Auto companies are reeling under various pressures such as higher interest rates and slumping demand. Now they have started feeling the heat of depreciating Indian rupee. It is making a big dent in the financials of these companies. How? Many companies such as Maruti Suzuki India, Honda Siel Cars India and Toyota Kirloskar Motor used to import several auto components from foreign vendors. In many cases, their local vendors import materials for manufacturing of auto components for them. Hence, indirectly it is also an import for the companies who are using the final components. With the sharp fall in Indian currency, now these companies have to shell out more money to import the materials, directly as well as indirectly. Therefore, their margins are getting hit. Some of them are going to report even losses in the near future. For example, Toyota imports around 50% of its component from vendors in Japan and Thailand. As per the company estimates, with every each rupee depreciation versus dollar, the company loses around Rs 600 m.
With the overall economy in doldrums and foreign players pulling money out of the country, rupee has been on a downward slide. With no sign of rupee appreciation in the near future, these auto manufacturers are now putting efforts on localisation of manufacturing of auto components. Localisation is not a new phenomenon in the manufacturing industry. Companies have been practicing this for a long time. However, weakening rupee left these companies with no choice but to go for more localisation. Now these companies are striving to do all possible localisation. For example, currently indigenisation levels (of its vendors and of the company) of India's largest car maker company Maruti Suzuki are around 75%. Now to mitigate the adverse effect of rising import bills, the company aims to raise this level to 90%.
These companies are taking several steps to increase localisation. They are not just looking at their own purchases of materials from local vendors, but are also working with their vendors to help them in getting materials locally, thereby, cutting the import bills. Definitely, this exercise would help them curb the rising raw material costs. These efforts may have a good long term effect which is de-risking of the business operations from adverse currency movements.
Many companies use hedging instruments to de-risk the currency risks. But that too is not free of cost. And hedging all the transactions would be very costly. Hence, the steps taken by the companies towards localisation are definitely a good strategy. It will not only benefit their business in the longer run, but also help grow local businesses.
Source : equitymaster.com