Localisation picks up speed as import bill increases

Last Updated: Thu, Dec 01, 2011 19:33 hrs

Car makers, hit by a rising import bill as the rupee loses value, want to go in for pure localisation of their products. This involves not only getting components from the domestic auto ancillary industry but also initiating programmes with this industry to get it to source raw materials locally.

Maruti Suzuki India, Honda Siel Cars India and Toyota Kirloskar Motor have started working with their vendors to cut imports and to get raw materials for components locally.

India’s largest car maker, Maruti Suzuki, aims to raise indigenisation levels (of its vendors and of the company) to 90 per cent from the current 75 per cent over the next two years. It imports components worth Rs 8,000 crore every year. “We import over 10 per cent of our components indirectly through our vendors. The appreciation of the yen or the depreciation of the rupee puts pressure on our margins,” said a senior executive. “So, now we are trying to work with our vendors and encouraging them to increase localisation levels of the products.”

The company expects the pure localisation to help cut production costs by as much as five per cent.

Analysts say the move towards localisation was an inevitable one. “Eventually, auto companies would have to localise to reduce costs and improve profitability,” said Abdul Majeed, partner, PricewaterhouseCoopers. “The adverse foreign exchange movements have further catalysed the drive towards improving localisation levels”.

The rupee has weakened about 17 per cent against the US dollar since January, hitting an all-time low of Rs 52.73 last week.

A rising import bill is something car makers cannot afford at a time when they are also facing low sales. High interest rates and rising fuel prices are keeping away new customers .

In October, car sales suffered the worst year-on-year decline in over a decade, slumping 24 per cent to 138,521 units. This means car makers need a cautious approach on any price revisions. So, while Maruti increased prices by up to Rs 10,000 on its diesel cars early this month, it left prices of petrol cars untouched.

Low sales, coupled with little option to raise prices, are making most companies look towards cutting costs.

“For every rupee depreciation, we stand to lose as much as Rs 60 crore. The rupee has dropped from Rs 46 per dollar to Rs 52 over the last few weeks. This is having an adverse impact on our financials. In the current year, we will end with huge losses,” said Shekhar Vishwanathan, deputy managing director (commercial), Toyota Kirloskar Motor. The company is mulling raising prices of its vehicles before January.

Toyota imports as much as 50 per cent of its components, largely from vendors in Japan and Thailand. The company has started work on an engine manufacturing facility (capacity of 100,000 units per annum) by 2012 for the Etios range and a transmission plant (capacity of 240,000 per annum) by 2013. When these facilities start, the localisation of its cars, the Etios and the Liva, will go up to 90 per cent.

General Motors, too, which imports completely built-up units for the Captiva and critical components for some of its cars, is considering a price rise.

“We are currently evaluating the extent to which we are being impacted by the depreciation of the rupee. We will raise prices accordingly, probably before January next year,” said P Balendran, vice-president (corporate affairs), GM India.

Honda Siel, which has de-risked exposure to forex fluctuations through forward contracts, is not looking at a price hike immediately. “The yen has been stable lately, the dollar has appreciated sharply in the last three weeks. For the moment, we are covered,” said Jnaneswar Sen, senior vice-president (sales & marketing).

More from Sify: