Maruti to Consider Africa Assembly Plant as Exports Ebb
Maruti Suzuki India Ltd. (MSIL), the nation’s biggest carmaker by volume, is considering setting up its first overseas assembly plant in Africa as it seeks to revive flagging exports.
The company, based in New Delhi, is scouting for new export markets and Africa is more or less untouched, Chairman R.C. Bhargava said in an interview. Countries that are on the cusp of motorization may be key to Maruti’s plan of doubling exports in the next four years as Europe struggles to recover from a slowdown, according to Mayank Pareek, head of sales.
“We will look at local assembly for two reasons,” Bhargava said. “Firstly, there’s usually a tax advantage. And second, there’s pressure from governments in these countries to assemble models locally.”
A local manufacturing facility will help Maruti drive down costs for buyers and boost sales in these emerging markets for basic models such as the Alto and M800, said Umesh Karne, an analyst at Brics Securities Ltd., who recommends buying the stock. Exports as a share of revenue shrank to 10 percent from two years earlier as sales of its A-Star compact hatchbacks dwindled in Europe, prompting the automaker to turn to Africa.
“Whenever import volumes rise above a certain threshold, countries impose duties, so after a certain point, Maruti will have to look for local assembly,” said Mumbai-based Karne. “Africa is at the same level where India was about 10-15 years ago. Basic cars without airbags or other features will allow Maruti to offer low prices and sell large volumes.”
Maruti’s shares have surged 61 percent this year, outperforming the 25 percent gain in the benchmark BSE Ltd. Sensitive Index, even as a factory lockdown following labor violence in one of its factories near New Delhi hurt output.
The stock, rated a buy by 35 of the 63 analysts tracked by Bloomberg, rose 0.1 percent to 1,482 rupees at the close in Mumbai. Fourteen advise holding it, while 14 recommend selling.
The automaker may face hurdles setting up any production facility overseas as a few countries may mandate local purchase of some components, according to Mahantesh Sabarad, an analyst with Fortune Equity Brokers India Ltd. in Mumbai.
“Setting up an ancillary base will be the biggest challenge,” said Sabarad. “It will be a whole new learning experience.”
Exports as a share of total sales at Maruti have declined from 15 percent two years ago. Shipments overseas in the year ending March 31 may stay little changed, Chief Executive Officer Shinzo Nakanishi said this month, after dropping 8 percent to 127,379 vehicles in the previous 12 months. The numbers peaked at 147,575 units in the year to March 2010.
Europe, which accounted for 70 percent of Maruti’s exports three years ago, now contributes to 30 percent as the debt crisis in the region damped demand. Car sales this year are due to plunge to the least in the European Union since 1995, according to auto-industry group ACEA.
“The mix is completely reversed now,” said Pareek. “If you had conceded that Europe is gone, you would’ve been finished. The whole idea is take up the challenge and find alternative markets.”
The company is exploring Colombia and the Dominican Republic to boost sales, according to its annual report. The automaker will refrain from setting up factories in countries such as Indonesia and Thailand, where parent Suzuki Motor Corp. (7269) already has manufacturing facilities, Bhargava said.
Local sales at Maruti are set to rebound in the current financial year after dropping 11 percent in the previous 12 months. The latest version of its best-selling model Alto, which the company started selling in October, may revive growth to 6 percent, compared with a 1 percent expansion for the industry forecast by the Society of Indian Automobile Manufacturers.
Maruti first started selling the Alto in September 2000, priced at 300,000 rupees ($5,465) to compete against Hyundai Motor Co.’s Santro model and defunct Daewoo Motor Co.’s Matiz hatchback. The new version, introduced on Oct. 16, is 19 percent cheaper at 244,000 rupees in New Delhi, making it the company’s least expensive hatchback after the Maruti 800, which it has been producing since 1983.
Production at Maruti fell after the company shut one of its factories near New Delhi for about one month following a labor agitation in July that left one person dead. Maruti has seen its market share dwindle to about 40 percent from as high as 87 percent in 1998. Closest rival Hyundai commands 19 percent, 15 years after starting production in the southern city of Chennai.
The carmaker reported second-quarter profit declined 5.4 percent after the monthlong shutdown at its Manesar factory. Maruti may boost profit to 19.6 billion rupees in the year ending March 31 from 16.8 billion rupees in the previous 12 months, according to the average of 52 analysts’ estimates compiled by Bloomberg.
Net income margin before interest, taxes, depreciation and amortization may narrow for a third straight year, according to data compiled by Bloomberg. The company reported a margin of 7.8 percent in the year ended March 31.
Maruti, which is planning to start work on a new factory in the western Indian state of Gujarat in early 2013, may use the facility to meet some export demand, Bhargava said Dec. 22. The new factory will be located in the same state as Mundra Port, which the company currently uses to ship its vehicles overseas.
“If we are doing anything in Africa, it makes sense to use the Gujarat factory as it is near the port,” Bhargava said.