The Hindu Business Line : Slowdown in global OEMs sourcing plans

New Delhi, Feb. 26 Even as India’s low-cost engineering is luring purchasing heads of global automobile companies to source components locally, vendor-specific capacity constraints and rupee appreciation are serving as speed-breakers.

“The fast growing domestic automotive sector fills up the component makers’ order book quickly. We have got feedback from suppliers that they do not have adequate capacity for potential projects, and would require to make additional investments for it,” said Mr Peter Kronschnabl, President, BMW India.

Freight costs

BMW said that the logistic costs incurred by the company worked against the cost advantage it gets. “But the strategy would be to go for value-added products like fully machined components in which India retains its cost advantage in contrast to a raw part,” he added.

Volvo India Pvt Ltd, that has a purchasing team to source components from here, says that pricing and supplies in the right quantities were major concerns.

“We sourced components worth Rs 450-500 crore in the last calendar year from India for our global operations and this year we are looking to increase procurement by 25 per cent annually,” said Mr Eric Leblanc, Managing Director and CEO, Volvo India.

However, he added, “When we look at sourcing from here we look at 30 per cent cost competitiveness since we also incur freight costs. We are also concerned about suppliers being able to meet capacities in specified time.”

Exchange rate clause

Unlike Volvo that procures in euros, companies that are billing in dollars also find the exchange rate protection clause an issue. The clause derisks the business of the component makers by giving them protection from the original equipment manufacturers to absorb the difference arising due to currency fluctuations during the contract period.

BMW added that though so far it has not considered using the exchange rate protection clause for sourcing from India, but when sourcing volumes increase, it may become an issue.

General Motors, that has announced sourcing of $1 billion cumulatively by 2010, said that the company would continue to buy $300 million annually from the country as per its target as the quality matched international requirements.

But whether it would have contracts with an exchange rate protection clause would vary from contract to contract, said Mr P. Balendran, Vice-President, General Motors India.

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