How much is too much? That’s the question being brought up again regarding auto manufacturer Maruti Suzuki’s royalty payments to Japanese parent Suzuki.
Big parity According to a research report by Institutional Investor Advisory Services (IIAS), a proxy advisory that bats for the interests of minority investors, “Over the past 15 years, royalty paid to Suzuki has grown 6.6 times to ₹21,415 per car sold, while average sales realisation per car has increased only 1.6 times.”
Multinationals charge their Indian subsidiaries a royalty fee for either using the brand or technology that the parent developed abroad. But IIAS is raising the question of when does royalty end and fleecing begin. The report says the company must explain its coercive charges on Maruti Suzuki’s cash flows.
The report’s main argument is that if Maruti Suzuki is transferring technology worth the high royalty payments, the incremental effect is not seen in the car-maker’s sales. That is, Maruti Suzuki’s royalty payments have outpaced Suzuki’s expenditure on research and development.
Payouts vs R&D spend The report points out: “Over 15 years, royalty payouts from Maruti have grown to 6 per cent from 2 per cent of net sales. However, Suzuki’s investments in R&D have not stepped up accordingly: in 2014-15, Suzuki’s expenditure in R&D aggregated only about 4 per cent of net sales.”
Another friction point is Maruti Suzuki’s operating margin (even after royalty payouts) is at over 12 per cent, almost twice that of Suzuki’s which is below 7 per cent for its automobile segment. Hence, IIAS concludes that Maruti Maruti Suzuki’s margins emanate from its own local efforts of cost control, value engineering, and indigenisation, and not from a dramatic improvement in technology transfer from its Japanese parent.
The report advises that investors must engage with companies to understand the terms and conditions based on which royalty is being paid. Royalty payments, although they are to related parties, are not presented to shareholders for a vote because companies classify the transaction as being part of the ordinary course of business. Also, since the transaction value is rarely over 10 per cent of revenues or net worth, shareholder approval under SEBI’s Listing Agreement is not required.
Indigenous effort The car-maker recently announced its new R&D facility at Rohtak, the Suzuki Group’s first R&D centre outside Japan. The centre, expected to be fully functional by the end of the current fiscal, is expected to aid in testing and validating products to meet new regulations regarding safety and environment. “If the incremental investment in R&D facilities is largely being made in India through Maruti, should shareholders expect a reduction in royalty payouts per car going forward?” the report asks.