Investors in doubt as to why Maruti not investing in Gujarat

Following the decision taken by Maruti Suzuki India to let parent company Suzuki Motor Corporation own the upcoming plant in Gujarat, the company stated that it will enter into a Contract Manufacturing Agreement (CMA) with Suzuki Motors Gujarat, a fully owned subsidiary of Suzuki Motor Corporation of Japan.

Investors in doubt as to why Maruti not investing in GujaratThis move of not investing, might allow Maruti Suzuki to save about INR 10,500 crores in the first 15 years. The CMA will be valid for a period of 15 years which will then be extended for another 15 years under agreement of both parties. The earnings on investment not resorted to by Maruti Suzuki will continue for extended period of the CMA as well.

In the meantime, Maruti Suzuki is planning an investor road show to explain to both investors within the country and abroad, this move to let parent company Suzuki Motor Corp own the proposed Gujarat plant. Top level management will be meeting with investors from US, UK, Asia and India to explain this strategy.

The road show will commence from mid June and will continue to mid August after which a process of voting by shareholders will commence. The Gujarat plant which could be Suzuki Motor Corporation’s first fully owned plant in the country is being planned with initial capacity of 1,00,000 units per year which will be supplied to Maruti Suzuki India Limited.

maruti-suzuki-gujarat-plant-site-photos-hansalpur-becharji-mehsana-0024Apart from the expected savings on paper, it is now reported that there in an operational complexity as far as Maruti allowing Suzuki to own full stake in Gujarat plant. As per Institutional Investor Advisory Services (IiAS), Suzuki already has the upper hand in Maruti Suzuki, and with this new set-up, the balance of power will tilt even further to the Japanese company. This has left investor’s wondering why is Maruti allowing Suzuki to take full control of Gujarat plant.