Why Suzuki should sell stake

It’s not difficult to see why. Apart from what the fight between Suzuki and the government is doing to the company’s image and staff morale, the fact is that Maruti does not have a single model on the anvil which can tackle the new and stringent emission norms which will be in force from the year 2000. More important, each one of its existing models will be outdated in a couple of years even new models like the Zen will be seriously challenged by the new cars in the market. The Zen, for example, gives a brake horse power (BHP) of 50 on a 1,000 cc engine as compared to the 52 BHP which the 800cc version of Daewoo’s small car will offer next year.

Given the fact that it usually takes at least 3 years to develop new models of cars, clearly this is the time that Maruti needs to be deciding on the new models. Equally clearly, with the government — and yes, it is the government which runs Maruti, not the company’s board — refusing to enter into any discussions with Suzuki nominees, no such planning for the future is possible.

So why is the government refusing to talk to Suzuki, and why is it saying that Suzuki is welcome to walk out of the joint venture?

More so, when it is very clear that the joint venture agreement with Suzuki does not allow it to have its nominees as both chairman and managing director this is one of the points Suzuki is objecting to. The issue about whether the government requires Suzuki’s concurrence before appointing a managing director — in this case, R.S.S.L.N. Bhaskarudu — is, of course, the one under dispute and will be decided by the arbitrators in London.

The crux of the government’s case — never formally stated, though, with the government preferring to use innuendo and leaks in the press — is that Suzuki has been siphoning off funds from Maruti through over-invoicing of supplies. It has been alleged that Suzuki, for example, is not indigenising the Maruti fast enough so that it can make money on the components. Evidence of this, it appears, is the `fact’ that the government has ensured a saving of Rs 300 crore by insisting on global tendering for new equipment for Maruti’s expansion project.

Suzuki, however, put out an advertisement in the national dailies on December 1 rebutting all the allegations. And while the government has not responded to the ad so far, it is unlikely to have an answer to the fact that, for example, at 95 per cent, Maruti’s indigenisation is probably the highest for any car plant in the world. No, even the Hondas and the Toyotas of the world don’t have this kind of indigenisation in most of their overseas plants. In fact, most automobile companies prefer to buy certain components from outside suppliers, even in their own home ground — it just makes more economic sense. Interestingly, the maximum indigenisation level that even the government’s own new automobile policy insists on is just 70 per cent.

The much-talked of gear box, in fact, is a wonderful example of how it doesn’t make economic sense to go in for local manufacture of every part a grouse against Suzuki has been that they refuse to produce gears in the country. First, at Rs 5,000 a gear-box that’s what Suzuki charges Maruti the value-addition that Maruti can get from producing this locally is surely very low. Second, since a gear-box plant is capital-intensive and typically needs large production volumes to be economically viable, few automobile companies make this in every country they produce cars in. Daewoo, for instance, is producing gears in India, but will also be exporting half of these to other countries.

Suzuki also debunks the statement made by a senior government official a few months ago, on the Rs 300 crore of `savings’ — this figure, apparently, has been extrapolated from the savings of Rs 107 crore made on orders placed so far, of Rs 380 crore. Except, Suzuki’s ad says, the government forgot to mention that Rs 42 crore of this was due to the appreciation of the rupee against the yen — this will obviously have changed considerably now — or that global tendering has always been part of the practice followed at Maruti.

The point is that if what Suzuki says is true, the government will find it very difficult to justify its actions so far. For while none of the allegations have been made formally, the justification given is that the government is simply trying to prevent Suzuki from `milking’ the company. It would be interesting to see if the government is willing to contradict the claims made in Suzuki’s advertisement. Chances are, however, that it won’t, but will continue to use its brute force to kill one of the few Indian automotive success stories.