JVs and governance

Suzuki Motor Corporation's decision to invest in a new plant is a welcome vote of confidence in the sustainability of India's automotive boom.

But the decision to set up the unit outside Maruti Udyog Ltd, albeit in association with it, raises several issues. The markets are clearly not amused, as the sharp drop in the Maruti scrip on Tuesday indicates.
This is not to say that there is anything mala fide in Suzuki's intent. As competition intensifies, every company has to decide what kind of corporate structure it needs to take on rivals.

If Maruti Udyog is not the right vehicle to tackle the Hondas, Toyotas, Hyundais, Tata Motors, and other players in the Indian market, Suzuki should be free to decide what a better option is. But this cannot be at the cost of minority shareholders.

Maruti's is a special case because minority shareholders do not have a vocal co-promoter offering them an alternative.

In the case of earlier joint sector disengagements""the split between TVS and Suzuki, and the Firodias and Honda, for example""the Indian promoters decided to buy out their JV partners and go their own way. In the case of Maruti, the Indian promoter is the government, which has already ceded control to Suzuki.

So the Maruti board that decided to accept Suzuki's proposal to invest in another company is effectively a Suzuki board. It is not clear how the government nominee voted on the Suzuki proposal, but in all fairness, if Suzuki wants to take a different approach to the Indian market, it should keep the interests of Maruti Udyog's minority shareholders in mind.

When the Indian auto sector was still a minor sideshow in the global arena, the ownership structure of Maruti did not matter much to Suzuki. The stakes were not big enough.

But in the last few years, the game has changed. A recent report by Booz Allen Hamilton has forecast four-wheeler sales to cross 3.5 million annually by 2015 if industry growth is 40 per cent higher than GDP growth.

Even if this is too optimistic, three million still seems a distinct possibility. Four-wheeler density is forecast to double from a projected 8.5 per 1,000 population in 2005 to 15 per cent three years later.

This kind of market growth has raised the stakes for all serious long-term players, and Suzuki is no exception in realising that it cannot take anything for granted anymore. When you are up against 800-pound gorillas, you have to be fighting fit.

As the competitive battle moves to another level, the real struggle will be between rival supply chains: Will the Suzuki supply chain deliver greater competitive advantage than Toyota's or Honda's?

Suzuki's moves to create a new venture have to be seen in this context. When you are building or defending marketshare, having a large number of minority shareholders obsessed with quarterly results can be a huge distraction.

However, while Suzuki is entitled to decide how it wants to proceed in India, it has to play fair by minority shareholders who are already invested in Maruti Udyog.

The market has given the company high price-earnings multiples on the assumption that it will be the main vehicle through which Suzuki will participate in the auto sector in India.

If this is not going to be so, Suzuki should consider buying back shares from Maruti Udyog's minority shareholders at market-related prices. If not, it will be failing the crucial test of corporate governance.