India’s largest car maker, Maruti Suzuki, has put in place a new strategy to reduce its dependence on Japan for auto parts. It will source parts from new geographies such as Thailand and Germany, and hopes the move will help it save five to 10 per cent on the cost of production.
Maruti changed its sourcing strategy because of an appreciating yen that has made imports expensive, and supply chain disruptions in the wake of the March 11 earthquake, tsunami, and ensuing nuclear crisis. Also, countries such as Germany offer tax benefits to companies importing from European countries, which again has a bearing on the cost of production. It imports 20 per cent of its parts, directly and indirectly, from Japan.
“We have taken a conscious decision to increase sourcing from other countries to reduce the company’s exposure to the appreciating yen, which had impacted our finances adversely last financial year. Besides, some of our Japanese suppliers have facilities in Thailand, and it is more cost-effective to source from there than from Japan,” said S Maitra, managing executive officer (supply chain), Maruti Suzuki. It took a hit of Rs 361.3 crore on account of adverse foreign exchange movement in 2010-11.
A recent Citibank report highlighted the effect of appreciating yen on Maruti’s margins. According to the report, every one per cent appreciation in the yen beyond a level of 83 against the dollar incrementally impacts Maruti’s margins by 0.27 per cent. Maruti also pays royalty to its parent company, Suzuki Motor Corporation of Japan, for using its technologies.
Maruti has started importing parts from Germany for its compact car, A-Star. It exports this car to European markets. Maitra said, “There is a scheme in Europe in accordance with which if we source 40 per cent of components required for cars exported to European markets, we can avail of certain tax benefits from the government.” The benefit would increase the average realisation per vehicle exported by Maruti to European markets.
In 2010-11, Maruti exported 59,450 units of A-Star to Europe. This was 43 per cent of the company’s overseas sales.
Apart from getting protected from the appreciation of the yen, Maitra said parts in Thailand were cheaper than in Japan.
Maruti yesterday reported a 8.4 per cent dip in net profit at Rs 2,288.6 crore for 2010-11 on higher input costs and adverse foreign exchange movements.
In 2010-11, it explored new destinations like Malaysia, Vietnam, Laos, Brunei, Algeria, Chile, Indonesia, South Africa, Hong Kong and Australia. This resulted in increased contribution from non-European markets at 57 per cent, against 23 per cent in 2009-10.