Car companies take the local route!

Auto companies are having a rough ride. On one hand, increasing petrol prices are raising demand concerns. On the other, the rupee's fall is increasing cost concerns. And now in a bid to protect margins, car majors are opting for the only way out...increasing localisation, reports CNBC-TV18's Swathi Narayanan.

The rupee's free fall against the dollar has meant that importing components for auto companies has become a costly affair. For example, Toyota Kirloskar says, if the rupee depreciates at this rate, it is likely to result in a Rs 350 crore setback for the company. Hyundai too is equally worried saying costs have risen by 10 to 12%. R Sethuraman, senior VP - finance & corporates affairs, Hyundai Motor India says, “Between February and today rupee has depreciated by 15%. In April-May alone 10% depreciation has taken place. That means your import costs have gone up by 10-15% in last three-four months.” To tide over this problem, auto makers are looking at manufacturing more components in India. According to experts, OEMs try to source about 65- 70% of the components domestically. But now they are trying to increase this to about 90% in the near-term in order to reduce the impact of the falling rupee. Some OEMs like Toyota and Nissan are even looking at making gear boxes and engines locally, which are usually imported. Abdul Majeed, leader - auto practice, PwC India says, “If you look globally, it is not only India. If you look at yen appreciation versus dollar, which no one imagined will happen, but it happened. Now you are talking about significant appreciation, dollar versus rupee. So, many OEMs will see what best they can do. Localise as much as possible. Achieve parity of 90% - 95%.” Srivats Ram, MD, Wheels India says, "People are trying to minimise the impact of forex on their costs. In the industry, there is a lot of activity around localisation and all OEMs are looking at increasing this.” Increasing localisation seems the best bet to hedge against a weak rupee. So, many OEMs like Nissan and Toyota are planning to drive down this route to save costs and protect margins.