts money into the Gujarat project and sells the cars to us on the basis of the pricing which I have described, our profit on the sale of those cars would be exactly the same as it would have been if we had made the cars,” Maruti chairman RC Bhargava said.
“In addition to which my money, which I would have invested, remains available to me, and so I can use that money to earn additional money out of that.”
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