The Hindu Business Line : Auto component makers not alarmed over Chinese imports

Chennai, May 21 Not too long ago, when FTA (free trade agreement) negotiations between India and Thailand were on, the Indian auto components industry raised a storm of protest.

Some engine and plastic components were to be included in the ‘early harvest’ list — products that would be quickly brought under zero duty — and leading spokesmen of the industry saw red splashed across balance sheets.

The logic appeared inexorable. The Japanese, they said, had built up huge capacities in Thailand and wanted to export.

With economies of scale on their side and some edge in terms of relatively lower input prices, exports from Thailand would lick the Indian industry blind — went the argument.

Four years down the line, none of the prognosis was vindicated by the turn of events. Imports of auto components from Thailand (at Rs 875 crore in 2006-07) have not wiped out the Indian industry. Today no one is fretting over the ‘Thai threat’.

Fear factor

As the threat faded away, its place began to be occupied by the ‘China factor’.

Unlike in the case of Thailand, the ‘Chinese threat’ is today referred to as something lurking on the horizon, something to be alert about, but nothing that causes a loss of sleep.

But beneath this new-found sangfroid lies the perception of growing mistrust of Chinese technology by OEMs (original equipment manufacturers).

OEMs use the ‘China factor’ as a stick to beat their vendors into price reduction, or at least as a deterrent against demands for price increases.

Take for instance, Ashok Leyland, the country’s second largest truck manufacturer.

The value of the components it buys is around Rs 7,000 crore. What it imported from China last year was worth Rs 50 crore.

But asked at a press conference if Ashok Leyland would buy more from China, the Managing Director, Mr R. Seshasayee, said it would this year.

Yet, in the same breath, he also said that as a matter of policy Ashok Leyland would not deny business to an existing vendor.

Industry observers see the “will buy from China” line as posturing.

While admitting that China is causing “some turbulence”, the Chairman and Managing Director of Sundram Fasteners, Mr Suresh Krishna, observes that the country has “not come to a stage of launching a full assault on Indian companies.”

The numbers bear this out. The Rs 70,000-crore Indian auto components industry, in 2007-08, saw imports from China at Rs 2,200 crore, or 3 per cent. True, imports from China grew 70 per cent during the year, but the number is not very alarming.

Imminent imports

Industry associations, understandably, have taken a hard line against imports from China.

Mr Vishnu Mathur, Executive Director, Automotive Components Manufacturers Association, notes that sourcing by Indian OEMs is based mostly on price arbitrage, which is “artificial” because often the Chinese products come at a price less than the raw material costs of Indian manufacturers.

“If it is a fair competition, we have no issues,” he says. “If the OEMs import from China, what will happen to component manufacturers who have created capacities, based on long-term supply chain commitments?” asks Mr Mathur, apprehending a collapse of the entire supply chain, over time.

However, the pervasive feeling in the industry is that the imports of Chinese components will happen — perhaps even at a faster rate — but not to the extent of elbowing the domestic industry out of existence.

Just as the components industry is alert against imports, OEMs are always on the lookout for what best they could buy from China. Even the public sector BEML recently opened a purchase office in Shanghai. The President of the Association of Indian Forging Industry, Mr Vidyashankar Krishnan, says that public sector companies setting up sourcing offices is “not a good sign.”

Dealing with it

Yet, the arguments that support apprehensions of a surge in imports from China are pretty much the same as those put out when India was negotiating the FTA with Thailand — economies of scale and access to cheap raw material and funds.

These very factors were counterweighted by others such as long-term relationship with OEMs, proximity and technology when imports from Thailand posed a threat. There is no reason to believe why they will not come into play against Chinese imports.

There is no denying that the Indian industry has to battle with some inherent disadvantages, such as higher input costs and poor infrastructure.

But then, notes Mr Suresh Krishna, every country has its minus points. He notes that German companies have to contend with very high costs of labour, which work out to about 35 per cent of total costs. Yet, Germany exports billions of euros of engineering products.

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