Maruti plans to invest INR10 billion (USD155.3 million) in the current fiscal year towards land acquisitions for the establishment of new dealerships as part of an aggressive strategy to achieve annual sales of 2 million units by 2020.
IHS Markit perspective:
- Significance: Maruti Suzuki plans to invest INR10 billion (USD155.3 million) this fiscal year towards acquiring land in India for the establishment of new dealerships, according to a report by the Economic Times citing unnamed sources with knowledge of the matter. The automaker has identified 77 potential sites, the company said recently in a conference call.
- Implications: Although this move promises to enable dealerships to break even faster, a potential downside for dealers exists in the form of even greater control going to the automaker.
- Outlook: Given its huge cash reserves, Maruti should be able to achieve this investment target relatively easily, and the move will be crucial to the automaker's attempts to reach its annual sales goal of 2 million units by 2020.
Maruti Suzuki plans to invest INR10 billion (USD155.3 million) during the current fiscal year towards acquiring land in India for the establishment of new dealerships, according to a report by the Economic Times citing sources with knowledge of the matter. The automaker has identified 77 potential sites, the company said recently in a conference call. The properties are mostly located in prime locations in metropolitan areas.
The plan is part of the automaker's strategy to move closer to its customers and have greater control over its finances and cost structure. The move is also in line with its plans to offer more upscale products. The automaker is sitting on cash reserves of INR220 billion and plans to invest INR10–15 billion every year on such initiatives. The real-estate division at the automaker is headed by SY Siddiqui, chief mentor for new projects. The report adds that the real-estate team comprises 12–15 people, mostly hired from real-estate consultancies.
Maruti's investment to own a retail network, something of a novel exercise, is necessitated by the automaker's aggressive plan to achieve annual sales of 2 million units by 2020. This dictates a massive expansion of its retail footprint, especially in urban areas where most of its existing and upcoming premium products will be sold. "The availability of the infrastructure has to precede the sales and we have to expand the network faster," Maruti Suzuki chairman RC Bhargava had said earlier. The company today has about 2,200 outlets, a number that it aims to double by the end of the decade.
Outlook and Implications:
Maruti has previously outlined an aggressive investment plan involving INR150 billion to bolster its sales infrastructure in India over five years. As a result, this latest INR10-billion investment is part of a wider exercise that will play out over a longer period. The idea was first floated in October 2014, and since then Maruti has been working to put its plan into action.
Although the idea is new in India, it is not entirely unheard of in global markets. A couple of years ago, Daimler decided to divest 15 Mercedes-Benz dealerships in Germany to independent investors after concluding that their profitability was being hampered by tied-up capital. It seems somewhat counterintuitive for automakers to get into core retail operations with their own money. Although Maruti only plans to own the land and offer it to dealership operators on lease, owing land is traditionally not seen as the best use of capital. However, given its huge cash reserves, Maruti should be able to achieve this investment plan relatively easily. Soaring land prices across India in recent years have diminished the attractiveness of vehicle sales for dealerships; instead, most dealerships make their profits from spares and aftersales service functions.
By leveraging its cash reserves, Maruti plans to lower the initial cash outlay for dealerships, although the automaker will most likely spread the cost over a longer period and pass on the savings to dealerships. Although this move promises to enable dealerships to break even faster, a potential downside for dealers exists in the form of even more control going to the automaker. A lower capital requirement for opening a new dealership is likely to spur more competition among entrepreneurs, while allowing the automaker to practically dictate its terms in financing and inventory off-take agreements.
Maruti's plan is something of a curveball for competing automakers, which require dealers to purchase real estate on their own. Nevertheless, Maruti's move is unlikely to be replicated by other automakers. Other OEMs operating in the country lack the reach and volumes to justify this sort of investment.
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