Maruti Suzuki Case Study

Maruti Suzuki, the Indian subsidiary of the global automaker Suzuki Motor Corporation and India’s largest automobile player, announced a new business model in January-2014 wherein the planned manufacturing facility in Gujarat will be built and operated by the wholly owned Indian subsidiary of Suzuki Motor Corporation,Japan and manufacture cars exclusively for its Indian subsidiary Maruti Suzuki India Limited (MSIL). The decision comes on the back drop of the parent company sitting on a cash pile of Rs.25,000 crore and getting negligible interest due to Zero interest rate policy in Japan and the fact that Asia contributes almost 64% of the international revenues generated by Suzuki Motor Corp outside Japan which is driving the parent company

On the face of it, the decision leads to zero capital investment for Maruti Suzuki in the new Gujrat plant which is expected to run to the tune of Rs.3000 crore till FY2017, and generate higher sales and profits in the current capital structure. The arrangement will lead to buying vehicles on a cost plus basis from the new subsidiary and the cost will be added with the cost of capital invested and reserve for expansion by the manufacturing entity. As Maruti Suzuki is the leading player in the segment the return on investment for Suzuki Motor Corporation will be higher compared to the royalty of 5.87% of the sales that is shared with the parent company currently. This new model will add up the dividend factor from the new entity to the already existing royalty fee to the parent company from the Indian operations which is currently flat but looks bullish on a long term perspective. The fact of the matter is also that Maruti Suzuki has a cash pile of Rs.7,000 crore which can be moved to build the factory in Gujarat, if looked from a long term perspective for growth and higher margins for the business as it will not take more than 3-4 years to recover the capital involved in the new

The concerned investors have already reacted with major investment companies meeting the leadership to take the decision back in the case of Maruti Suzuki and invest the already existing cash pile with the Indian subsidiary. The case in discussion is also not accepted across the board by investors that the new subsidiary is not for profit and will sell vehicles at the rates similar to Maruti Suzuki manufacturing cost and is just a move to invest in better prospects by the parent company and not a standalone profit centre which leads to the question as why doesn’t the parent company provide soft loan to the Indian arm for putting this facility in first place than create a 100%