New Delhi: Maruti Suzuki India Ltd, the nation’s biggest car maker, has started a three-year-long indigenization programme to safeguard it against a rising yen, which raised the cost of imports of components from its Japanese parent Suzuki Motor Corp. this year.
The car maker aims to reduce import of parts to 7-8% over the next three years from the current 20%, S. Maitra, managing executive officer, supply chain, told investors in in a conference call on Monday.
Cutting costs: Maruti’s Manesar factory. The indigenization scheme is expected to help the company save at least Rs 150 crore a year. Photo: Ramesh Pathania/Mint.
This programme is expected to help the company save at least Rs 150 crore a year, said a top company official, who declined to be named.
A stronger Japanese currency has increased production costs at the Indian units of Japanese auto makers as they have to pay more to import parts. The rising costs have forced companies including Maruti to encourage vendors to produce more parts locally, reducing their dependence on imports.
The yen has strengthened 20% against the Indian currency in the three months ended 30 September, according Shinzo Nakanishi, managing director of Maruti Suzuki.
• • •
• • •
“We have had an extensive meeting with our vendors on this issue,” said Maitra. “We have chalked out a strategy that would help us in reducing our dependence on imports.”
The impact of the stronger yen is more worrying for Maruti because rising competition is preventing the company from raising car prices to offset cost increases at a time when growth in car sales is slowing because of higher fuel prices and rising interest rates on automobile loans.
The central bank has raised its policy rate effectively by 5.25 percentage points since March 2010 to fight inflation.
Maruti shares gained 0.44% to Rs 1,130.60 at the end of trading on Monday on the Bombay Stock Exchange. The benchmark Sensex index lost 1.27%.
On Tuesday, Maruti reported a 53% drop in vehicle sales in October to 51,458 units because of labour unrest at its Manesar plant, which severely affected production. The company had sold 118,908 units in October last year.
While Maruti’s own level of localization is as high as 95-96%, its vendors import components, which is hurting it the most. At least 30% of the imports made by vendors is exposed to currency fluctuations. Maruti pays vendors for the cost incurred because of currency fluctuations.
Maruti’s imports costs increased by Rs 27 crore in the three months ended 30 September.
The stronger yen has also impacted royalty payment to parent Suzuki. This rose to 6% in the September quarter from 5.5% a year ago. However, the Rs 449 crore royalty fee paid in the September quarter was lower than the Rs 492 crore in the preceding three months.
The royalty payment in the second quarter was less as it sold fewer cars because of the labour unrest at its Manesar factories.
The company sold a total of 252,307 units in the September quarter, a decline of 19.6% from a year earlier.
The unidentified company official cited above said Maruti will help vendors produce more parts in the country.
“This will be done by helping the vendors in doing more and more research and development in India and asking the joint venture partners of Indian vendors to produce more and more components in India,” said the official.
This will help the company in the longer run as the impact of the yen will be minimized, said Mahantesh Sabarad, an analyst at Fortune Equity Brokers (India) Ltd. “In addition to that, the company will not have to pay the import duty and freight cost,” Sabarad said.
Maruti has, meanwhile, started hedging its exposure to the Japanese currency, said Ajay Seth, chief financial officer.
“However, in the third quarter, the vendor imports, which remain unhedged, will be impacted due to yen appreciation in the second quarter as it comes with a lag of a quarter,” Jinesh Gandhi and Mansi Verma, sector analysts with Motilal Oswal Securities Ltd, wrote in their report on Maruti.