With Suzuki threatening to pull out, the GOI looks for a new partner.

By Rajeev Dubey

Call it Zen and the art of keeping the Maruti alive. For, the relationship between the equal partners in the Rs 7,956.48-crore Maruti Udyog Ltd (MUL)--the $13.34-billion Suzuki Motor Corp. (SMC) and the Government Of India (GOI)--has sunk to its nadir. One indicator: the partners, who have had problems ever since the government appointed Ravela Sri Satya Laxmi Narasimha Bhaskarudu as MUL's managing director on August 27, 1997, have stopped communicating directly. Completely.

Bringing them together may be a formidable task given the confrontationist stance adopted by SMC, which has dragged the GOI to the international court of Arbitration. After all, SMC has consistently maintained that Bhaskarudu's appointment was illegal since the resolution to appoint him could not have been passed as SMC's five directors, who were in a majority on the nine-member board, had opposed it.

Things have come to such a head between the dramatis personae--Union Industry Minister Murasoli Maran, 60, and Osamu Suzuki, 68, the chairman of SMC--that an outsider, the 59-year-old CEO of the $168.37-billion General Motors, John F. `Jack' Smith, was asked by both the partners to mediate. And Smith, who was in the country in mid-November, 1997, said that he was willing to help bring them together if it was possible.

Meanwhile, the GOI's stance is that if SMC had a problem with the resolution, the matter should have been sorted out at the company's Annual General Meeting held on September 29, 1997. Such contrary postures could mean the end of the joint venture, choking off critical imports of parts--primarily, the gear-box---for all the MUL models from its Japanese partner.

The result: MUL could be saddled with inventories of unfinished cars at the rate of 1,200 vehicles per day. Obviously, if SMC pulls out, the loser will be MUL. And the chances of this appear to be quite high. Says former Union Industry Minister K. Karunakaran, 79: "In a meeting in July, 1996, the Japanese company did threaten to walk out of the venture if the GOI did not concede to its demands. But we decided not to yield to such pressure."

Meanwhile, the GOI has drawn up a back-up plan: Maran is scouting for a new partner, and has held discussions with many global auto majors. bt learns that the Wolfsburg (Germany)-based $58.70-billion Volkswagen ag has evinced interest in buying up SMC's stake in MUL. Indeed, most of the auto majors would be keen on replacing SMC since the benefits of such an alliance far outweigh the costs.

Consider the upsides. Using the capitalisation approach, SMC's 50 per cent stake in MUL will cost between Rs 2,430 crore and Rs 2,750 crore. In comparison, a greenfield plant of the same capacity, with a 70 per cent-plus level of indigenisation, will cost Rs 4,600 crore. What's more, the new partner gets a 80.43-per cent marketshare of the car segment right from the outset.

MUL, on its part, will need a partner to introduce new models, which will be essential to counter the competition thrown up by the three new cars to be launched by its rivals in early 1998. Says Subodh Bhargava, 54 the chairman of the Rs 916-crore Eicher Group: "It is imperative to have a global partner to keep pace with the latest technological developments."

However, much of the success of the GOI's bid to rope in a new partner will depend on the foreign auto majors' interpretations of the treatment that has been meted out to SMC as a business partner. In fact, many of them may not even want to invest in India in view of the SMC-GOI fiasco. For instance, the Detroit-based $61.39-billion Chrysler Corp. has already decided to shift the location of its proposed Asian plant from India because of the country's ambiguous policies.

One exception: Volkswagen's Czech subsidiary, Skoda ag, whose board recently signed a Letter of Intent with the deputy chief minister of Maharashtra, Gopinath Munde, in Prague to explore the possibility of setting up a car project in Maharashtra. Says Milan Smutny, 43, a spokesperson of the company: "Skoda is willing to invest $300 million (Rs 1,080 crore), but the decision finally depends on the Indian government."

The key question for MUL if Volkswagen, or Skoda, becomes the new partner is whether it is possible to achieve a smooth transition from one partner to another. Theoretically, the answer is in the affirmative. For instance, the $5.78-billion Daewoo Motors of South Korea easily replaced the $105.04-billion Toyota Motors of Japan as the partner in the erstwhile DCM Toyota (now Daewoo Motors India). Daewoo even offered to continue manufacturing Toyota's Light Commercial Vehicles (LCVs), which was accepted by Toyota. Explains S.G. Awasthi, 54, the managing director of the Rs 654.19-crore Daewoo Motors India: "Restructuring and reengineering on such a scale is difficult, but achievable."

An important lesson from Daewoo's experience is that even the South Korean giant had to stop making the Toyota models for months when it wanted to launch its own models. Daewoo sold only 1,935 LCVs in 1995-96, and the figure came down to less than 100 LCVs a month between April and December, 1996. Since January, 1997, the company has not produced, or sold, a single Toyota LCV as Daewoo plans to launch its own models soon.

Legally, MUL can continue to sell its existing models, using the Maruti brandname. But there may still be a few hiccups although the indigenisation levels hover at 82.15 per cent for the Gypsy and 95 per cent for the Maruti 800. At present, the gear-boxes of all the models--including the Maruti 800--are being imported from SMC since the Japanese company has repeatedly rejected MUL's proposal to indigenise this crucial component during the past decade.

Says V. Krishnamurthy, 71, who was the company's chairman from 1982 to 1990: "We had prepared the details of a gear-box-manufacturing plant by the fifth year (1987) of operations." But SMC rejected the plan on the grounds that the volumes did not justify the setting up of a Rs 250-crore gear-box plant. Fortunately for Maruti, most agreements--details of the one between SMC and the GOI were not available--stipulate that a foreign partner, even after deciding to pull out of the venture, will continue to supply critical components for six to 12 months. Says Krishnamurthy: "No JV can stop functioning abruptly. Even SMC cannot stop the production at the gear-box plant that supplies to MUL."

Even Toyota supplied components to Daewoo for 18 months after the scrapping of its alliance with dcm. Although MUL will still have to set up a gear-box-manufacturing base in less than a year, it should not prove to be an impossible task. Explains Deepak Dhawan, 43, the director (strategic planning), at Eicher Goodearth: "Global specialists are capable of designing a new gear-box or reverse-engineering an existing one." For instance, companies like Steyr of Austria and Ricardo of the UK are specialists in re-designing gear-boxes.

Clearly, the GOI may have to pursue these options:

• Get SMC to supply parts for a few months after the pull out.
• Ask global specialists to reverse-engineer the gear-box to continue the production of the existing models.
• Tie up with another partner for new models.
• However, the search for another partner cannot be delayed. Almost all the majors have already driven up the high road to the Indian auto market. And it would be a pity to see MUL, which has led the charge all these years, bring up the rear.