Betting on the long-term potential of the Indian market, Suzuki Motor Corporation of Japan on Tuesday decided to take over the setting up of a plant in Gujarat proposed by subsidiary Maruti Suzuki India.
Suzuki Motor Corporation (SMC) will invest in the plant through wholly owned unit Suzuki Motor Gujarat Pvt Ltd (SMGPL), which will manufacture vehicles exclusively for Maruti Suzuki India (MSI). "Four-wheeler passenger vehicles and components will be manufactured at the Gujarat plant. The new company will manufacture vehicles only for Maruti Suzuki," SMC Chairman and CEO Osamu Suzuki told reporters in Delhi.
MSI announced in 2012 plans to invest Rs 4,000 crore to set up its third plant on a 700-acre site near Mehsana by 2015-16 with a capacity of 2.5 lakh units in the first phase. Last year, the company said the plant had been delayed due to the slowdown in the automotive market.
The decision to change the plant ownership was approved by the boards of SMC and MSI, in which the Japanese firm held a 56.21 per cent stake on December 31.
SMGPL will produce vehicles in accordance with MSI's requirements and sell them at a price that would "include only the cost of production plus adequate cash, net of tax, to cover incremental capital expenditure requirements." Suzuki said the move will be a win-win situation for both SMC and MSI and would allow the Indian arm to focus on its sales and service network.
"Maruti can invest surplus cash in expanding marketing network...The current network can do 1 million units, but it it has to increase to 1.5 million or 2 million. It needs to be doubled," Suzuki said. SMC can extend "co-operation in production" so that Maruti can focus on the network, he added. "Suzuki Japan, Maruti Suzuki and Suzuki Gujarat will form one group and the benefits will be shared between the three partners," Suzuki said.
Another reason for SMC to own the Gujarat plant was the 'distance' between Gujarat and Haryana, where MSI's plants are located. Setting up a new company to look after production was considered better because most of MSI's current employees don't speak Gujarati, Suzuki said.
"Our capital will be available for investing on other purposes like strengthening sales and marketing, research and development," MSI Chairman RC Bhargava said. "At the same time, the vehicles will be sold to MSI by the Suzuki subsidiary without any return on capital employed."
Investors, however, did not take the development positively. MSI shares tanked 8.12 per cent to Rs 1,563.20 at the close on the BSE.
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