A Bigger Cut in Production on the Anvil at Maruti Due to Semiconductor Shortage

Maruti Suzuki may resort to a deeper-than-expected 30-40% cut in vehicle production this month, as the shortage of semiconductors remains severe, people in the know said.maruti

For the nation’s top car manufacturer, this would mean a loss of 50,000-60,000 units in production and INR 2,500-3,000 crore in revenue in August. This could also affect the availability of popular models in the upcoming festive season, with demand already on an upswing.

The Indian unit of Japan’s Suzuki Motor was until recently expected to lower its production plans for this year by 5%, or 70,000-80,000 vehicles. The output cut in August alone would be about three-fourths of that, the people said.

The company is now likely to produce 110,000-120,000 units this month, they said.

Maruti Suzuki said it has no comment to offer.

The automaker has initiated production rationalization at parent Suzuki Motor’s Gujarat plant in the first fortnight of August and has now expanded it to its own Manesar facility in Haryana.

Production at Manesar is likely to go down to 45,000 units in August versus the average production of 65,000 units a month. At Suzuki Motor Gujarat, the output is likely to be cut by 65-70% to 15,000-20,000 cars, they said.

The impact on the Gurgaon plant, which makes entry-level cars, is relatively less.

Global forecasting firm IHS Markit expects the July-September quarter to be the worst in terms of chip shortage in India. IHS Markit expects the situation to remain uncertain in the coming months too.

But, since this guidance, Covid cases in Malaysia and the drought situation in Taiwan have worsened, which may further exacerbate the problem, said people in the know. These two countries are among the major suppliers of semiconductors to the world.

The company had produced 165,576 vehicles in June and 170,719 in July, taking the cumulative production for the first four-month of this fiscal year to 537,174 units. The market has been expecting a volume of 1.75-1.8 million units for the current fiscal year.

According to several people in the know, the production loss in the July-September quarter may now be as high as 150,000 units, as the chip shortage is unlikely to be resolved anytime soon.

Lower production may impact inventory build-up ahead of festival season and supply to its outstanding order book. The company had an order book of 170,000 vehicles when it’s announced its June-quarter results.

Lower output, particularly of higher variants, will depress the average selling price as well as weigh on the margin at a time when raw material prices are elevated.

Maruti Suzuki’s operating profit margin dropped to 4.6% in the June quarter on account of a fall in sales volume and a 3.5-percentage-point increase in raw material cost. According to analyst estimates compiled, its second-quarter revenue is estimated to be INR 23,067 crore, an increase of 30% from a year earlier, with an operating profit of INR 1,778 crore at a margin of 7.7%.

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