Just about three years back, component vendors working for Maruti Suzuki would have had to use steel and machine tools imported from Japan for making auto parts. Most of the dies (used for carving out auto parts) were also designed in the island nation and brought here for making components.
It kept costs high for the car market leader, but was not pinching as the rupee was moving only in one direction — northwards. But now, with a depreciating rupee, Maruti Suzuki has been forced to embark on its biggest-ever localisation drive in a bid to keep costs under check.
Weaker rupee
A depreciating rupee hurts Maruti at two levels. It increases the outgo on royalty, which the auto giant pays to its parent Suzuki for using its technology and brand name. And, its import bill for components also goes up.
“The exchange rate is always uncertain and, therefore, the focus on our localisation programme will continue to be strong,” Maruti CFO Ajay Seth told
Localisation, however, is not an overnight process and takes time to reflect in the company’s bottomline. “Localisation is actually a total activity of investing into equipment and then manufacturing it locally. There is obviously a long gestation period,” said S. Maitra, Managing Executive Officer of supply chain at Maruti.
Maitra points out that once a decision to reduce import dependence has been taken, the real localisation happens after one-and-a-half to two years.
Typically, for a component designed abroad, Maruti has to pay on a per piece basis or make a huge upfront payment. That cost comes down substantially with indigenisation.
The capability to design and develop tools and dies locally also translates into the developing new models at a faster pace and lower cost due to nearness to vendors. With automation in design and manufacturing processes in FY12, Maruti achieved a cost advantage of 25-40 per cent over imported dies. (FY12 is the latest year for which audited, segment-wise numbers are available.) It is expected to achieve similar savings in FY13, for which the numbers will be put out by August-end.
And here’s how the auto giant is doing it. One, its about 250 vendors are being asked to use more local materials like steel alloy. Two, there is emphasis on using local machine tools, and three, wherever possible, components and dies are being designed in India.
For example, earlier, Maruti would ask vendors to use steel from Japan that could withstand temperatures as low as minus 30 degree Celsius. However, since India does not witness that level of cold, vendors are now using local steel to make components.
Special steel
Similarly, auto component manufacturer Shriram Pistons & Rings, which has so far been manufacturing engine valves using imported alloy, is working with Indian players to develop special grades of steel. Several models of piston pins made from steel tubes imported from Japan are also being made through the cold forging process, which requires locally available raw material, said Ashok Taneja, MD of Shriram Pistons and Rings.
“In both these cases, there is cost reduction without any change in quality standards. Also, since the prices are not affected by exchange rate fluctuations, there is no need to hold high inventory,” he added.
Auto parts maker Motherson Sumi too has localised a lot of products for Maruti. “We have started making locally some of the parts that Japan’s Sumitomo was manufacturing for Maruti,” a senior official at Motherson Sumi said.
These initiatives at Maruti are part of its ‘reforms through partnership’ programme, where any item being imported is offered to Indian component makers for manufacturing it locally. “Whoever quotes the best price is given the contract,” added a Maruti official.
Analysts said another way Maruti can protect its bottomline from forex volatility is by increasing exports. A company with exports revenue greater than imports expenses has a natural hedge from forex losses. Maruti, however, has always been a net importer – except in FY10. In fact, Maruti’s exports revenues have declined in the last three years. In FY12, Maruti exported cars worth Rs 3,691 crore, down from Rs 4,557 crore in FY10.
During the same period, company’s total forex expenses including direct imports and royalty payments jumped 69 per cent to Rs 6761.2 crore in FY12. “Maruti also needs to close this rising gap between forex expenses and forex earnings fast if it has to protect itself from the depreciating rupee,” said an analyst.