Institutional Investor Advisory Services India Limited 15 th Floor, West Wing, Dalal Street, Fort, Mumbai – 400 001 Phone +91 22 22721570 - 3 Fax: +91 22 2272 1574 www.iias.in CIN: U74990MH2010PLC204788 An open letter to the shareholders of Maruti Suzuki India Limited Allowing Suzuki to own the Gujarat plant and its manufacturing has implications that extend beyond commercial arrangements. Suzuki is currently dependent on Maruti, but allowing Suzuki to own the Gujarat plant will shift the balance of power in favour of Suzuki. If the transaction is approved, Maruti will lose all control over its own destiny, and Maruti’s shareholders will always remain subservient to the interest of Suzuki’s shareholders. Equally important are the implications of such transactions on other family-run and MNCs in India – they too may begin manufacturing in unlisted companies and allow the listed company to merely trade. 24 November 2015 Dear Shareholder: For a company with as strong a manufacturing track record as Maruti has, to willingly cede ground to another manufacturer should be anathema - yet this is just what your company is proposing, by allowing Suzuki to own the Gujarat plant. Make no mistake, this vote is about the shifting power equation and whether shareholders will allow a manufacturer to continue to ‘manufacture and sell’ or let it shift gears, and ‘buy to sell.’ To put it simply, you - the shareholders of Maruti - need to decide whether Maruti will continue to remain a manufacturer of cars or will it become a glorified distributor. Equally important are the implications of this vote on family run firms and on other MNC’s. If shareholders agree to Suzuki doing owning the Gujarat plant, why should they not agree to the Tata’s, Munjal’s, Mahindra’s or the Bajaj families proposing the same? Will Glaxo or Nestlé or Holcim now set up fully owned subsidiaries and have their Indian arm only market the products? If so, it will spell doom for the Indian equity markets. About Maruti and this vote Your company, Maruti currently has two facilities - in Gurgaon and in Manesar - which have a combined capacity to manufacture 1.55 mn cars. Your company planned to expand its capacities by setting up a third plant in Gujarat (1,500,000 cars annually – to be set up in a phased manner). However, in early 2014, Maruti took us all by surprise when it announced that, Suzuki (and not Maruti) will set up and own the Gujarat plant. Suzuki will manufacture the cars in Gujarat that will be purchased by Maruti at cost and be sold under the Maruti product portfolio.
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Institutional Investor Advisory Services India Limited 15th Floor, West Wing, Dalal Street, Fort, Mumbai – 400 001
In order to execute this arrangement, your company now proposes to enter into two related party
transaction contracts with Suzuki Motor Gujarat Private Limited (SMGPL), a wholly-owned
subsidiary of Suzuki Motor Corporation (Suzuki), and as required by the Companies Act, 2013, is
seeking your approval for the following transactions:
i. Contract Manufacturing Agreement for manufacture and supply of vehicles for an initial
period of 15 years. All goods will be sold at cost by SMGPL to Maruti with no profit or loss for
SMGPL.
ii. Lease Deed for developing the plant on land owned by Maruti. As per the deed, SMGPL will
pay Maruti an annual aggregate rental of Rs.49.9 mn for the land an initial period of 15 years.
IiAS recommends that you vote AGAINST the resolution. Voting AGAINST this resolution
means that Maruti will own the Gujarat plant and not Suzuki – it will not result in any stoppage of
capacity creation at the Gujarat plant.
IiAS has had reservations about this deal since it was first announced in January 2014 and
continues to believe that the deal is not in Maruti’s long term interest. Our main contentions are:
Suzuki is squarely dependent upon Maruti for sales volumes and profits; owning the
Gujarat plant will limit Maruti’s growing criticality to the group
Suzuki is largely an automobile maker1; automobiles contributed to 89.5% of consolidated
revenues and 95.5% of (segment) profits in 2014-15. Suzuki’s automobile growth, and effectively
the company’s entire growth, over the past 15 years has emanated largely from Maruti’s growth.
Japan volumes have been almost flat and volumes in ex-India ex-Japan markets have also
reported limited growth. Maruti’s sales (including exports) accounted for 45% of Suzuki’s global
volumes and Maruti’s production accounted for 43% of Suzuki’s total automobile production
volumes in 2014-15. India, which is catered to solely by Maruti, has grown almost three times
faster than Suzuki’s sales volumes in Japan and the rest of the world (ex-India ex-Japan).
1 Other products include motorcycles, and marine and power products
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 3 of 14
Chart 1: Volume growth in Indian markets (and Maruti) drive Suzuki’s automobile sales
growth
Source: Company Annual Reports, IiAS Research
Chart 2: India is Suzuki’s single largest market, larger than Japan
Maruti’s profit level was over 50% of Suzuki’s (pre-minority interest) in 2014-15 (See Table 1
below). Moreover, Maruti’s margins have been consistently higher than those reported by Suzuki.
On a consolidated basis, in 2014-15, Suzuki reported net margins (after minority interest) of 3.2%
against Maruti’s 7.7%.
India41%
Japan26%
Other Markets
33%
based on 2014-15 automobile sales volumes
Maruti domestic sales volumes
Suzuki's automobile sales in Japan
Suzuki's automobile sales in ex-India ex-Japan markets
An open letter to the shareholders of Maruti
Suzuki India Limited
Page 4 of 14
Chart 3: Maruti's EBITDA margins are higher than those of Suzuki
Source: Company Annual Reports, IiAS Research
Table 1: Maruti’s profit levels drives Suzuki’s global size
2010-11 2011-12 2012-13 2013-14 2014-15
Suzuki Motor Company, Japan (Consolidated) Net sales $ Bn 31.37 16.83 27.41 28.55 25.09 Net income before minority interest (A) $ Bn
0.78 0.78 0.97 1.24 1.06
Net income before minority interest margin %
2.5% 4.6% 3.5% 4.3% 4.2%
Maruti Suzuki India Limited, India (Consolidated) Net sales Rs. Bn. 366.11 351.97 432.16 432.72 492.95 Profit after tax, but before minority interest (B) Rs. Bn.
23.07 16.34 24.49 28.32 37.91
Profit after tax, but before minority interest margin %
management was supportive, as was the government, it was the Indian management that ensured
that Maruti became the company it did, and in the process put India on the global auto map.
Suzuki has not seen this degree of success in any other market, not even in Japan, its home
market. With Maruti’s phenomenal success, it became critical to the group. Therefore, establishing
greater control over Maruti became equally critical. Suzuki first attempted to control Maruti by
wanting to own the Manesar plant. This decision was opposed by many Maruti executives,
including Mr. R C Bhargava – it was, in fact, Mr. R C Bhargava who convinced Osama Suzuki to
revise this decision. The decision to set up the Gujarat plant under Suzuki rather than Maruti
continues to reflect Suzuki’s need to establish greater ownership over Maruti. IiAS continues to
ask – what has changed now?
Going forward, Maruti’s one-sided dependence on Suzuki’s technical support will reduce
Maruti has benefited from Suzuki’s technical support in the past, but this will no longer be a one-
sided relationship. Over the past three years, your company has invested an average of over
Rs.3000 per car (produced) in R&D efforts: capital expenditure aggregating Rs.10.14 bn and
another Rs.8.14bn in revenue expenditure. Maruti’s R&D efforts have supported the launch of new
models and variants, new feature developments and fuel efficiency improvement efforts in the
recent past.
Table 2: Maruti’s R&D spends have increased over the past five years
Year Production Volumes
R&D Revenue expenses
R&D Capex R&D Capex Amortization
R&D spend per car produced
Nos Rs. Mn. Rs. Mn. Rs. Mn. Rs. A B C D E=(B+D)/A
2005-06 572,127 396 692.2
2006-07 667,048 536 803.5
2007-08 777,017 379 259 24 518.1
2008-09 774,738 666 244 46 918.7
2009-10 1,027,879 1,110 623 102 1,179.5
2010.11 1,273,361 1,847 2,316 313 1,696.2
2011-12 1,134,607 2,226 1,491 448 2,357.2
2012-13 1,168,917 2,533 2,613 686 2,753.8
2013-14 1,153,645 2,265 4,311 1,078 2,897.7
2014-15 1,308,446 3,340 3,220 1,371 3,600.2 Note: R&D capex amortization has been assumed at 11-year straight line method. Maruti depreciates its plant and machinery on a straight line basis using an estimated life of 8-11 years. Source: Company Annual Reports
The Rohtak R&D facility (Suzuki Group’s first R&D centre outside Japan) is expected to be fully
functional by the end of the current fiscal. Among other facilities, the Rohtak R&D facility is
expected to aid in testing and validating products to meet new regulations regarding safety and
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