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Indian FMCG MNCs getting ripped on royalty

Posted by fairval on March 27, 2013

Royalty rates have been going up in MNCs operating in India. The table below from a Nomura report shows prevailing rates amongst sundry FMCG and other companies.

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5% of sales appears to be rather high for FMCG companies which certainly don’t spend nowhere near that in R&D. Here I am assuming royalty is more to do with paying up for global parent’s R&D support. Can’t be for branding, since local cos anyway spend more than 10% of revenue on advertising. Can’t see how a Colgate India benefits from a Colgate ad in the US.

R&D spends in FMCG appear to be low. Indian companies like Marico and Dabur spend less than 0.5% on R&D.This could be lower than what global cos spend.

Unilever Plc spends Euro 1bn annually on R&D, or about 2% of sales. Further, its local sub HUL spent 0.7% on its India P&L on R&D in FY12. So how much of global R&D in Unilever is happening for India hard to say, since the India ops is anyway spending on this account. Also, cost of doing R&D in India is low, so 0.7% in India is perhaps equal to 2% abroad. Further, the Indian arm could well be doing some work from which the parent benefits.

Colgate Palmolive spent $259mn on R&D in 2012 on revenue of $17bn, or about 1.5%. In India, it spend 0.22%. The global parent is charging the Indian arm 5.2% as royalty, which clearly appears to be excessive then.

Maruti Suzuki spends 1% of its India revenue on R&D, and is charging Indian arm 5%. In auto industry, R&D spends are far higher compared to FMCG. Suzuki Motor Corp spent Y109bn on R&D in FY12, on global revenue of Y2512bn, or about 4.3% of sales. Dailmer AG spent Euro 4.8bn on R&D in 2012, or about 6.7% of its revenue.

So high royalties are understandable in auto, cetainly not in FMCG. Bosch could charge a lot more than it charging. Bosch India spent 1.4% on R&D, and paid 1% royalty. The global parent could well be spending more than 10% on R&D, Bosch is reportedly most R&D focussed automotive company in the world.

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One Response to “Indian FMCG MNCs getting ripped on royalty”

  1. shiva kommareddi said

    Interesting. I didn’t know that parents cos charged a management/ royalty fee.

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