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Separating Maruti, Esteem

That the government has no business being in the business of making cars is a truism, but that has never been an obstacle when viewed throug...

Written by Sunit Arora |
January 19, 2006

That the government has no business being in the business of making cars is a truism, but that has never been an obstacle when viewed through the prism of the Government of India’s love for carmaker Maruti Udyog Ltd. Now, as the Government looks set to finally drive away from a true pre-reforms success story, one can wonder if letting go needed to be so hard and long drawn out.

As things stand, the Heavy Industries Ministry retains a 10.3 per cent stake in Maruti, which it has now said it will sell at a suitable time. That statement of intent will be tested, for sure, as even today, there are voices that want the Government to retain some stake in the company. Some say this will protect shareholder interest — others feel the company has historical significance, as it all did begin thanks to the wishes of a Prime Minister’s son.

Either way, Maruti has always evoked strong emotions. At a time when manufacturing and consumer successes were rare in India, here was a car company that met and even exceeded consumer expectations with its best-selling dinky Maruti 800.

While the emotional quotient was the backdrop for the numerous spats between the Government and joint venture partner Suzuki Corp, it was always done under the garb of protecting Indian, and, more recently, shareholder interests. As stated often by both the Government and Suzuki, their actions have always been driven by Maruti’s interests.

But that has not always been the case. In 1997-98, when the major face-off took place between the two partners, the company suffered, not only registering a drop in profitability for two straight years , but also registering enervating slippages in all key performance indicators.

Suzuki had objected to the Government appointing RSSLN Bhaskarudu as Maruti’s managing director, arguing that filling up the post was a matter of mutual discussion. The Government disagreed, and the matter even reached the International Arbitration Court. The Government also felt that as Suzuki was not setting up a gearbox plant in the country, this was stalling the complete indigenisation of the Maruti plant — a ridiculous concept considering that India, just few years later, sees itself as a global manufacturing hub.

Ultimately, it took a change of government to sort things out. With an eye on sending the right signal to Japan at a time the nuclear sanctions were at their peak, the NDA government carved out a deal with SMC supremo, Osamu Suzuki. Maruti had what the Managing Director Suzuki wanted — Jagdish Khattar — and it began a strong turnaround.

Khattar’s entry did more than just turn Maruti into a quick-moving and cash-rich company. The former bureaucrat combined this with political savvy in order to tackle egos and ride over another major spark point: negotiations to fix the issue price and the ‘control premium’ for the Government to give way to Suzuki.

Suzuki had already been given 50 per cent shareholding in 1992. Then, a rights issue in 2002 raised Suzuki’s holding to 54.21 per cent. Finally, in a much-hyped IPO in June 2003, the Government got close to Rs 2,000 crore (including the premium) for reducing its stake to 18 per cent.

Less than three years later, the Government has picked up a cool Rs 1,567 crore for its 8 per cent stake — and at a 12.3 per cent premium to the average price over the past three months. That’s five times the price the Government got for its 7.94 crore shares in 2003.

In hindsight, that looks like a classic case of bad timing. But then, in the aftermath of the bitter spat in the late 1990s, Maruti was also on the recovery path. Ironically, it was the Maruti IPO that opened the floodgates for the stock market, and sparked off a boom that continues to this day.

Khattar’s skills on the shopfloor were put to another test barely a year-and-a-half ago, when Suzuki annouced the setting up of a new company to assemble cars under a 100 per cent subsidary. This provoked howls of protests from the Government and later, Maruti was made the dominant partner in the new venture.

Whatever Suzuki’s intention in the future may be, the state must stop equating national interest with Maruti. The ultimate test for Maruti — and its majority owner Suzuki — remains in the marketplace. And Maruti has its work cut out in the fast-moving car market. Most importantly, it is yet to shed its small-car image at a time when the Indian car consumer is increasingly thinking bigger — be it SUVs or sedans.

Assuming that the Government doesn’t let the emotional quotient overtake it one last time, walking away profitably would be the best tribute to a new, confident India.

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