Lack of vendor capacity seen as hurdle for Maruti Suzuki’s future growth

New Delhi: Maruti Suzuki India Ltd’s vendors need to collectively invest Rs1.5-2 trillion in the decade starting 2020, to keep pace with investments the carmaker’s parent company, Suzuki Motor Corp., would make in India.

investments would be geared towards achieving its target of selling five million cars in the country by 2030.

A group of tier-I vendors, formed last month to deliberate on the topic of “corporate excellence”, made a presentation to the management of Maruti Suzuki regarding the projected cash flow from parts suppliers.

This comes against the backdrop of Maruti Suzuki’s management expressing concern about the ability of the vendors to match the company’s growth trajectory, two people aware of the development said on condition of anonymity.

During its vendor meet in Abu Dhabi last month, the top management of the company had aired concerns about whether the vendors would be able to expand their respective capacities and make new investments in line with the company’s own investment in the next decade.

The group of vendors said they needed to increase their investments substantially to Rs1.5-2 trillion.

To maintain its dominance, Suzuki Motor Corp. will invest $1.5 million in fiscal 2019 to develop future products for the Indian market, which include an entire range of hybrid vehicles and gasoline engines.

As reported earlier, Suzuki has also planned massive capacity expansion for its Indian subsidiary.

According to the first person mentioned above, most of the vendors beyond tier-I do not have the appetite to make huge investments due to reasons such as high cost of capital and weak balance sheets.“A lot of vendors of Maruti Suzuki are not in a financially sound position, hence they may not be able to make huge investments required to stay on course with Maruti’s ambitions,” the first person said. “The lack of vendor investment in Gujarat is also an example.”

Maruti Suzuki has more than 420 vendors in India and according to the two persons mentioned above, only 75-80 of them are present in Gujarat.

Most of the tier-I suppliers have moved or just started investing in the state, but those in tier-II and beyond are yet to make their investments there.

“Maruti Suzuki and its parent company have a robust plan in place to protect their turf in India and the management thinks the lack of capacity from vendors can be a challenge for the company in future,” the second person said.

“The management has advised the vendors to keep investing in the core automobile business and not to put it in some other businesses,” the person mentioned above added.

According to a senior industry executive, the 12-12.5% average earnings before interest tax depreciation and amortization (Ebitda) of companies in the components industry is a concern. The borrowing cost is around 12% and the Reserve Bank of India is not in the mood to lower the repo rate, if crude stays at the same level to curb inflation.

“The concerns regarding the investment appetite of vendors, barring some, are quite genuine and Maruti in the long run could change its vendors or source more components from the established players or the Japanese ones. Also there will be some consolidation amongst the vendors as well going forward,” said the senior executive requesting not to be named.Maruti Suzuki declined to comment.