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Why Maruti Suzuki will not leave Manesar despite labour worries

Why Maruti Suzuki will not leave Manesar despite labour worries

Almost 80 per cent of the components that go into making a Maruti car are sourced from some 200 vendors. About 70 per cent of these are based in the Gurgaon-Manesar belt.

PHOTO: Associated Press PHOTO: Associated Press
Maruti Suzuki India Ltd seems to be lurching from one crisis to another. Nine months after putting an end to labour unrest at its Manesar plant, India's largest carmaker found itself in the midst of a bigger disaster.

On July 18, production at the factory came to a sudden halt after violent conflict between management and workers resulted in the death of its human resources general manager, injuries to 96 employees, and damage to the plant.

Worried about the safety of its staff, Maruti has shut down the factory indefinitely. The lockout is costing it over Rs 50 crore daily, say analysts. The incident has sparked a fresh debate on whether Maruti needs to move out of Manesar.

"There's a possibility that Maruti could shift some part of its Manesar operations to Gujarat in the next two years," says Ashvin Shetty, analyst at Ambit Capital.

Analysts at the brokerage firm ICICI Securities say there are two possibilities: either management and workers arrive at a temporary resolution and until then the company shifts production to Gurgaon, or, in an extreme scenario, Maruti exits completely and shifts to Gujarat.

Maruti signed a pact in June with the Gujarat government to buy 700 acres of land near Mehsana to set up a factory. It is estimated that Maruti will spend around Rs 4,000 crore and commission the factory by 2015/16.

However, Maruti's top management, including CEO Shinzo Nakanishi and Chairman R.C. Bhargava, has indicated that the company had no intention of shifting the Manesar plant. In fact, it wants to push ahead with its expansion plans in Manesar.

So what makes Maruti stay in the region despite mounting losses and worsening labour woes?
The Manesar plant rolls out Swift, Swift Dzire, SX4 and A-star models from two assembly lines. A third line is in an advanced stage of completion and is expected to be operational by 2013.

"Production loss of these models can impact revenues by Rs 1,600 crore and net profit by Rs 100 crore per month," says a report by Nomura Equity Research. Last year, a series of labour strikes had led to a revenue loss of Rs 2,400 crore.

Started in February 2007, the Manesar plant is spread over 600 acres and can make 5.5 lakh vehicles per year. It also has a diesel engine unit with a capacity of one lakh engines and transmissions. The Manesar and Gurgaon facilities have a combined capacity of 14.5 lakh vehicles per year.

Almost 80 per cent of the components that go into making a Maruti car are sourced from some 200 vendors. A majority - about 70 per cent - of these vendors are based in the Gurgaon-Manesar belt. For instance, Sona Koyo Steering Systems supplies steering systems and axles; Bharat Seats sells seats; and Denso Haryana supplies radiators. A relocation would mean Maruti has to take this vast network of vendors along.

"Over the past many years, Maruti has built a strong network of local vendors and supporting infrastructure in this entire corridor," says Vinnie Mehta, Executive Director at the Automotive Component Manufacturers Association of India.

"It takes a long time to replicate it anywhere else," he adds. In addition, the proximity of the Gurgaonand Manesar facilities gives Maruti flexibility in manufacturing and change the product mix in line with demand.

Mayur Milak, Senior Analyst at Dolat Capital, says labour problems can be tackled. "Maruti has around 3,090 permanent and contract workers. If contract workers are the root cause of problem, the company can terminate its agreement with the service provider, pay one-time settlement and hire workers on company payrolls," he says.

Industry observers also point out that many companies which have set up shop in Gujarat are struggling to find skilled workers. "There is a sufficient talent pool available in the National Capital Region due to the presence of various technical colleges and institutes," adds Mehta.