New Delhi: Maruti Suzuki India Ltd will stop offering contracts to suppliers that fail to meet its zero-defect policy as part of the nation’s largest car maker’s efforts to avoid frequent and costly vehicle recalls.
“About quality, we worked in terms of percentage for two decades and then we moved to PPMs (parts per million). But now, we tell all our suppliers that PPM is no longer acceptable. Zero-defect is what we want from you. It should become a norm. Only those vendors with us will go to Gujarat who have the quality levels we want them to deliver," said Deepak Sethi, executive director (supply chain), Maruti Suzuki India.
The Gujarat plant will also cater to overseas markets, which demand very high standards, making it critical for Maruti to have top-quality vendors.
“This is a very good step and may soon become an industry-wide phenomenon. Obviously, not all the suppliers will be able to meet such norms," said Abdul Majeed, partner and national auto practice leader at PricewaterhouseCoopers. “What will happen is instead of a company having five or six prominent suppliers, it will prefer to have two who will meet such quality performance. This will also put pressure on the bottom line and margins of suppliers."
In Gujarat, Maruti has entered into a contract manufacturing partnership with parent Suzuki Motor Corp., which will produce and sell vehicles to Maruti at cost price. Suzuki Motor Gujarat aims to start production with an initial capacity of 250,000 units a year from February 2017 and reach a maximum capacity of 1.5 million by 2030.
The plant will start production at a time when vehicle makers across the world are grappling with stricter safety, emissions and vehicle-recall norms.
Over 2 million cars had been recalled in the past four years in India, Mint reported on 2 June. Of these, 1.01 million were recalled in 2015 alone. In the five months to May this year, car makers had recalled around 700,000 cars, and with increased scrutiny on the quality of vehicles, 2016 may end up seeing the highest number of recalls yet. Maruti has recalled 282,875 units in the past four years.
“Unfortunately, we have had two incidents of (vehicle recalls) this year and we have had our share of these incidents in the past. Now, recall is something which an OEM (original equipment manufacturer) does not like as customers start losing faith in the brand and that is something which is very, very damaging," said Sethi. “Today, we do about 5,600 cars a day. If there is a quality defect, the line must be stopped and every hour of non-production is damaging. So, imagine what quality can do to us."
As of now, India does not have a mandatory vehicle-recall policy, but the industry has adopted a so-called vehicle recall code where companies voluntarily recall vehicles if safety issues are found. But a mandatory recall policy is in the making at the ministry of road transport and highways, and Sethi said that once it comes through, the dynamics of the Indian vehicle industry will change abruptly.
“Those who will not recall vehicles voluntarily, the government will force them to recall should there be any doubt about the safety of the customers. All this is of great concern for auto components makers as recalls are very few in India. Number of recalls in India would be less than 2% of the total recalls in US. Once the compulsory recall code comes, the game is going to be very different from today," he said.
In the agreement between Maruti and its vendors, the onus for vehicle recall is on suppliers. If a component is found faulty and the vehicle is recalled because of that, the supplier is supposed to bear the expenses. Since the auto component industry functions at multiple levels—where a tier-III vendor supplies tier-II, who in turn supplies the tier-I vendor, and then the component reaches an OEM —chances of defects passing undetected are high. In India, the situation is worse as tier-II and tier-III vendors are often financially weak and are unable to invest sufficiently in people, technology and machinery.
“These recalls are very, very expensive. Double digits of crores is more or less the average cost of a recall. But it could be much, much more than that (after the mandatory recall policy comes into play) and it could destabilize even those vendors who may have ₹ 1,000 crore or ₹ 700 crore turnover," Sethi said.