Royalty Flows in Suzuki's Blood

Mumbai, November 17, 2015 (Newswire.com) - Suzuki needs to explain the basis of charging Maruti very high rates of royalty. Royalty payments aggregated 5.7% of net sales and 36% of profits before royalty in 2014-15. 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% of sales, its royalty payments from Maruti are 6% of net sales.

Most multi-nationals charge their Indian companies royalty. This royalty is typically charged for either the brand and / or product technology. The basis for this charge is that the global brands have been developed outside India, as is the product research and technology. There is some merit to this argument, but the question is how much should be claimed.

IiAS is a proxy advisory firm providing corporate advisory services, independent opinion, research and data on corporate governance issues as well as voting recommendations on shareholder resolutions

Miss. Hetal Dalal, COO, IiAS

The Maruti-Suzuki royalty relationship :

Maruti cars are for the most Suzuki’s products that emanate from the research and development undertaken in Japan. Yet, Maruti has been a stronger brand in India than Suzuki. To the extent that Maruti uses Suzuki’s technology, it must pay royalty. But how much is enough? IiAS examines Maruti’s royalty payouts in the context of revenues, margins, and research and development (R&D) spends, and concludes that Maruti’s royalty payouts are extortive. Maruti has been paying royalty to Suzuki for its car manufacturing technology since inception. Over the past five years (2010-11 to 2014-15), Maruti’s aggregate payout towards royalty was Rs.118.7 bn while the 5-year profit before tax (PBT) aggregated Rs. 167.7 bn (Table 1). In 2014-15 alone, royalty expenses aggregated 36% of profit before tax and royalty1