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High drama in Motown

S Kalyana Ramanathan and Priti Patnaik | September 25, 2004

On Thursday morning, the directors of Maruti Udyog assembled at the company's headquarters in downtown New Delhi for over an hour. All the top executives, half of them Japanese, were relaxed and there was nothing in their demeanour to suggest that a severe crisis had been averted barely 24 hours ago.

The government of India had made up its mind to block the plans drawn up by Suzuki Motor Corporation, the Japanese parent of Maruti Udyog, to grow in India. It was only after over two hours of convincing by Maruti Udyog Chairman S. Nakanishi and Managing Director Jagdish Khattar that the union heavy industry minister, Santosh Mohan Dev, announced that he would roll back the offensive he had unleashed on Monday, September 20.

It all began on Monday, September 13, in Tokyo when Osamu Suzuki, the chairman of SMC, told reporters at a press conference that the company would invest nine billion yen (Rs 427 crore) in a plant at Manesar in Haryana to make diesel engines.

A communication issued to SMC dealers the same day said that the diesel engine plant would be set up by a SMC subsidiary, tentatively named Suzuki Engineering India Ltd. Scheduled to start production by 2006-end, the plant would make 100,000 1.3 litre engines with four cylinders for SMC joint ventures and subsidiaries in Asia.

SMC had earlier signed a product licence agreement with Fiat of Italy and Adam Opel AG of Germany to make these engines.

So far, so fine. But it was also announced that SMC would form a joint venture with Maruti Udyog, a 54 per cent SMC subsidiary, called Suzuki Maruti India Ltd which would set up a car assembly plant, again at Manesar, with a capacity to produce 250,000 cars per annum. (Maruti Udyog's existing plant at Gurgaon can produce 500,000 cars per annum.)

As soon as the news reached India, all hell broke loose in the stock markets and investors started hammering down Maruti Udyog shares.

In the next two trading sessions, the company lost over Rs 300 crore in market capitalisation. Investors read the communication as an indication that SMC was setting up its own production and marketing network in India, parallel to that of Maruti Udyog.

The example of Honda was fresh in their minds. In spite of its hugely successful joint venture, Hero Honda, had set up its own production facility and distribution network for motorcycles. A similar initiative by SMC could deal a crippling blow to Maruti Udyog, investors feared.

The next day, Maruti Udyog said in a communication to the Bombay Stock Exchange that the diesel engine plant would be "controlled and managed" by Suzuki Metal India Ltd, an existing 51:49 joint venture between SMC and Maruti Udyog to make aluminium castings and other engine components.

This company would subsequently be renamed Suzuki Engineering India Ltd, the communication added. But it failed to calm frayed nerves.

Actually, there was little disagreement between SMC and Maruti Udyog on the issue. The investments involved in the two ventures were huge which Maruti Udyog alone would have found it difficult to bankroll.

Two, Fiat and Opel had licenced the diesel engine technology to SMC and would only be comfortable if production took place in a venture controlled by the Japanese company.

Three, SMC wants to make its second car plant in India its best anywhere in the world with its own culture and ethos. Thus, it was keen, on making it a separate venture, though Maruti Udyog would have a controlling stake in it.

Moreover, it had already conveyed to the Maruti Udyog brass that there was no question of SMC setting up its parallel marketing network in India; the cars produced at the Manesar plant would be sold only by Maruti Udyog.

Auto analysts too were foxed by the reaction of investors: with its profitability driven substantially by Maruti Udyog, why would SMC kill the goose that laid the golden eggs?

On Monday, September 20, Heavy Industry Minister Dev fired the first salvo when he alleged that SMC had kept the government, which holds a stake of 18 per cent in Maruti Udyog, in the dark while announcing the plans.

This was a gross violation of the joint venture agreement that the Japanese company had signed, he said adding: "Maruti Udyog Ltd today has a cash surplus of Rs 2,000 crore, which effectively means that the company is capable of participating in the expansion plans."

The same day, senior officials from his ministry wrote to the Foreign Investment Promotion Board saying that any SMC proposal for an investment in the two ventures should not be cleared as the government's concurrence, mandatory under existing norms (Press Note 18), had not been sought. It also wrote to SMC seeking clarifications on the investments.

Things took a turn for the worse the next day when Finance Minister P Chidambram told Deb that he was in total agreement on the issue and assured him of the full support of his ministry.

The portents were ominous for SMC: the all-powerful FIPB is a part of Chidambaram's ministry. Officials at FIPB, when contacted, told Business Standard that there were valid grounds for the government to stall the investments by invoking the powers under Press Note 18. Under the rules, a foreign company needs to take the permission of its local partner before making any fresh investments.

This was the second time that the Government and Suzuki have faced problems in the last few years. In August 1997, SMC objected to R S S L N Bhaskarudu's appointment as the managing director of Maruti Udyog after R C Bhargava retired. Its five directors on the company's board of nine had objected to the appointment.

On its part, the government argued that each partner could appoint the managing director for five years by rotation and, thus, no discussion was required.

SMC took the Indian government to the International Court of Justice, while Murasoli Maran, the then heavy industry minister, upped the ante by saying India was looking for a new partner for Maruti Udyog.

The stalemate ended in 1998 and a compromise was reached: Bhaskarudu's term was capped at December 2000 and Khattar, a SMC nominee, was named his successor.

But unlike that controversy, there were signs that the current crisis could have snowballed into a political dispute. Deb had told reporters that Maruti Udyog was more than just another project -- the Congress was emotionally involved with it.

He was, of course, referring to the role played by Indira Gandhi and her son Sanjay in making the people's car happen. But there was more to it.

It was during the Vajpayee government's rule that SMC acquired a controlling stake in Maruti Udyog. With the perception gaining ground that within two years of being on the driving seat, SMC was trying to sidestep Maruti Udyog could help the Congress hurl some uncomfortable questions at its political rivals.

Deb also expressed concern that the fall in Maruti Udyog's share price could delay the government's plan to offload its residual stake in the company within the current financial year.

The next morning saw Nakanishi and Khattar at Udyog Bhawan, the headquarters of the heavy industry ministry, confabulating with senior officials. Nakanishi told officials that Maruti Udyog could hold up to 70 per cent in the car assembly venture. He also added a sweetener to the offer by talking of reviving the proposal to set up a gear box plant in India.

This was enough to defuse the crisis. Soon, Nakanishi and Adarsh Kishore, the heavy industry secretary, were shaking hands and beaming at the cameras.

A beaming Deb told reporters later in the day: "We can have up to 70 per cent equity in the car venture. In the diesel engine unit they have offered us as much equity as we want but propriety demands that the decision be taken by the Maruti Udyog board."

The next day, it was decided Maruti Udyog would hold 70 per cent in the car assembly venture. It was also announced that SMC would invest Rs 6,000 crore in the country over the next five years. And Maruti Udyog and SMC were back on the fast track once again.



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