Maruti's royalty payouts to Suzuki extortive: Report

After having examined Maruti’s royalty payouts to its Japanese parent Suzuki in the context of revenues, margins, and research and development (R&D) spends, proxy advisory firm IiAS, in a recent report, said that Maruti’s “royalty payouts are extortive."

The amount paid has increased over six times per car sold over the past 15 years. The report says that royalty payments aggregated 5.7 per cent of net sales and 36 per cent of profits before royalty in 2014—15.

It added that over the past 15 years, royalty paid to Suzuki, has grown 6.6x to Rs 21,415 per car sold, while average sales realization per car has increased only 1.6x.

"While Suzuki’s consolidated R&D spend per vehicle (including motorcycles) averaged 4 per cent of sales, its royalty payments from Maruti are 6 per cent of net sales,” IiAS said.

The report also highlights that Suzuki’s R&D efforts do not appear to aid Maruti’s margins or expansion and that Maruti shareholders must understand what is the right amount of royalty that must be charged.

"Royalty is not Suzuki’s indelible right — it must explain its coercive charges on Maruti’s cash flow,” said the report.

"Suzuki benefited enormously from its partnership with the Indian government at a time when India was fiercely regulated, and displacing a largely monopolistic market was not difficult. It was this partnership in its formative years that has given Maruti its edge,” the report added.

(Image credit: Economic Times)