As part of a major cost-cutting exercise, Maruti Suzuki India Ltd (MSIL) will sign an agreement with its vendors under which they would have to increase localisation of car components within a given time frame or face a penalty.

It aims to increase the overall indigenisation level, both of its vendors and the company itself, to 90 per cent, from 75 per cent at present, in two years.

This, the country's largest passenger car maker thinks, would help it save five per cent on cost of production.

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MSIL chairman R C Bhargava said, "We expect by the end of the year, we would have signed up with all our vendors a time frame for indigenisation.

If a vendor fails to achieve its target, it will have to fork out a penalty by paying the additional amount due to adverse foreign exchange fluctuation."

"However, we will also incentivise the vendors by helping them to improve their margins, by not asking them to pass on the entire benefit of the cost reduction to the company," he said.

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According to Bhargava, if indigenisation helps a component price to fall from Rs 100 to Rs 90, Maruti would buy it for Rs 95, so that the vendor can also improve his margins through this process.

Maruti is also working on a completely revamped Alto. Its research and development (R&D) centre in Rohtak is making a significant contribution to the designing of the new version.

MSIL is also in talks with Fiat India for outsourcing diesel engines from the latter's Ranjangaon plant in Maharashtra, once the capacity of its Manesar engine plant in Haryana gets exhausted due to the spurt in demand for diesel cars.

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The plant in Haryana, a joint venture (JV) between Suzuki and Maruti, can produce 240,000 diesel engines per year.

MSIL plans to increase the capacity to 300,000 engines per annum.

Bhargava said: "Our JV gets technology for making diesel engines from Fiat. We are now talking to them for outsourcing some diesel engines from their Ranjangaon plant, where they have spare capacity."

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He said Fiat was working on a new engine in the 1,000cc range, which could be used for powering Maruti's smaller cars.

"At the moment, we have a 1.3-litre diesel engine. Fiat is working on 1,000cc engines also. We don't know the timeline, but surely, we will get these for our smaller cars."

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Suzuki has also decided to synergise its R&D centres in India and Japan, so that there is no duplication of work.

"As volumes go up in the Indian market, more R&D work will be done here. However, we have to build the capacity.

Currently, we can do a lot of work on body change, facelight and considerable amount of styling. However, we have so far not done any work on new platforms, powertrains and hybrid cars," said Bhargava.