Maruti Suzuki India Ltd. is weighing options for restoring production of its most popular models as recurring labor disputes at one of its plants threaten the company’s lead in Asia’s third-largest car market.
The next two to three weeks will be crucial for the automaker as it decides if it needs to shift manufacturing to its other plant in Gurgaon after rioting on July 18 shuttered its Manesar facility, Chairman R.C. Bhargava said Saturday. Violence that erupted in early July resulted in the death of a manager at the factory, which accounts for about 40 percent of Maruti’s output, including DZire sedans and Swift hatchbacks.
The unit of Suzuki Motor Corp. reported a fourth consecutive decline in quarterly profit Saturday, even before July’s riot, as it battles a weaker rupee, intensifying competition and cooling demand amid the slowest pace of economic expansion in almost a decade. Boosting output in Gurgaon is key to stemming any erosion in market share and reviving earnings growth, according to Deepesh Rathore, managing director at IHS Automotive in New Delhi.
“Getting Manesar back onstream is definitely on top of the agenda as the company is crippled at the moment,” said Rathore. “But, that is easier said than done. Shifting production to Gurgaon is an option because only the Swift and DZire are really bringing in the numbers for Maruti.”
Maruti, which rolled out its first 800 mini hatchback from its Gurgaon plant in 1982, has seen its market share dwindle to about 40 percent, from as high as 87 percent in 1998. Closest rival Hyundai Motor Co. commands 19 percent, 15 years after starting production in the southern city of Chennai.
The current stoppage, the carmaker’s fourth in the past year at the factory, underscores challenges faced by Chief Executive Officer Shinzo Nakanishi in preventing further losses to its share.
The Society of Indian Automobile Manufacturers on July 10 cut its forecast for car sales growth in the South Asian nation to a range of 9 percent to 11 percent for the year ending March 31, from an estimate of 10 percent to 12 percent given in April.
India’s economy expanded 5.3 percent in the quarter through March, the smallest gain since 2003, while the rupee slumped to a record low amid a paralysis in policymaking that has hurt efforts to spur investment as a global recovery falters.
Net income dropped 23 percent to 4.24 billion rupees ($77 million) in the three months that ended June 30, the New Delhi-based company said Saturday. Sales still jumped 27 percent to 105 billion rupees from 82.6 billion rupees.
A weaker rupee pushed import costs higher, making raw materials 26 percent more expensive from a year ago, Maruti said. Exports contribute 8 percent of total sales, while it spends about 21 percent on importing components such as electronics and diesel engine parts.
The local currency weakened about 20 percent against the dollar and the yen in the 12 months that ended June 30. In the quarter to June 30, the local currency slumped 12 percent against the yen and 8.6 percent versus the greenback.
Investors will now look for a more permanent solution to the labor issues, said Basudeb Banerjee, an analyst at Quant Broking Pvt. in Mumbai.
“It can’t go on like this,” said Banerjee. “Shifting won’t come free of cost and that would mean the other plant will be out of commission for a long time.”
The latest dispute began after a worker beat up a supervisor on the shop floor. The union then prevented management from taking disciplinary action, blocking managers from leaving the factory after work, Maruti Suzuki has said. The company moved some of its production to Gurgaon the last time workers went on strike at its Manesar plant, in October.
The automaker signed an agreement in June to set up a manufacturing facility in the western state of Gujarat. Production will start in the financial year starting on April 1, 2015, taking the combined capacity to 2 million units, Maruti said in a statement June 2. The current capability is about 1.45 million units, according to its website.
“We can’t start production at Manesar until we think it is safe for our workers,” said Chairman Bhargava, who announced a lockout on July 21 and ruled out an early resumption. “The next two to three weeks are crucial. Shifting to Gurgaon can’t be done immediately and we will have to see what we can do.”
The automaker, 54 percent owned by Suzuki, sold 295,896 vehicles in the quarter to June 30, Maruti said. Sales of the DZire sedan surged 87 percent, while that of the Swift, Estilo and Ritz hatchbacks rose a combined 31 percent.
Sales of the SX4 sedan declined 74 percent in the quarter, according to a company statement on July 2. Exports rose 6 percent to 32,632 units.
Sales of diesel-powered cars outpaced gasoline vehicles and the company will offer what the customer wants, Bhargava said.
Should the Manesar plant stay shut for two months, it will hurt Maruti’s revenue and profit, R. Murali Krishnan and Mitul Shah, analysts at Karvy Stock Broking Ltd. in Mumbai, wrote in a research note last week.
“We see the current event at Maruti’s Manesar plant as a structural impact on its business, as it is more related to humanitarian and psychological aspects beyond the financial implications,” wrote Krishnan and Shah. “We don’t see light at the end of the tunnel, at least for the time being.”
MMC profit spikes 367%
Mitsubishi Motors Corp. on Monday reported a group net profit of ¥19.96 billion for the first quarter of fiscal 2012, up 367.3 percent on the previous year, as demand for its cars surged elsewhere in Asia and securities sales gained.
In the April to June period, the company logged a consolidated operating profit of ¥14.93 billion, up 22.1 percent from the previous year, on sales of ¥419.30 billion, down 2.9 percent, as it was pressured by the yen’s strength against other major currencies.
MMC also logged ¥11.4 billion in proceeds from shares sold in a Chinese carmaker in the period.
Its first-quarter global unit sales dropped 11 percent to 239,000 vehicles, with all major markets except for Asia excluding Japan reporting a decline.
For the full business year ending next March, the company slashed its group net profit outlook by nearly half, now forecasting ¥13 billion, as it expects ¥2.8 billion in charges for the sale of its plant in the Netherlands.
The automaker decided to sell the plant, Netherlands Car BV, for ?1 to Dutch bus and industrial machine maker VDL Groep BV on the condition that some 1,500 employees there will not lose their jobs.
“While the amount (of the special losses) could fluctuate, we do not believe there will be any large additional losses,” said Managing Director Shuichi Aoto at a press conference in Tokyo.
The automaker revised its operating profit outlook upward to ¥80 billion from ¥70 billion because first-quarter performance was better than expected and because it is introducing new models in the coming months.
Nevertheless, it kept its sales outlook the same at ¥1.98 trillion.
In the face of a persistently strong yen, MMC changed the assumed exchange rate for the full year to ¥97 to the euro from ¥103 forecast earlier, while keeping it at ¥78 to the dollar.