Comments
With rupee depreciation making raw material and component imports dearer, the pressure on margins has been high for automobile and motor-parts makers. Companies are trying to offset these pressures through localisation — making or sourcing more components in India.
The rupee depreciation has fed directly into costs for many carmakers.
“Forex has been a killer this year with (adverse movements) in both the dollar and yen. We import raw materials used for disk pads such as friction material, resin and glass fibre, components for electric power steering and steel from Japan; the company's margins have been severely impacted,” says Mr L. Ganesh, Chairman, Rane Group.
Car maker Toyota too expects a Rs 200-crore hit to its bottomline this fiscal following a steep depreciation of the rupee.
Increasing prices to tide over currency impact may not always be the solution. Component companies negotiate hard to get a better price, but for most small players, there is stiff resistance from customers. For OEMs too, hiking retail prices becomes dicey considering market sentiments are low already.
Some respite
Some carmakers are discovering that localisation provides respite in troubled times.
Mr Vinnie Mehta, Director-General of the Automotive Component Manufacturers Association says: “While we may be challenged in terms of access to technology or may not be able to localise on the electronics front, there is scope elsewhere. Today, the interesting challenge is that while we complain about sales slowing, there is a significant wait list for diesel vehicles.
“That is on account of the fact that we do not have (enough) diesel engine manufacturing facilities. So, I think one opportunity on the localization front will certainly be diesel engines.”
Auto companies have drawn up aggressive plans to step up localisation. Diesel engines for the Nissan Micra are currently being imported from Europe, but the company plans to localise this with the setting up of a diesel engine plant next to its current plant in Oragadam, Chennai. The diesel variant of the Sunny is expected to benefit from this move.
Toyota too has announced an engine and gearbox plant in India. The company expects its localisation levels across models to improve by 25-30 per cent after this. High-volume models like the Etios and the Liva would be the first beneficiaries.
Valeo, a French components manufacturer, is expanding its friction material factory at Maraimalainagar, Chennai. It is also setting up a new factory at Oragadam for clutches. Besides, Valeo is looking to locally manufacture wiper systems, top column module, compressors and air management systems.
Challenges
But localisation of component/raw material supplies are not without challenges.
According to Mr Sugato Sen, Senior Director, Society of Indian Automobile Manufacturers, the problem with local sourcing of raw materials is that domestic suppliers also supply at a price that is pegged to the import parity price.
“But that can be addressed to a certain extent by entering into longer term contracts with suppliers which the larger players of the industry may normally be able to.”
Rane's Mr Ganesh says while the long-term solution is to localise, unfortunately, in India there are vested interests, unlike China where local value-addition is encouraged. “For instance in India, we have an FTA with Thailand and components come at zero per cent import duty. Hence, localisation is not encouraged. Companies resist localisation as long as import duty is low.”
Natural hedge
Another way out for companies to manage the currency related risks is to step up exports. The country's status as a ‘small car' hub could come in handy here. Hyundai Motors, for example, has been better off managing the currency fluctuation even as imports turned costlier due to its export volumes. One in every two cars exported from the country is manufactured by Hyundai.
Says Mr Shekhar Vishwanathan, Deputy Managing Director, Toyota Kirloskar Motors, “Exports will be a natural hedge. Although we export gearboxes for vehicles like the Fortuner, it is not good enough. We are beginning to export the Etios compact car shortly. I do expect, with the natural hedge in the form of exports and further localisation, we will be less dependent on the vagaries of the currency.”
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.