Maruti Imposes a 5% Cut in the Indirect Import Cost of Components

Maruti Suzuki India is planning on cutting down the indirect import cost of components by 5 to 10 percent. This move is directed toward averting the dents in the profits on account of unfavorable exchange rates. MSI is involved in the process of indirect import of components through the local vendors of the company in countries like Japan so that it can finish the build of the components here in India. During last FY, owing to the strength of yen currency and depreciation of Rupee against it, Maruti Suzuki had to shell out Rs. 280 crore for the vendors as compensation.

According to the Head of supply-chain of Maruti Suzuki India, Mr. S Maitra, the indirect import of components constitute 15 to 20 percent of the overall sourcing of the components and this year the company is planning on reducing it by 5-10 percent in order to reduce the risk involved in the variation of foreign exchange. Maruti Suzuki directly sources 10 percent of the total components from Japan and Europe, 70 percent of the remaining components used in the manufacturing of the cars is sourced locally. As a part of this cost-cutting scheme Maruti Suzuki is also planning on turning towards ASEAN countries like Thailand; this move is again targeted at averting the currency related risks and also reducing the dependence on the vendors of Japan.

In order to ensure better quality of the components, Maruti India is planning on trimming down the number of Tier I vendors that supply finished components to the car-makers.  At the same time, the company will also be increasing the Tier II and Tier III vendors that supply components to Tier I vendors for manufacturing the finished components. Mr. Maitra mentioned that in 2003-04, the company had 355 suppliers from Tier I which has now reduced to 250. This ensures better quality as most of these are foreign vendors operating in India which better able to make investments in the building of hi-tech components, he added. He also mentioned that at the same time the company is working towards motivating the suppliers of Tier II and Tier III so that they can focus more on the specific components as they are unable to make large investments.

He also revealed that out of the total Tier I companies supplying component to Maruti Suzuki 35 percent are from Japan and Europe, the remaining 35-40 percent are from India and the balance 30 to 35 percent suppliers are basically the joint ventures of Indian and Japanese component manufacturers operating in India. During the FY 2011-12, the total profit of MSI waned by 29 percent at Rs. 1,635 crore as compared to last year’s figure of Rs. 2,288 crore. This happened because of the contrary currency movement, torpid demand of petrol vehicles and the strike at the company’s Manesar plant. The yearly sales of the company in 2011-12 also suffered a blow of 3 percent decline which stood at Rs. 34,705 crore against the previous year’s sales of Rs. 35,849 crore. 

Read More on : Maruti Ertiga review