Control of vendors to help Maruti Suzuki check Gujarat costs

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Components supplied by vendors account for 80% of vehicle cost. PTI Components supplied by vendors account for 80% of vehicle cost. PTI
SummaryComponents supplied by vendors account for 80% of vehicle cost

BY retaining charge of vendor relations at the new Gujarat car factory to be set up by its Japanese parent Suzuki Motor, Maruti Suzuki India will ensure that the cost of producing cars there remains on par with its own two plants in Haryana.

Since components from suppliers amount to 80% of the cost of a vehicle, combining sourcing for Gujarat operations with its own plants in Haryana will help Maruti keep production costs low by deriving benefits from higher economies of scale. Maruti currently has an annual capacity of 15 lakh units across its two plants in Haryana, to which Gujarat will initially add 2.5 lakh units by early 2017 and take it up to almost 18 lakh at full capacity.

Maruti chairman RC Bhargava told FE: “Around 80% of the value of a car is sourced from vendors; so, that will be done by Maruti and not by Suzuki Motor Gujarat (SMGPL) directly.” He added that over the next 2-3 months, Maruti will sign several agreements with its new Ahmedabad-based affiliate.

The first pact will be a 15-year contract manufacturing deal which will decide how the ‘fair price’ of cars sold to MSI will be arrived at, while other agreements will decide the terms for leasing out Maruti’s 1,190-acre Gujarat land to SMGPL, apart from HR and vendor support. All transactions will be done at an arms’ length basis.

The pricing of cars sold by SMGPL to MSI will take into account the cost of material, labour, electricity, depreciation of equipment and other consumables, but not include any profits.

“The pricing of cars sold will be based on the contract manufacturing agreement,” Bhargava said.

Senior and mid-level management from both MSI and SMGPL will also maintain daily contact and meet at frequent intervals to make sure there is no mismatch between production and market demand. At present, the industry practice is that production plans are decided a month in advance by the marketing teams on the basis of demand forecasts.

“Just as we inform our plants in Haryana right now, we will be giving production targets to the Gujarat plant and pick up as many vehicles as they produce. However, since there will be two companies, very close coordination will be needed; so, they will have to meet regularly,” Bhargava said, adding that a formal structure for such interaction is yet to be decided.

SMGPL, which will invest R3,000

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