The Hindu Business Line : Auto parts makers insist on currency fluctuation clause

Bangalore, Sept. 27Some of the Indian auto parts makers are rushing to re-open key supply contracts with their US-based customers as the rising rupee is sending the entire industry into a tailspin.

A few others, who have entered into fresh negotiations with their customers, have started insisting on building in currency fluctuation clauses to counter further changes in the Indian rupee.

“The contracts currently under negotiations are building in currency fluctuation clauses. Previously this was not a common practice particularly since no one anticipated this kind of appreciation of the rupee,” auto-parts maker Sona Koyo Chairman and Managing Director, Dr Surinder Kapur, told Business Line. “Most auto component manufacturers working under old contracts are asking their customers to revise pricing based on the appreciation of the rupee,” Dr Kapur said.

According to Automotive Component Manufacturers’ Association of India, exports to US companies are worth over $500 million out of the total exports of $2 billion.

Another auto-parts manufacturer, RSB Group’s chairman, Mr R. K. Behera, said almost all the suppliers are trying to have the currency fluctuation clause built in.

“In the past when the USD-INR exchange rate was relatively stable, currency fluctuation clause was not a norm in the export contracts. Some had this clause, while others did not have it. However, in the present volatile exchange rate regime, all suppliers are endeavouring to have the currency fluctuation clause built into export contracts,” Mr Behera said.

He said as Indian auto component makers work in a very competitive environment with thin margins, many companies which do not have currency fluctuation clause built into the old agreements, are now trying to re-negotiate the contracts. But there are other manufacturers who are trying to shift their focus to euro currency.

Shift to euro

Sona Koyo itself is trying to balance out this impact by focusing on European exports while decreasing its exports to the US. But a recent report by an industry association has pointed out that even though euro is emerging as the most preferred currency for Indian exports, there could be hurdles to move away from the dollar.

“The change in the billing currency requires both the parties to a contract to agree on change in transaction currency,” the Federation of Indian Chambers of Commerce & Industry said in a report.

But there are a few who have escaped the current onslaught. Suprajit Engineering which has a manufacturing plant in Europe said significant amount of its exports are in pounds and euros and hence its business has not been impacted.

“Our dollar exposure is limited and our imports are in dollar. Hence, generally we have a good natural hedge on dollar part of our transactions,” said Mr Ajit Kumar Rai, Suprajit’s Vice-Chairman and Managing Director.

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