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Rupee slide spurs automakers to look home for auto parts
Posted on 31 May 20124,610 Views Comments
Depreciating value of the rupee urges manufacturers to increase localisation
Car and motorbike makers, smarting from a tumble in the rupee that has increased import costs, now have little choice but to go local when buying parts - a shift that will further help the domestic industry become a sourcing hub for global automakers. Much of the industry's import bill is due to historical support provided by foreign carmakers. Suzuki Motor Corporation, Honda Motor Co and South Korea's Hyundai Motor Co invested heavily in the country, and local manufacturers looked to the East for parts.
But things are different now. Hit by global risk aversion stemming from the European debt crisis and India's bulging current account and fiscal deficits, the rupee hit a record low last week, and has fallen 26 percent against the yen and 24 percent against the dollar since May 2011. Ajay Seth, chief financial officer of top carmaker Maruti Suzuki, said his company could cut annual parts costs by 25 to 40 percent if it switched to local suppliers. "Localisation is absolutely the only way around a further weakening of the rupee. There is no other answer."
Maruti, which with its suppliers imports about $2 billion (Rs 11,222 crore) worth of parts every year, lost $40 million (Rs 224 crore) in the October-December period as the rupee fell against the yen. "Hedging is only a short-term measure. The only way to truly de-risk yourself is through localisation," added Ajay. The impact of the rupee can perhaps be best seen in the very different profit margins of motorcycle makers Bajaj Auto and Hero MotoCorp, which until recently was aligned with Honda. Bajaj, the nation's No. 2 motorbike maker, uses 97 percent local parts and its imports costs are equivalent to just 15 percent of its export revenue, which grew 40 percent in the year to March 2012 to $1.4 billion (Rs 7,859 crore).
That local edge helped Bajaj to an operating margin of 19.4 percent in the year that ended in March. By comparison, Hero which imports around 15 percent of its parts and saw its costs go up by $70 million (Rs 3,929 crore)in the fourth quarter of the last financial year due to the rupee, posted an operating profit margin of 7.3 percent. Led by auto hubs such as Chennai, known as India's Detroit, and which is located in the southern Indian state of Tamil Nadu, the nation's auto component industry has grown to around $45 billion (Rs 2.52 lakh crore), double its 2008 value.
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