In an exclusive interview, CNBC-TV18’s Shereen Bhan spoke with RC Bhargava, chairman of Maruti Suzuki India , to discuss the company’s upcoming plant in Gujarat, which attracted some controversy early this year, as well as its business plans with respect to new products and markets.
Below is the transcript of the interview on CNBC-TV18.
Q: Let me get you to address the news that is making headlines today and that is the fact that the Haryana government has halted everything at your R&D facility in Rohtak due to the lack of an environment clearance. This is not a new issue but do you believe that a resolution is now only possible post the Haryana elections once the new regime is in place?
A: I think a resolution is partly in the courts. The matter is sub judice so it is difficult to talk about the merits of the case. However, the answer ultimately will lie in some amendment to the environmental rules and regulations that were made by the previous government, which gave rise to this kind of situation.
Q: Let me ask you about the other issue which created controversy a couple of months ago and now of course is perhaps going to be voted on (by minority shareholders) very shortly from hereon — the Gujarat contract agreement between you and Suzuki. I understand that you have been meeting investors: FIIs, domestic institutions. Where do things currently stand, have you been able to generate enough support?
A: We have met investors all over the world. All the major investors we have met in the US, UK, Hong Kong, Singapore and of course in India, mostly in Mumbai and Chennai. No investor has anything to say adverse against the proposed arrangement.
Q: So you have been able to convince them?
A: Foreign investors are almost 100 percent positive on this. Some of the Indian investors came up with two interesting things. One is they said we cannot believe that any arrangement of this kind can be a win-win for both parties because in this business, we think it is always a zero-sum game. They don’t believe that it can be a win-win, which actually it is a win-win because it leverages the low cost money available in Japan.
Q: Are they expressing this reservation even after the reworked agreement that has been put out?
A: They just don’t like to believe. The second thing is some of them think this gives us an opportunity to apply a little pressure on Maruti and do a little arm-twisting. So, while the main issue they won’t contest but for example they say, we want you to give higher dividend , declare a dividend policy and do something with Suzuki on royalty rates.
So, that kind of pressure is being brought. It has nothing to do with the subject of vote but the opportunity is being used to put pressure in other areas.
Q: Did you agree to revision as far as the royalty rates are concerned or on the dividend issue because, as you said, pressure is being built on you?
A: Suzuki had changed the royalty policy earlier because we had been discussing this for a long time. For all licence agreements of new products which we will sign hereafter, royalty will be expressed in rupees on the Indian price of the car. It means that what has been happening over the last four years in terms of the royalty being exposed to the yen fluctuation will cease. We will have certainty on the amount of royalty to be paid.
The second change that has also been made is that to the extent any future model there is an Indian content in the development — in other words the Rohtak R&D will put in efforts into it — to that extent, the royalty will be adjusted downwards.
Q: What kind of downward revision because now most of the products are being co-developed?
A: It will depend how much work is done here. For each product, this will have to be assessed and the amount worked out.
Q: Going back to the point that you mentioned that the royalty rate will now be determined on rupee terms as opposed to yen terms, again there are question marks on the decision because the view is that on account of what is happening with the yen versus the US dollar, this is a decision being taken once again to benefit Suzuki?
A: I don’t think any company wants to take exchange rate risk. What we are doing by expressing the royalty in yen is that we are assuming the exchange rate risk. Nobody can predict where exchange rates will move over the long term. So the question is who should take the exchange rate risks? Early on, Suzuki was assuming the risk. When the government allowed a change in royalty, Suzuki went to the system of charging royalty in yen on the grounds that their R&D costs were in Yen and therefore they would like to get royalty in yen because the royalty is a kind of deferred payment on the cost of doing R&D.
However since we kept telling Suzuki that we are less able to handle this exchange rate risk, you have global operations and you are better able to sort of diversify your risks, we feel it is better you take the risks rather than us. So they finally agreed. Actually we have been discussing this with them for about one and half years that this exchange risk to us is…
Q: (Interrupts) what has been the reaction from investors as far as this particular change is concerned?
A: They are happy with this because at least they know what it is. The main thing in most of these investors is they want certainty about what is going to happen. They don’t like volatility and a situation where they are not able to project what the margins would be or what the earnings will be because you can’t do it if there is an exchange risk involved. At the moment, the yen has weakened but not all that much. It has gone from 100 to 105 today but what will happen three years from today, who can predict?
Q: So as far as the issue of royalty and dividend is concerned since you clearly said that that is being used to arm-twist you to get the support of domestic institutions. Minus that do you believe that you are going to be in trouble as far as domestic institutional support is concerned for Gujarat?
A: No, there is no issue raised. Almost everybody accepts that this is very much beneficial to Maruti. Nobody can actually point out a reason why it is not. All that they (domestic institutional investors) say is, yes, we recognise it is beneficial but we can’t believe it is a win-win, so there must be something else which we don’t know.
Q: So when does this come up for vote. I believe you are looking at the possibility of October?
A: It is one of the possibilities but it is not yet decided. We have yet to take a view on when would be the right time.
Q: What are you waiting for? Are you waiting to try and muster up more support?
A: No, we don’t think there is more support. We have met everybody, so that story is over.
Q: The LICs of the world are onboard?
A: We have had three meetings with LIC and they seem to be quite onboard.
Q: If the minority vote goes against you — and we have seen a fair degree of activism especially in the last couple of months — is there a plan B?
A: We haven’t made a plan B yet.
Q: But don’t you think you may need to keep a plan B in place in case the minority vote goes against you?
A: No, I don’t think we need a plan B. I don’t think it will go against us.
Q: You are absolutely certain about that?
A: That is our judgement. That it can’t go against us. It will be too perverse to go against us.
Q: So if not October, what is the earliest that we can actually see this go to vote?
A: I can’t give you a date yet.
Q: Any particular reason why there is still some doubt on when this is actually going to go to vote?
A: No, but we have to see what the correct timing for doing this is going to be.
Q: Are you pushing back the plans as far as commissioning Gujarat is concerned?
A: No, that is carrying on as we had planned. In any case Maruti can continue to invest there and when the vote takes place after that we will just transfer all that to Suzuki and they will reimburse the money.
Q: But you are not reviewing your plans on commissioning Gujarat at this point in time. It is on track and on schedule?
A: No. The recent news report was strange news because we have said we should commission it by 2017 at least for the last year and half. So why suddenly somebody would say we postponed it by a year now, I am not sure. In any case earlier date was 2015. So if we postponed it is two years, not one year.
Q: Do you believe that there is a fear that you may be spreading yourself to thin in light commercial vehicles (LCVs), sport utility vehicle (SUVs)? You are of course the small car specialist, that is where your bulk of money comes in from.
A: SUV is very much a part of our car segment. So that is natural course of development for us
Q: Except that you had a disastrous launch, the relaunch in that segment with the Vitara?
A: Sorry, we have never been in the SUV segment.
Q: Why, the Vitara is an SUV?
A: That is a 100 percent imported SUV at a price the same on par with the Honda CRVs and how many do they sell. But the big domestic market for SUVs is over 500,000 today. It constitutes about 21 percent of the car market. So we are number one player in India. Can we afford not to be in 21 percent of the market and leave it to anybody who wants to get in the market? People are getting into it, the domestic and foreign players. So what is special about Hyundai or a Ford or a GM that they should get into the SUV market and we shouldn’t.
Q: So, how soon are we going to see the Maruti SUVs localised, priced for the Indian market out in the market?
A: The first SUV we will see in the first half of next year.
Q: And what kind of pricing are you looking at?
A: It will be in the same segment as the Duster. So it has to be priced competitively with the Duster.
Q: What kind of margins will you enjoy on those kind of products?
A: I don’t know at this point. A second SUV will happen one year after that which will be the compact SUV and that being in the same segment as the Honda Mobilio. We will have to price competitively that way. So pricing has to be competitive.
Q: Let me ask you about the light commercial vehicle (LCV) plans and how soon we are actually going to see you put that out into the market as well and what the strategy is going to be there?
A: The LCV is due again early next year, first half of next year but our marketing strategy there is still being evolved I don’t think we are going to launch the SUV across the country in one go. We are going to go a little bit gradually in spreading its coverage because it is a product and a segment, which we have never entered before.
The sale of LCVs is to a different class of customer. It requires the sales and service organisation a different mindset and we need to learn that.
So we don’t think we should in that area spread ourselves too thin by trying to cover all parts of India in one go.
Q: So you will set up specific dealers so on and so forth?
A: We will go slowly and keep acquiring knowledge and skills on how to sell this product and ensure that when we give the product to a customer he remains a happy customer after that. So it will take a little time to cover all of India. It is not something we are going to rush into.
Q: But again, what is the strategy as far as these new markets are concerned in terms of profitability?
A: We never do a product — knowingly at least — which is not profitable and the SUV will conform to our minimum standards of profitability, we will always look for that.
The Gypsy was also in a sense in the SUV segment. But it had a very limited market, it was four wheel drive, it was petrol.
The problem in India is that the SUV segment is totally diesel. We couldn’t enter this segment earlier because we didn’t have diesel options. So the reason we have delayed entry into the SUV is not that we didn’t recognise that this is a sector we should be in.
Suzuki is in the SUV sector the world over, but they couldn’t succeed in India because of the fuel issues. But now that the diesel issue has been sorted out and we have a diesel engine, we are entering the SUV segment. The only new segment is that LCV.
Q: On the LCV again, because it is already a business where there are a lot of entrenched players in the market. So you are not going to be the first mover in that sense. What kind of profitability can you expect there?
A: Again the same question of getting the minimum return on our investment. We won’t enter a segment if we didn’t think we could make a profit. So we will aim to get the kind of profit we are getting on other products but as I said we will go slowly in this segment.
So it may take a little time to get to the full profit levels but we don’t see any reason why once we have fully got the hang of this business, the SUV segment should not be as profitable as the car segment.