The Hindu : The Maruti sale

Online edition of India's National Newspaper
Friday, May 17, 2002

Opinion

Opinion - Editorials

The Maruti sale

THE DISINVESTMENT PROCESS at Maruti has begun on entirely expected lines. The Government will be exiting totally from the country's largest and most successful car manufacturer, often cited as an outstanding example of public-private cooperation, in about two years time. But it will cede the all-important management control to its equal partner Suzuki Motor Corporation almost immediately. The route chosen for this — a rights share issue, with the Government renouncing its portion completely to Suzuki — is the most transparent and workable of the options. Once that stage is completed, the Government's stake will come down to 46 per cent while Suzuki's goes up to 54 per cent. For the Government the gain is two-fold: it sells its rights at an attractive price and equally significantly also gets from Suzuki a premium of Rs. 1,000 crores for the control. In the subsequent stages, the Government will offload its shares through a public offering in the domestic market with Suzuki providing a minimum floor price. An incidental benefit in the form of a primary capital market revival is therefore expected.

The financial arrangement for the transition in Maruti, however well thought out, is secondary to certain other larger issues involved. The Government has demonstrated that it can bargain well and that augurs well for the strategic sales of companies such as IPCL and the oil majors due to take place shortly. In a sense, the Government gets a control premium for merely legitimatising Suzuki's de facto control over Maruti. Proposals to sell the Government's stake to other carmakers, made when the relationship between the two partners were strained, were impractical. Not only would the Government have reaped much less but no manufacturer of stature could possibly have stepped in when Suzuki has been calling the shots especially in the technology areas. Post disinvestment by the Government, Maruti might still be attractive to the global auto majors such as GM who are struggling to get a foothold in the highly competitive Indian market. In all probability, that can happen only through developments abroad where a sweeping consolidation of the passenger car industry is taking place. Interestingly, GM has a stake in Suzuki already even as it acquired most of the non-Indian operations of the troubled Korean auto major, Daewoo, recently.

Attention will now shift to the immediate fortunes of Maruti, which, even a decade after the opening up of the domestic passenger car industry, sells more than six out of ten cars in the country. Its nearest competitor's market share is just a fourth of its size. Equally significantly, the company engineered a spectacular turnaround last year. After incurring a first time loss of Rs. 269 crores during 2000-01 caused mainly by the expenditure on a slew of new models, the company recovered to post a profit of Rs. 55 crores last year and consistently scored high in customer satisfaction surveys. The company has made forays into related areas of used car sales, car financing and leasing and recently insurance. But for a long time to come Maruti's undisputed strength will lie in its dominance over the small car market — the A and B segments where its offerings the 800, the Alto, the Zen and the Wagon R have been received well. Competition, which has now come to these segments, has had to encounter the other formidable strengths of Maruti — the advantages of an early start and hence greater familiarity with the Indian market — which will now be boosted by Suzuki's unstinted support and involvement. The Government's decision to move out of the passenger car business might not have been based on financial considerations alone but there is no room to think that it has struck a bad bargain.

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