I have just received a SMS from one of my good friends in Maruti-Suzuki. He texted to inform that Maruti (Suzuki India) sold more cars in the first six months of the financial year than Suzuki did in Japan.

Kudos to Maruti!

Leaves me with a few questions though.

Is Suzuki happy with the development? I wonder how a father feels when the son starts doing better. I know - bad analogy.

Is Maruti allowed to express its happiness openly? FYI no formal press releases.

Will Jagdish Khattar be elevated to play a role in Suzuki's global operations? After all, in a market like India where everyone is feeling the heat due to high interest rates, it is Khattar's confidence (bordering sometimes on cockiness) that has seen Maruti continue its march ahead.   

On the serious side, this definitely means that India is now even more important for Suzuki than it ever was.

Will that translate into greater product development happening in India? The trend is definitely there. Starting with the Swift, the YN4 (Swift three-box under development) and now the YC5, Maruti engineers have been playing an ever increasing role in product development.

We are heading towards interesting times in the near future. Two wheeler majors Bajaj Auto and TVS are about to enter a bitter war over patents. The story so far:

Bajaj made an engine with twin spark plugs and two valves. Its engineers exclaimed “Eureka!” and then promptly applied for a patent. Someone pointed out that two valve engines and twin spark heads have existed since Elvis. “Well they were big engines, ours is a small one,” claimed the Bajaj tech boffins and were awarded a patent.

“Ridiculous,” said the TVS tech team and promptly started working on their own twin plug bike motor. The result was unveiled last week in the form of the Flame, a 125cc which at least has set the rival Bajaj camp on fire.

“Holy beejesus, we will sue the crap out of them.” cried some of the top Bajaj guys, howling like an infant after its first polio booster shot. 

The retort from the TVS guys was equivocal and in the last two days, both rivals have made allegations against each other about stealing technologies and misrepresentation of facts. Since yesterday, both companies have issued press releases lambasting the rival. Everyone says that they are hurt and feel bad.

In the process, at least two law firms are richer and they don't feel too bad about it.

This crisis is unlikely to subside anytime soon as some major egos have already been hurt on both sides. For Bajaj, twin-spark, or Digital Twin Spark (DTS-i), as they call it makes a lot of money, nearly 60% of all they earn so if a rival peddles a product with a Digital Dual Spark (DDS-i) or any similar moniker, it's bad news.

On the technical front, my feeling is that Bajaj have a weak case. Patenting twin sparks is like, umm, patenting a 27-hole shower nozzle. Someone can easily drill another through it and claim another patent. It is always dangerous to adapt an existing technology and give it a twist to claim a patent because another Indi-genius may come around and give it another twist, showing you the middle finger.

If Bajaj has a painful rear end, they have themselves to blame.   

I am in Frankfurt as I write this. On Thursday, my organisation SupplierBusiness had organised a conference during the show. The conference's agenda was “Supplying the Global Auto Industry” and we addressed issues like “Supplying to Low Cost cars” and “Supplying from Low Cost Locations” during the conference.

The day long event had some interesting speakers including Bo Anderson from GM, Wolf-Henning Scheider of Bosch, Prof. John Henke from Planning Perspectives (They carry out a very interesting survey of suppliers in North America) and Glenn Mercer (formerly McKinsey, now Sr. Advisor UBS).

However, the surprise ‘hit' of the day was E Balasubramoniam (I hope I got the spelling right), who is responsible for the purchasing of the Tata One–Lakh (Euro 1800) car. The man came with a very detailed presentation and disclosed as many details about the car (sorry, no photos) as possible at this stage. So, we now know that the car will be eventually manufactured at four plants across India, will target a production run of a million units per annum and is still staying true to its price target of Euro 1800, ex-showroom. Apart from these, more details of the Tata Low Cost Vehicle will appear in a future issue of SupplierBusiness Analysis.

The Indian component industry has been going through some anxious moments recently with the strengthening of the rupee (a bit) and the weakening of the dollar (a lot). The Rupee is currently hovering around INR41/US$1, down by around 10% from a year back. This is bad new for the auto component industry, particularly companies like Rico Auto who have a high exposure with the US based carmakers.

While a 10% strengthening of the rupee is something that companies can live with by tightening their belts and removing the inefficiencies in their systems, a recent forecast that landed on my desk spells even tougher times for the component industry. Leading financial institutions forecast that the Rupee will strengthen even more from the existing levels. Most FIs forecast that the Rupee will strengthen to INR38/ US$1 - INR39 / US$1 levels by the first quarter of FY 2009, The optimistic of the lot forecast the Rupee to be at INR 42/ US$1 levels – definitely levels that the Indian supplier base can live with but it is the pessimists that they have to worry about. BNP Paribas forecasts the Rupee to hit INR32/US$1 in the first quarter of FY 2009. The only solace is that there is a big gap between BNP Paribas' forecast and other's so we can expect (hope?) some flaws in BNP's forecast. The next most pessimistic (or should we say optimistic since the Rupee is strengthening) is Morgan Stanley which forecasts the Rupee to be at INR 37.5/US$1.   

Even assuming the Rupee to be at INR38/US$1 levels in the next one year will mean a challenging time for the supplier industry. A senior industry executive pointed out to me a few days back that increasingly more and more new export contracts are having currency fluctuation clauses built in and the amount of fluctuations being accounted for are on the increase. He did not rule out that companies may be forced to renegotiate existing supply contracts with US OEMs and Tier 1s if the situation worsens.  

What is important to note is that it is not the Rupee which is strengthening so much but it's the American Dollar which is weakening. This situation may actually influence Indian suppliers to actively pursue contracts in Europe and elsewhere as compared to the US.

I am a great believer of conspiracy theories. That's why I continue to believe that the automotive sections in the last central government budget were penned under heavy Maruti influence (also under heavy alcohol influence, I presume) in the way they significantly benefitted the Numero Uno carmaker in India. Looking at how many Maruti models benefitted (and how many competitor models were shafted) overnight due to excise duty exemptions, the budget sure was good news for the company.

Or was it?

Look at the long-term prospects. Everything was fine, all carmakers were merrily working on their confused action plans for India, and Maruti was singing a happy note, till the government dropped a bombshell in the form of the budget. Think of it, all the carmakers were clueless about what to do in India and then suddenly the government gave them ideas. After the initial shock (and the accompanying howling), everyone picked themselves up, dusted their clothes and then knew what to do.

Make small cars.

The government also told the new big guys like Volkswagen that small cars are the only way to big volumes in India.

Remember, the big guys who had entered the market ten years back (guys like GM and Ford and Toyota and Honda and Mitsubishi and Skoda) were still grappling with selling B and C segment cars in a market that was predomianntly A segment, and had things stayed put, would have continued selling the same for another decade while happily reporting a 20% growth in sales on a base of 20,000 cars per year. That, in a market where last year's automotive sales crossed the million units mark.

The government (and Maruti) actually told them what to do.

So now every company is investing top dollar in developing small cars for India. Ford is doing one, GM has already launched one and is developing another, Honda is doing one, Toyota ditto, Skoda will share the VW cheap vehicle concept and even a non-entity like Mitsubishi is keen on one. Not to mention Renault-Nissan-Bajaj / Mahindra and domestic players like Tata.

Maruti suddenly has so much competition coming up in the next two years, something that could have been delayed by another five years.

If not for the over-eagerness of the government to please Maruti.  

Unlike other Bloggers who will blame everything from a blown Hernia to an air crash over the Amazon jungle (and a trek back home) for not posting for nearly two months, I will just blame the higher powers, i.e. God and my boss who kept me snowed under work.

Needless to say, I am back.

A recent comment on SupplierBusiness caught my attention. The comment is about the payment terms of French carmakers – it seems they are bringing the payment gap down from an astronomical 105 days to a more respectable 90 days. That left me wondering about the payment terms in India.

While all OEMs have their payment terms with suppliers, the general time lapse between delivery and payment in India seems to be at around 30-60 days. That's quite good for an emerging market like India.

However, there is quite some variation in this time lag between different OEMs. While some OEMs maintain a 30-45 day lag, for some others the payment terms are quite harsh, extending up to as much as six months and many stages of approval. Maruti seems to have the best payment terms with its Tier 1 suppliers, maintaining an online transaction system – payment as soon as material is delivered is the stuff of dreams even in many developed markets.

But how are the payment terms of Tier 2s? Do Tier 1s pay the people below them in the value chain as fast as the OEMs are paying them? Do Maruti Tier 1s pay their Tier 2s instantly – I am not sure about this as the Tier 1s do not maintain an online system with Tier 2s barring some cases.

How about a Tier 1 using the cash flow from OEM payments to fuel its own expansion and acquisitions while delaying payments of its Tier 2s? Think of it, there is very little a Tier 2 can do in these cases, except request for payments.

Do the OEMs keep track of Tier 1 - Tier 2 relationships?  

The year 2008 may be the final year for the ubiquitous Maruti 800. The government's safety norms are coming up in 2008 and the 800 cannot meet the crash test norms. Bidding adieu in 2008 - for similar reasons - will also be the Maruti Omni van and the Esteem sedan. Amongst other cars on Indian roads, the Ambassador cannot meet the crash test norms and will finally say its last hooray in 2008.

Coming back to the M800, the car still sells about 5,000 units a month. That's a significant number, more than the total sales of a number of companies and is significant also because Maruti probably has 50-60% profit on every unit sold, having amortized every machinery, tools and dies, jigs and fixtures for the car.

So, does it make sense for Maruti to continue with the 800?

Apparently not. The whiff that I am getting out of Maruti's cooking pot is that it is the final goodbye for the 800 in 2008. The car will require heavy modifications in order to meet the crash test norms, something that Maruti does not want to work on. The 800's dies are beyond their use by date and they have already been refurbished. A second overhaul will be expensive and Maruti is not very keen to do that. So my bet is on the 800 limping till 2008 and then signing off.

The Esteem will sign off too and will be replaced by the Swift sedan. That's a product worth waiting for as the three-box version will be powered by the Swift's capable powerplants.

Also signing off will be the Omni. This should be replaced by the Versa which may meet the crash-test norms, barely.

And that is why the new Automotive Mission Plan (AMP), as unveiled by the Prime Minister recently (not the 46 page one originally drafted and available for download on the net, but the 55 page one with the last minute changes actually released by the PM) is so important.

The Versa is shorter than 3.8 metres so will benefit from excise duty reductions, bringing the price down. Put in the diesel engine from the Swift and you have a van that will thrash the living daylights out of the Indica taxicab.

It has all started to make sense to me now.

Or maybe I am just hallucinating.  

Warning: These are just my musings. The resemblance to any person, company or situation is completely unintentional.

I have always wondered how typical Indian OEM-supplier relationships work. On a micro-level that is.

I wonder how the Managing Director of a multi-million dollar supplier group greets the General Manager – Sourcing of a leading OEM. The MD of the supplier probably smokes Havana cigars, goes around in a chauffeur driven S-Class and has the Ritz-Carlton as a second home. On the other hand, the GM – Sourcing earns a modest salary like any senior executive in an Indian automaker does.

And yet it is the OEM executive whose stamp of authority ensures 85% of the turnover of the supplier group.

Yes, the Havana cigars are dependent on someone's signatures.

Does the high flying Managing Director (HFMD) greet the modest earnings OEM purchasing executive (MEPE) with reverence?

Up to the point of worship? 

Do they meet like friends? Or is there some stiffness?

If they happen to meet somewhere outside India, would the HFMD ensure that the MEPE had an “enjoyable” stay?

If they happen to meet over drinks, who picks up the tab?

This thought process brings me to the second string.

Is OEM sourcing a completely transparent issue? Is there no underhand dealing involved in OEM sourcing? How easy, or how difficult, is it for a purchasing executive to favour a particular supplier.

I know that to a large extent purchasing is based on ratings, scores and systems. But there is always scope for an ambiguity where a supplier meets 85-95% of requirements. In such cases, the supplier is just about good enough on most counts but falls short on certain counts.     

Does the supplier do a nudge-nudge wink-wink with the OEMs purchase personnel and get the contract?

Is people skills a factor in OEM-supplier relations? Should they be?

Is playing golf with the Japanese OEM's MD part of business or just for pleasure?

I know that there was a controversy last year about Faurecia and some other suppliers bribing officials at VW, Skoda and SEAT to get lucrative supply contracts.

Does it happen in India?

I cannot help but wonder about how transparent things are in Indian OEM-Supplier relations. After all we Indians don't have an enviable track record in the area of ethics and corruption.

Assuming that the relationship has a certain degree of corruption involved is it more in case of companies like Maruti where even small components mean multi-million dollar businesses or in the case of a company like Ford where volumes are much lower.

Are employees of a company which has conservative salaries more susceptible to corruption as compared to other companies where middle level managers are better paid? Think of it, automotive industry in India is one of the lowest rated in terms of take home salaries.

My personal experience is that OEMs, especially Indian ones, try to keep their supplier relations under wrap. A two wheeler OEM had blocked my entry into their offices once I became too nosey about their suppliers. The reason was clear – most of the suppliers were close relatives of the OEMs managing family and their were a number of cross-relationships involved which they did not want to talk about.

So how are Indian OEMs designing their supplier relations to ensure that they are completely transparent?

Bellsonica Auto Component Pvt Ltd., the Maruti-Suzuki joint-venture with Bellsonica Corp., is expected to reduce the contribution per vehicle of Maruti's existing sheet metal suppliers.

The joint-venture was set up in July last year and is setting up a plant in Manesar, near Maruti's new production plant. Maruti-Suzuki holds 30% in the joint-venture with the rest held by Bellsonica – one of Suzuki's traditional suppliers in Japan.

The biggest loser is expected to be Jay Bharat Maruti, Maruti's traditional medium-sized sheet metal components supplier. Along with Caparo Maruti, Mark Auto (now SKH Metals) and Rasandik Industries, JBML accounts for most of Maruti's sheet metal requirements. JBML is one of Maruti's top five suppliers in terms of value.

Bellsonica's Indian venture is likely to overlap the most with JBML's share in Maruti's sheet metal component requirements, supplying the same type of components. Sources pointed out that JBML, which supplies around 90 sheet metal components for the just launched SX4 saloon, was offered less than 20 components by Maruti for the Model P, a small car under development by Suzuki, slated for launch in October 2008, to be manufactured in Manesar and slated for export to the European market. Maruti is targeting exports of 150,000 units per year of exports of the Model P, apart from huge domestic consumption, once it is introduced. The Model P will also be badged as a Nissan and that will account for 50,000 units as well.    

Ironically, Bellsonica has been one of JBML's technology providers in the past.

JBML is not the only probable loser because of Bellsonica's Indian venture; Caparo Maruti, Mark Auto and Rasandik Industries are all likely to see their average content per vehicle with Maruti go down in the near future.

In another development, the four sheet metal suppliers were amongst the top ten worst rated suppliers at a recent Maruti supplier convention.

Not surprisingly, the sheet metal suppliers have been working at increasing the share of non-Maruti business in their total revenue. JBML has established a number of companies under the "Neel" umbrella which are responsible for non-Maruti businesses. These include a joint-venture with Thai Summit. JBML is already supplying to Tata Motors, Toyota, Ford, Ashok Leyland, Honda and several two wheeler companies as well as Tier 1 suppliers like Delphi.

Caparo Maruti is also aggressively expanding beyond Maruti. It is already supplying to General Motors and Eicher Motors and is looking at expanding to other OEMs as well.