To make sure of improved cash flow and financial stability of their firms, Maruti Suzuki India Ltd has advised the owners of its highly leveraged component vendors to sell some of their non-core businesses and increase promotor stakes.
The country’s largest carmaker has also asked suppliers to build a sizeable inventory of components to prevent any disruption in production from affecting Maruti.
The New Delhi-based company has also suggested that parts makers cut fixed administrative costs in every department to reduce any adverse impact on financials in case of a sharp drop in volumes in the coming months, the people cited above said seeking anonymity.
Financials of component makers have been adversely impacted because of the slowdown in the past two years, which has been worsened by the pandemic. Many of the company’s vendors had to raise debt to meet their working capital needs.
The financial stability of its suppliers is key to Maruti’s production operations and overall profitability. Suzuki Motor Corp.’s chairman Osamu Suzuki had written to all parts suppliers of its Indian unit to boost output and build a sizeable inventory to meet demand from the carmaker even if coronavirus infections disrupt production.
Some of Maruti’s suppliers have been hit hard by the economic slowdown triggered by the pandemic and the company has been suggesting ways to improve their financials and overall structure, said one of the two people cited above.
“The current situation is exceptional, and Maruti wants its suppliers to stay financially sound since its fortunes are linked to suppliers’ performances. So, promoters of some of the overall leveraged suppliers have been advised to increase stakes as that will improve the capital position of the firm. Maruti has also been focusing on the non-core businesses of vendors for some time now,” said the person seeking anonymity.
Sale of vehicles in the domestic market has been declining since the second half of FY19 when the crisis in non-banking financial companies started in the aftermath of the payment defaults by IL&FS.
A spokesperson of Maruti did not comment on the issue.
Despite witnessing decent recovery in retail sales, automakers such as Maruti Suzuki and others struggled to ramp up manufacturing during the May to July period due to disruption in supply chain network as vendors could not ramp up production as expected due to various factors.
According to the second person, Maruti has been asking suppliers to build inventory as it does not want output to be hit due to issues at the suppliers’ end. Usually, vehicle makers and suppliers work with minimum inventory.
“During this kind of a prolonged downturn, monitoring and improving supplier financials becomes a prerogative for big automakers such as Maruti. Hence, through Maruti Suzuki Suppliers Welfare Group, it has been suggesting ways to keep a check on the fixed cost and overall capital position of these companies,” the person said.