The Hindu Business Line : We are making the right moves: Khattar

ASK Maruti Udyog's (MUL) Managing Director, Mr Jagdish Khattar, if the company's proposed investments and the increasingly competitive car market could conspire to keep MUL in a high cost environment over the next few years, and he quips, "Tell me, is not some depreciation good?"

For MUL and its wide product range, he argues, cost impact in one area can be offset by gains in another. In September, the company was committed to two major investments, a 70 per cent stake in a joint venture with Suzuki to assemble cars and higher outlay by Suzuki Metals India, an existing 51:49 joint venture between Suzuki and MUL, to set up a diesel engine manufacturing unit.

The investments coincide with the recession of one promise and the marginalisation of benefits from another, both made during MUL's IPO.

"While royalty waiver on select models will continue, special concession on import of certain components promised by Suzuki at the time of IPO, for two years, expires in March 2005. If these concessions were to be withdrawn, margins of MUL would get affected," ENAM Securities noted in its October report.

Further, even as royalty waiver may have shored up realisations for MUL, the models - Maruti 800, Zen, Esteem, Gypsy and Omni - are old (the Zen and Esteem were given a face-lift in-house) and not exactly models for the future. Volume builders for the years ahead could be models requiring royalty outgo, an example being the Alto, already neck to neck with the 800 in sales.

In the first eight months of FY05, the two models accounted for 50.84 per cent of MUL's total domestic sales of 3,11,748 units, the royalty-free 800's lead being a slender 2,414 units.

Mr Khattar maintains Suzuki's demands on royalty are modest compared to other players in industry. And, the same way falling direct margins get averaged out in the overall car market play; there are more avenues of dealer business opening up through servicing and supporting MUL's large vehicle base. The company's dealer network is rated the best and post-IPO, MUL's operational freedom to remove non-performers has only improved.

Both the investment proposals of September are at a nascent stage. So, separate investment figures were officially not available, save the reported Rs 6,000 crore over the next five years. Mr Khattar and Mr Hirofumi Nagao, Joint Managing Director, MUL, told a group of visiting journalists from Mumbai, that MUL's participation would most likely be funded using its internal accruals.

"We are making the right moves," Mr Khattar said, pointing to MUL's current 55 per cent car market share with just a small presence in diesels. With own diesel engine unit, MUL gets to play strongly in the growing diesel car-market that allowed competing models like Tata Indica, to become strong. (In the long run, the engine plant may not be restricted to diesels, it could make petrol engines as well, Mr Nagao said.)

Manesar, where the new 2,50,000-units-strong car plant will come up, will host R&D facilities in line with plans to make MUL Suzuki's R&D centre for Asia. Over 50 MUL engineers have already trained at Suzuki and there was MUL contribution to the design and development of the Swift, slated for launch here and in China by early 2005. MUL is working to obtain "full model development" capability by 2007.

Understandably, Mr Khattar took a measured stance on the scale of R&D likely in India. As he put it, grafting the country's image of being low cost, to design and development, can be flawed. Particularly, using such arguments of being low cost to paint a simplistic picture of Suzuki's R&D work being largely done out of India.

Design and development costs, are held down by eventual production volumes. Albeit unspoken, those global volumes lay within Suzuki's control. One way of addressing this and catalysing volume transfer is to enhance profile within the Suzuki fold. Catch up with the Japanese major's best practices and production records. Thus, fast emerging is the reality that MUL is close to matching Suzuki's domestic sales in Japan.

According to Mr Nagao, MUL's 5,00,000 units capability (actual sales of 4,72,101 units in FY04 on capacity of 3,50,000 units, analysts estimate near 5,43,000 units-sales in FY05) compares with Suzuki's 6,30,000 units sold in Japan. MUL is known to be targeting sales of a million cars in the next five years.