Maruti Suzuki has come out with a new strategy so as to reduce its reliance on Japan when it comes to auto part supplies. They will now source their parts from new locations like Germany and Thailand, a move, which they hope will help reduce their production cost by 5 to 10%.
The move behind Maruti’s new strategy is a result on an increasing yen, which has made importing an expensive operation. This coupled with March’s Japanese crisis disrupting their supply chain. Another reason behind choosing new locations was their impact on production costs. Germany is known for offering tax benefits to those companies which import products from European nations.
Maruti currently imports 20% of their parts either directly or indirectly from Japan. Maruti’s executive officer for managing supply chain, S Maitra, said that they have made a conscious assessment to increase part imports from countries other than Japan, so as to reduce their exposure to the rising yen, which had an adverse impact on their finances last fiscal year.
Moreover, few of their Japanese suppliers also have plants in Thailand, which is more economical than sourcing from Japan. Maruti made a loss of Rs. 361.3 crore because of unfavorable foreign exchange in 2010-11. A recent report by Citibank highlighted the consequence of a rising yen on the company’s profit margins. The report stated that for every 1% rise of the yen beyond 83 against US dollar would additionally impact Maruti’s profit by 0.27%.
Maruti also gives royalty to Japanese based Suzuki Motor Corp, its parent company, for use of their technologies. Maruti has already began importing auto parts for their compact A-Star from Germany. This car is then exported to its European markets. Maitra added that they have a system in Europe, which gives them certain tax reimbursements from the government, if they export cars to Europe which have 40% European components.
Maruti exported around 59,450 A-Star units to Europe in 2010-11. This alone accounted for 43% of their overseas sales. Maitra also said that apart from receiving protection from the rising yen, Thailand also provided cheaper parts compared to Japan. Yesterday, Maruti had reported a drop in net profit by 8.4% at Rs. 2,288.6 crore for the year 2010-11, because of higher costs of input and unfavourable foreign exchange rates.
In 2010-11, Maruti surveyed new locations like Australia, Indonesia, Hong Kong, South Africa, Chile, Brunei, Algeria, Vietnam, Laos and Malaysia. This brought in increased contribution of almost 57% from non-European markets in comparison to 23% contribution in 2009-10.