Automotive companies pondering contract manufacturing to raise utilization ratio

Contract Manufacturing

Due to declining sales for over two consecutive years and predictions of recovery of the Auto-sector taking more than three years, the vehicle makers are now exploring options of contract manufacturing to utilize the idle capacities of the manufacturing units.

In order to earn a profit, the Auto-makers need to utilize at least 70 percent of their total manufacturing capacity. Last financial year, before the outbreak of the pandemic, the auto-companies utilized less than 60 percent of their total available manufacturing capacity.

To boost the utilization ratio, Auto-sector companies such as Mahindra-Ford and Skoda Volkswagen — which are partners in production, are exploring ways such as contract manufacturing.

Whereas, to improve the utilization ratio, Japan’s Toyota has already made a deal with Suzuki Motor Corporation to let it manufacture vehicles in Toyota’s second factory located in remote area of Bengaluru. Toyota used this second factory to manufacture it’s Etios range of vehicles which did not attract much attention in the Indian market.

It’s a huge task to commission an another plant due to significant investment, in the current investment scenario. As most of the Auto-sector companies have more than enough capacity to ultilize it hundred percent on their own, contract manufacturing becomes a good option. The domestic market did not pick up as the Auto-industry and manufacturers expected, so contract manufacturing is the best short-term solution.

For the companies who are looking to establish their manufacturing base in India, component manufacturing giants such as Motherson Sumi Systems Ltd are also set to facilitate contract manufacturing. To diversify it’s manufacturing abilities and end it’s reliability solely on Auto-part manufacturing, the Noida-based company has decided to explore sectors such as healthcare, information technology, aerospace and defence over the next five years.

To reduce their overall investments, companies like FAW Group Corporation and China’s Changan Automobile Co. Ltd who have been looking to enter the Indian market are also now contemplating a contract manufacturing pact.

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