Suzuki sucks dry the shareholders of its India subsidiary Maruti through massive royalty payments

Suzuki which is a global Tier 2 automaker is the biggest automobile company in India through its Indian subsidiary Maruti.The company which was formed in the 1980s when India had a command and control economy has a greater than  50% marketshare in one of the fastest growing auto markets in the world.Maruti was a JV formed between Suzuki and the Indian government in which the latter divested its stake in favor of Suzuki.Now this Indian venture is one of the biggest cash cows for its parent contributing a big percentage of the revenues and profits.Suzuki is however not treating  the minority shareholders of the Indian subsidiary in a fair manner charging high royalty payments which is contributing to lower margins and profits.

Suzuki hikes royalty payments from 3.5% to 5% in the 2Q 2010

Suzuki which had a dominant marketshare in the Indian market now faces tough competition from the like of Hyundai,GM,Tata Motors,Honda,Toyota and others which are making huge investments into the Indian automobile market.China has already surpassed the US as the biggest car market in the world and India should do it as well.Maruti has had to keep the prices of its cars low to retain its marketshare.On top of that comes the increased royalty payments which has led to compressed margins.The stock fell more than 12% as investors dumped the stock.Suzuki perhaps needs to reevaluate its strategy of sucking its cash cow dry otherwise it might end like the story of the golden goose.

Maruti skids 12% after royalty shock – Yahoo

The hike in royalty payment by Maruti Suzuki India to its overseas parent Suzuki Motor of Japan disappointed Dalal Street. Maruti stocks plunged 12.31 per cent on the Bombay Stock Exchange on Monday. An unexpected increase in the royalty payment by Maruti led to a 20.25 per cent drop in June quarter profits. Maruti paid an additional royalty of Rs 188.70 crore to Suzuki Motors that holds over 54 per cent stake in the company for using its technology.

The government recently relaxed the restrictions on outbound remittance of royalties which was earlier capped at 5 per cent of domestic sales and 8 per cent of exports. “The amendment document does not specify any caps and the future royalty costs are now left to parent, Suzuki’s discretion. The company’s EBITDA margins also suffered on account of unfavourable exchange rate and higher input costs,” it said.