The car and motorcycle manufacturer in India have to resort to local parts following the impact of steep fall in the value of Rupee, which increased the import costs. This shift from imported parts to local parts will lead domestic market to become a sourcing base for the international brands. Companies like Suzuki, Honda and Hyundai have invested huge sum of money in the country and local manufacturers were compelled to import the parts. This is the sole reason behind the mounting import bill of the car market.
Maruti Suzuki can reduce the yearly cost of the parts by 25 per cent to 40 per cent by shifting to local suppliers, said Ajay Seth, Chief Financial Officer, Maruti Suzuki. He stated, "Localisation is absolutely the only way around a further weakening of the rupee. There is no other answer." With the fall of Rupee against yen, the company lost USD 40 million since USD 2 billion worth of parts are imported by its suppliers every year. Seth said, "Hedging is only a short-term measure. The only way to truly de-risk yourself is through localisation."
The wide gap between the profit margins of Bajaj Auto and Hero MotoCorp (the erstwhile partner of Honda Motors), is the perfect indicator of the impact of Rupee decline. The second largest motorcycle manufacturer in the country, Bajaj marked a growth of 14 per cent in fiscal year ending March 2012 and stood at USD 1.4 billion.
This was in light of the fact that 97 per cent of its parts are sourced locally and the imports costs are just 15 per cent of its export revenue. It helped the two wheeler company to attain 19.4 per cent of operating margin.
This figure was way ahead of its rival Hero's operating profit margin of 7.3 per cent. The reason behind low figure of the Hero MotoCorp is that 15 per cent of the parts used by company are imported. This led to the increase in the input cost by USD 70 million during the Q4 of the last fiscal.
According to Automotive Component Manufacturers Association of India (ACMAI), the components industry will be able to bring in USD 113 billion worth of revenue by 2021. Finance Head, Bajaj Auto, Kevin D'sa, stated, "Local sourcing has definitely been a conscious business decision.” He added, "India has a very well-established vendor network with state-of-the art production facilities. The need for imports doesn't really exist." According to Automotive Head, Pawan Goenka, Mahindra and Mahindra group, following the unexpected decline of the rupee, country's leading Sports Utility Vehicle maker is in the process to localise production of some parts, which were imported earlier.
He added that the parts like air bags and parking sensors cannot be manufactured in the country and hence need to be imported. This is why the companies can only localise the parts production to a certain extent.
Not just the local players but the international brands are also opting to increase sourcing of parts from India for the cars manufactured in the country as well as abroad. Doubling the amount of parts sourced from local suppliers in 2011, Volkswagen is planning to buy 700 million Euros worth of parts locally for its global manufacturing plants. Besides VW, international car makers like Ford is aiming to go for 95 % localisation.
