Suzuki could start paying royalty to Maruti

High royalty payments by the countrys largest passenger car manufacturer Maruti Suzuki to parent Suzuki Motor Corporation of Japan could soon become a thing of the past. With growing efforts to develop a technology hub in India,which would be up and running by 2015,the opposite is set to happen,when the Japanese firm starts paying royalty to Maruti.

High royalty payments by the countrys largest passenger car manufacturer Maruti Suzuki to parent Suzuki Motor Corporation of Japan could soon become a thing of the past. With growing efforts to develop a technology hub in India,which would be up and running by 2015,the opposite is set to happen,when the Japanese firm starts paying royalty to Maruti.

Maruti Suzuki chairman RC Bhargava told FE that once Suzuki starts sourcing technology from the companys R&D centre at Rohtak,the trend may reverse. There is logic in Suzuki Motor paying a royalty to Maruti…the issue is bound to be addressed at an appropriate time. However,theres no point discussing something that will come up in 2015, Bhargava added. The R&D centre is planned to be a hub for Suzukis global operations.

The issue of royalty and the possibility of Maruti demanding it from Suzuki in the future attracted the attention of analysts on two recent occasions. The first was during the first quarter when Marutis net profit declined 20% on account of higher royalty payout to Suzuki. It paid a royalty of Rs 188.70 crore or 5.9% of its total revenues during the quarter. This included some arrears too,which were on account of the royalty being revised because the government has removed the cap of 5% on sales in domestic market and 8% on overseas sales. This enabled the Japanese parent to revise royalty rates.

Currently,royalty and other technical payments constitute the second largest cost head for Maruti after raw materials.

The second instance came when days after Maruti showed a decline in its earnings,parent Suzuki in its April-June quarter earnings reported an over seven-fold jump in net profit at Rs 814 crore. The higher profits were on account of a significant jump in sales from Maruti Suzukis refreshed WagonR and Swift.

Abdul Majeed,auto analyst with PricewaterhouseCoopers said that since leading global OEMs are looking to make India their R&D hub due to the cost effectiveness,Indian companies could soon start demanding royalty for their technology.

The technology hubs are slowly shifting from developed countries to the developing countries. In the medium to long term,India and China are going to become R&D hubs for several global automakers…in case of Maruti,they are going to expect a royalty from the parent firm, Majeed said.

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The R&D centre coming up at investment of Rs 1,500 crore is going to be Suzukis first R&D centre outside Japan. Spread over 700 acres of land,the first phase of the project is estimated to be completed by 2012. The company had stated in August 2009 that Maruti Suzuki is going to design and roll out a car that would be totally developed here.