Disclosing details in an investor presentation, SMC said it would set up a 100 per cent subsidiary, Suzuki Motor Gujarat (SMG), to make cars on a strictly no-loss, no-profit basis for Maruti Suzuki (MSIL). SMC intends to fund this expansion with own equity and accumulated depreciation.
MSIL said it could earn Rs 10,500 crore from the savings on investments not made in Gujarat, assuming a post-tax annual return of 8.5 per cent during the first 15 years of the contract with its parent company.
"The skill and capacity to manufacture cars is by no means enough to differentiate between car companies. Market research, product design and development, sales and service, spare parts distribution and brand building are perhaps even more important. All these functions would be with MSIL and adequate resources would be available to strengthen these activities," it said.
The additional funds available with MSIL will be used to strengthen its marketing and sales infrastructure, research and development, and foreign market penetration.
SMC put on record that Suzuki Motor Gujarat woud not generate any profits or losses at the end of a financial year. If this manufacturing company does generate profit or any interest thereon, it will be utilised in reducing the prices of the products to be supplied to MSIL during the immediately following financial year.
When MSIL first disclosed its Gujarat plan, it had said further expansion at this new plant (beyond the initial investment by SMC of Rs 3,000 crore) would be funded through incremental capex cost' or a mark-up, to be over and above the cost of production of vehicles. And, this was to be borne by Maruti Suzuki.
This arrangement had met stiff resistance from mutual fund managers and insurance houses holding stake in the company. They contented the deal was "value erosive" for Maruti Suzuki and unnecessary. The new plant will eventually have a capacity of 1.5 million units annually, the same as the total capacity of its existing plants at Manesar and Gurgaon in Haryana.
Similarly, if there is loss at SMG, it will be compensated by an increase in sale price to MSIL during the immediately following financial year, said the presentation note.
SMG shall continue to supply the spare parts for the model of any vehicle even after MSIL officially decides to discontinue the production of such a model. The definite date of the discontinuance of supply of the spare parts shall be separately negotiated and agreed between the parties.
Benefits to SMC due to the arrangement highlighted that it would be much higher' than the return the company would have if investments were made in other options'. The Japanese company stands to benefit from generation of additional profits at MSIL from the incremental sales achieved by sale of products manufactured by SMG. More, additional other income generated by MSIL on investment expenditure at Gujarat saved by MSIL would also benefit SMC.