Language fixation: Why Suzuki is taking over Maruti’s Gujarat plant

When in Rome, do as Romans would, goes the saying. Well, Suzuki Motor Corp chairman Osamu Suzuki seems to have a lot of faith in this saying. His largest operation outside Japan, Maruti Suzuki India, has been talking of setting up a new manufacturing plant in Gujarat but Osamu wanted to know how prepared Maruti employees were for this. After all, it is the first facility of the company outside Haryana and is about a 1000 km away. Will Maruti and its employees be able to manage this? So when 10 employee union workers from Maruti’s Manesar plant visited Suzuki’s Hamamtsu offices late last year, Osamu asked them if they could speak Gujarati. None of them could. During his current visit to India, Osamu discovered that none of Maruti’s 40 top managers could speak the language either. Only one independent director on Maruti’s board could converse in Gujarati and of employees at General Manager and below, less than 10% could. [caption id=“attachment_1305351” align=“alignleft” width=“380”] Reuters[/caption] Well, inability to converse in the language of the state where a new facility is coming up seems to have played no small a part in Suzuki’s surprise announcement today about setting up a completely new company, separate from Maruti, to house the Gujarat plant. But investors in the Maruti Suzuki scrip have not taken kindly to this sudden turn of events. Maruti shares fell by almost 10 percent today because Japanese parent SMC is establishing a new, 100 percent arm outside Maruti. Maruti is already 56 percent owned by SMC, is listed on Indian bourses but the new company will be wholly owned by SMC and will remain unlisted. It will house the Gujarat manufacturing facility, which till now was under Maruti. The new facility will need at least Rs 3,000 crore investment and will be called Suzuki Motor Gujarat (SMGPL). So why did investors think it is bad idea for Suzuki to set up a wholly owned arm with direct control in India? Maruti chairman R C Bhargava says this decision will help Maruti double its return on equity and return on capital by 2018. Ten things you need to know: 1) SMGPL will house manufacturing facility with capacity of up to 7.5 lakh units a year, equal to the current individual capacities of the Manesar and Gurgaon plants of Maruti 2) It may need Rs 3000 crore investment and will come in stream by 2017. 3) Initially, only one lakh units will be made here. Startup capital for SMGPL is Rs 100 crore and will become operational by April 1 with its headquarters in Ahmedabad. 4) It will make cars only for Maruti, will not sell to anyone else. 5) Cost of the cars from this plant to Maruti will include only cost of production actually incurred plus adequate cash to cover incremental capital expenditure needs. So net cost of acquiring cars for Maruti should fall. 6) Maruti is sitting on Rs 7500 crore cash (net of taxes) and will be able to park these funds at higher interest rates or use them for expansion instead of pouring money into Gujarat 7) O Suzuki categorically denied any plans to increase stake in Maruti for now, now that his company is setting up a wholly owned arm. 8) New company will have no role in future product developments for Maruti, which will continue to happen in collaboration with SMC at the Rohtak facility 9) Through SMGPL, Maruti gets access to cheaper cars while retaining cash pile. Suzuki gets to park funds in India where rates of interest are far better than in Japan 10) Headquarters of SMGPL to be in Ahmedabad, it will have its own Managing Director and people at key positions who will all report to SMC.