Suzuki Betting Big On India

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Maruti Suzuki is the crown jewel of Japanese automaker Suzuki (OTCBB:SKZMY), with the Indian subsidiary contributing the lion’s share of Suzuki’s global sales. The automaker is working towards upgrading its Indian facility into a production and export hub for its small cars. These plans will gradually take place after the new Maruti Suzuki factory at Hansalpur in Mehsana district begins operations in 2016.

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The company reaps a big advantage of lower labor costs by manufacturing its cars in India while maintaining an internationally acceptable level of quality. This is the foremost reason why Suzuki has been using Maruti to manufacture cars bound for Europe and other international markets. Also, Suzuki has had to contend with the appreciating Yen resulting in uncompetitive exports, therefore producing cars in India offset’s the appreciating Yen.  This was especially true in 2012 as the rupee and Euro both structurally weakened in the first half of the year.  The company is guiding 6-7 per cent sales growth in 2013-14 after closing the current fiscal year with a 6 per cent rise in vehicle sales overall.

Japanese carmakers, Toyota (NYSE:TM) and Honda (NYSE:HMC), have emerged as the biggest beneficiaries from the recent labor woes that hit Maruti-Suzuki’s Manesar factory in Haryana. In the first five months of fiscal 2013 Maruti’s share of the Indian car market, the country’s largest car maker, dropped from 40.3% year over year to 36.6%.

In July 2012, the company experienced a major setback when one of the factories was ransacked due to a manager being killed and 100 other workers injured. More than 500 workers were fired following the incident and the plant restarted its production on August 21.

Suzuki motors of Japan plans to establish a car factory in India’s western state of Gujarat as it looks forward to increase its share in one of the world’s fastest–growing markets while also enhancing exports to Europe. The company’s executive travelled to Gujarat to negotiate an agreement with the state to purchase the land for the plant and the $1 billion needed to develop the factory. Suzuki’s Indian affiliate, Maruti Suzuki, has been troubled by industrial actions over the past three months which nearly halved production in the plant near Delhi. The steps to invest in Gujarat could lessen some of these difficulties.

Suzuki at present has two manufacturing plants in India, both close to New Delhi (Northern India). Both of the plants have combined capacity of 1 million vehicles. The company however is seeking to escalate its production capacity to meet India’s growing capacity. Since the company sold approximately 1 million vehicles in India for the year ending March 2011.

The company also continues its plans expand its capacity in the two-wheeler segment in the coming years. Its bike manufacturing subsidiary has inked plans to set up a new manufacturing unit at Rohtak, Haryana by 2014-15. Along with this Suzuki is also seeking to increase the capacity of the current assembly line at Gurgaon with additional investment of Rs 500 crore (~$92 million USD). The company will be able to roll-out 500,000 units annually from the new assembly line.

Maruti Suzuki, in order to revive the dwindling export sales numbers, is working on a plan to come up with its first overseas assembly plant in Africa. The move will boost the overall car exports to international emerging markets.

With Suzuki exiting the unprofitable U.S. market, Japan going on a crusade to weaken the Yen, and the Euro in a structural bull market versus nearly every currency, the factors are in place for Suzuki to do a stunning amount of business in the low-end of the European car market in 2013, especially with the troubles that GM/Opel (NYSE:GM) and Ford (NYSE:F) are having in the region.

Suzuki’s stock on the Tokyo exchange is up more than 70% since speculation heated up about it exiting the U.S. market.  With the Nikkei approaching strong resistance near 11,000 and Suzuki approaching the 2010 highs, there is a good possibility of a pullback in the near term.  But, structurally Suzuki looks strongly positioned in the rapidly growing Southeast Asian auto market where the cheaper Yen/Rupee give their vehicles an advantage.

 

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