Suzuki Motor Gujarat (SMG) and Maruti Suzuki have announced that they will end their contract manufacturing relationship and that Maruti Suzuki will exercise its option to purchase the shares of SMG from Suzuki Motor Corp. (SMC).
According to the company’s regulatory filing, Maruti Suzuki India Ltd. (MSIL) will need to virtually double its existing production capacity by the years 2030–31 to reach about 4 million automobiles annually due to the expansion of the Indian auto industry and export potential. This might occur in a number of places, some of which are known and some of which are under investigation.
Chairman of Maruti Suzuki, RC Bhargava, stated, “In 2014, we had made a very unique proposition to our shareholders that Suzuki Japan will establish a manufacturing facility in Gujarat and create a 100% owned subsidiary to produce cars for MSIL. Since its 2015 signing, the contract manufacturing agreement (CMA) has operated successfully.
However, a lot has happened since then in both the nation’s and the car industry’s general environment. This is related to the expansion of the auto industry in India, the size of the nation, and the variety of vehicle technology. By 2030, MSIL expects to reach a capacity of 4 million units, up from its current 2 million. Model numbers have significantly increased as a result of our exploration of numerous alternative technologies and the necessity of minimizing our carbon footprint. The contract manufacturing arrangement will not function well, it has been determined. We must discover a restructuring that will function for the ensuing ten years.
SMG currently manages 25% of MSIL’s production, which could complicate the management structure in the future. If production and activities related to production are combined under a single entity, SMC and MSIL are in agreement.
the agreement being terminated with the parties’ consent. The CMA contains a clause that allows Suzuki to sell them 100% of the equity in SMG. In a separate board meeting, it will be decided how and in what form the equity will be obtained.
This outcome won’t have any impact on the company’s output or earnings in any way. However, it will make MSIL’s operation easier by making it more organized and well-managed. Later, the method of acquisition will be chosen.
According to the CMA, the transaction may be completed using the book value. We will eventually benefit from MSIL’s work on the electric vehicle, for example.
Benefit: By getting involved in EV production, our employees will get significantly more experience and knowledge in this field over time than they otherwise would. By March 21st, 2024, the deal should be completed.
Employees of SMG will transition to MSIL following the acquisition.
However, given the need for carbon neutrality, a variety of powertrain technologies, including EVs, hybrids, CNG, ethanol, etc., will co-exist for a sizable amount of time. It would be difficult to manage a production of this size and complexity with many powertrains under various managements.
The business stated in a regulatory filing that “the Board of Directors considered this and decided that for the purpose of efficiency in production and supply chain, it is best to bring all production-related activities under MSIL.”
Therefore, subject to all legal and regulatory compliances, including the approval of minority shareholders, the Board approved terminating the contract manufacturing agreement and exercising the option to purchase the shares of Suzuki Motor Gujarat Pvt Ltd (SMG) from Suzuki Motor Corporation (SMC).
At a later Board meeting, the method of purchase and the amount to be paid to SMC will be agreed.
The automobiles that were previously supplied by SMG as a contract manufacturer will now be supplied as before, therefore there won’t be any changes in terms of actual production, logistics, sales, or costs associated therewith.
