Maruti to invest Rs2,600 crore on new diesel plant, R&D centre

Maruti will build the plant in phases and will start operations by mid-2013 with an initial capacity of 1.5 lakh units a year

Maruti Suzuki India (MSI) has said that it will invest Rs2,600 crore to set up a new diesel plant at its Gurgaon facility and to expand R&D activities at Rohtak by 2014.

The company's board of directors has approved setting up of a diesel plant in Gurgaon at an investment of Rs1,700 crore. It also allowed the company to ramp up investment by Rs900 crore at its upcoming R&D centre in Rohtak.

“We are going to invest Rs1,700 crore to set up the diesel plant, which will be constructed inside our Gurgaon manufacturing facility. This will be a brand new unit and will be owned by the company,” MSI chairman RC Bhargava told reporters.

Talking about its upcoming R&D centre in Rohtak, Mr Bhargava said: “The board has also approved an additional investment of Rs900 crore to set up various facilities, including testing for emission and safety. This will be over and above the Rs1,500 crore earlier announced to set up the test track.”

The company will build the plant in phases and will start operations by mid-2013 with an initial capacity of 1.5 lakh units a year, he added.

“In the first phase, we will invest Rs950 crore. After that, we will double the capacity to three lakh units per year by 2014 and it will entail a total investment of Rs1,700 crore,” Mr Bhargava said.

The company, which is sourcing diesel engines from Suzuki Powertrain India Ltd (SPIL) and Fiat India, had put on hold investments on the plant awaiting clarity over any additional taxes on diesel vehicles in the Budget.

When asked about the emphasis on diesel cars, Mr Bhargava said the demand for diesel vehicles has soared as this fuel is sold at a subsidised rate.

“The petrol car sales in the ongoing fiscal declined by 15%. In the next fiscal, we will still witness fall in petrol car sales, but we are trying to bring down this decline to 6%, which will be selling about 50,000 petrol cars less," he added.

MSI's Gurgaon plant produces all of its petrol engines. It has an installed annual capacity of 7.2 lakh units that the company managed to stretch to about 13 lakh units.

“Because of decline in petrol cars, the company expects about 40% of its petrol engine capacity at Gurgaon to be idle,” Mr Bhargava said.

However, the company is expecting sales of its diesel vehicles rising by 1.5 lakh units in the next fiscal compared to about 2.4 lakh units in 2011-12. “With both petrol and diesel cars, we are expecting an overall growth of about 10% in FY'13,” Mr Bhargava said. Following increase in demand for diesel cars, SPIL is ramping up its diesel engine capacity to three lakh units per annum from 2.4 lakh units. Moreover, MSI will also get one lakh diesel engines a year from Fiat, supply of which has already started from January this year.

In the early afternoon, Maruti Suzuki India was trading at around Rs1,300 per share on the Bombay Stock Exchange, 0.66% down from the previous close.

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Distortions of markets by state-owned banks

In every country where they exist, state-owned banks run up massive amounts of bad loans, often politically motivated, that eventually end up the responsibility of the taxpayers. In certain countries there is an even more insidious effect. They distort depositor behaviour sending money where is should never be

Many commentators and economists feel that state-owned banks are wonderful things. After all they do have tremendous advantages when a government is trying to manage an economy. Still in every country where they exist, state-owned banks tend to get out of hand and run up massive amounts of bad loans, often politically motivated, that eventually end up the responsibility of the taxpayers. In certain countries there is an even more insidious effect. They distort depositor behaviour sending money where is should never be.
 
One supposed benefit of state-owned banks is that they are not subject to the fears that haunt normal bankers. In times of financial stress, when most banks stop lending even to each other, state-owned banks can be counted upon to splurge and help stimulate the economy. This is exactly what happened in China. In 2009, the government ordered its state-owned banks to triple the amount of loans. This splurge went on in 2010 and 2011 when new loans were double the average amount of lending prior to the Great Recession.
 
It is not just China. In the US, mortgage lenders Fannie Mae and Freddie Mac back nearly half of all outstanding US home loans. Fannie Mae owns or guarantees nearly $2.8 trillion of home loans and is the largest provider of mortgage credit in the US. They are also expensive. So far it has received $116 billion from the US Treasury to make up for loses as a result of bad loans.
 
In India the central bank, the Reserve Bank of India (RBI), has raised interest rates to tame inflation. The result is a slowing economy and more bad loans. Predictably these bad loans have fallen disproportionately on the state-owned banks who take in about three quarters of deposits. While the three largest private banks, ICICI, HDFC and Axis, posted good results and bad loans actually dropped, the state-owned banks had a different experience. The largest, the State Bank of India (SBI), saw its bad loans rise by 140% and it was forced to set aside $610 million to cover the problem.
 
Bad loans at private sector banks are beginning to accelerate. Last summer Brazil’s biggest lender, Itaú Unibanco predicted that the default-rate forecast for 2011 would be 4.5%. Their most recent forecast was a default rate of 5%. Public sector banks in Brazil have been pumping money into the Brazilian economy at five times the loans made by private sector banks. One would assume that their bad loans would at least be proportional most likely much higher.
 
Despite these alarming numbers and precipitous drops in the stock of the private sector banks in India and Brazil, investors and economists do not seem to be worried about China. On the contrary, they look at an increase in bad loans as good news. Their analysis goes something like this. Even though bad loans at the Chinese banks are predicted to rise by 40%, the Chinese simply roll the bad loans over. The Chinese have been doing this since the 1999 recession when they created bad banks like Cinda, whose bad loan bonds were extended another 10 years.
 
Since deposit rates are capped by the government at about 3 percentage points below lending rates, the state-owned banks have guaranteed profits.  In theory, the state banks in China are a monopoly, so depositors are supposed to accept low deposit rates. The low rates act as a sort of tax on consumers. They allow Chinese banks to earn massive profits, which can cover the bad loans. So despite the slowing of the economy Chinese banks shares in Hong Kong have increased 50% since last October. Investors are positive that if things really get bad, the government will step in with its magic money wand and make all things better.
 
But there is one thing that neither the Chinese government nor investors have counted on—the market. Unlike some other investors, depositors in China are acting rationally. Like their cousins in developed countries, they are chasing higher yields by investing in riskier assets and the market in China is providing these assets.
 
In China depositors are purchasing a growing array of “wealth management products”. They are also stashing money in the huge unregulated shadow banking system. The state banks are haemorrhaging deposits. Last September the “big four” state banks lost Rmb 420 billion ($66.6 billion) worth of deposits, four times their lending. The shadow banking system has been estimated at over 5% of GDP (gross domestic product), but there is no accurate information.
 
By distorting the incentives, the state banking system has sent money outside the regulated system to a place where statistics do not exist. While regular state banks might be able to avoid a crash, the shadow banking system cannot. When that crash occurs, there won’t be any warning.

(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages. Mr Gamble can be contacted at [email protected] or [email protected])

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Life Exclusive
Kirkuk to Baghdad: Mission accomplished!

Having got the site engineer in Kirkuk accept the consignment of pipes and withdraw her ‘rejection’ note, the journey back to Baghdad had to be completed without any breaks. The 12th part of a series describing the unknown triumphs and travails of doing international business in Asia in the seventies and eighties

We felt happy that after considering our detailed explanations the site engineer expressed her willingness to accept the consignment and withdraw her ‘rejection’ note that caused us to come for discussions in the first place. After all, she also admitted that broken pipes would leak and such damage could have been caused at any time, in loading to unloading, and even during shipment time. A certain negligible percentage of breakage should not condemn the whole shipment.
 
With all these matters sorted out, we began our journey in right earnest; it would take a few hours, but, hopefully, by midnight, we should be able to reach Baghdad, provided there were no major military crisis.
 
In fact, our return journey was just as peaceful as the onward journey; the highways were deserted and occasionally we saw some military vehicles moving about. Only at a couple of places our vehicle was stopped for inspection; the men in uniform were kind and hospitable, offering us tea and giving us the directions to reach Baghdad safely.
 
We stopped for a break and moved on; about four or five hours later, I cannot really recall how long it took, but we safely entered the outskirts of the city. We had to stop at several check posts before we were allowed to reach our hotel.

Abbas was half asleep; we relaxed for a while, helped ourselves for a drink or two, ate the leftover khubbas with some cheese, and went to sleep. We planned to leave by about ten in the morning, so that, safely we could reach Basra by night, including a brief stop-over, if possible, at Nasriya.

In the next morning newspapers, we saw a lot of stories about the progress the defence forces were making; there was hardly any information about the death and destruction this senseless war was causing; neither was there any data about the casualties in the area.
 
We tried to get through to our hotel in Basra; lines were unclear and he told us to come a day later, as no room was available. Stephen felt this to be some kind of a message for us not to come, for some reason. He decided that we stay for a day more in Baghdad.
 
There was nothing to do; it was not a holiday trip when conditions were totally unpredictable.  All that we did was to walk on the road, parallel to the Saadoon Street, which ran along the Tigris river.  In the past, when I had visited Baghdad several times before, I always stayed at the Ambassador on the banks of this river. Across the river, one could see some nice government buildings and guest houses, including the bridge. In less than an hour we returned back to the hotel and spend the day, for complete rest and taking stock of the situation.
 
We packed our bags and left rather early; except for greatly damaged roads and destroyed military vehicles, and the army movement, we hardly noticed anything else.  Civilian traffic was fear and far between.  On the way, we were able to pick up some fresh dates, both raw and ripened, and were joined by other vehicles, which were now joining the traffic, as we proceeded towards Basra.
 
Our stop-over at Nasriya was short; in fact our host advised us to move on and try to be in Kuwait by night fall. We enjoyed their hospitality and cautiously drove to the outskirts of Basra; here the military presence was visible and vehicular traffic under check and control. There was not much of gun fire, but we could sense the seriousness of the situation by the grim faces of personnel on the move.

At our hotel, the receptionist advised us that as the traffic had slowed down a bit it may be a better idea for us to proceed to Kuwait instead of taking a chance for overnight stay, though the room was available. As our major job was completed in Kirkuk, Stephen was determined to push through and reach home by night. We left the hotel immediately.
 
The exit formalities at Iraqi border did not take long and nobody even checked our luggage. The no man’s land was crawling with vehicles; mostly foreigners were trying to get entry permits to Kuwait.
 
Stephen took a little longer this time to get our passports stamped with entry permits to Kuwait, and we completed our customs formalities without much delay. I do not recall how long it took, but by about 10.00pm or so, we reached home safely.
 
Once we were in Kuwaiti territory, Stephen stopped at a roadside shop for some soft drinks and rest; alerted his wife about our arrival plans and requested her to get some nice food for starving folks from Iraq!
 
We thanked the Lord for His kind mercies. After a relaxing shower, we sat down, enjoyed our meal with the rest of the family before we hit the sack. We were tired, but our minds were running ahead, as to when we may get our seats to fly back to Dubai.  

(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts. From being the advisor to exporters, he took over the mantle of a trader, travelled far and wide, and switched over to setting up garment factories and then worked in the US. He can be contacted at [email protected].)

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