The strengthening rupee may bring cheer to many, but for auto component manufacturers it brings only more bad news.
Currency rise and FTA with Thailand have dealt a blow to the industry
NEW DELHI: The strengthening rupee may bring cheer to many, but for auto component manufacturers it brings only more bad news. The sector, which clocked exports of a staggering $3 billion last fiscal, may still achieve the projected 15-20% growth but margins have already taken a severe beating because of the rupee appreciation.
According to Vishnu Mathur, executive director, Automotive Component Manufacturers Association (ACMA), “auto component export margins have been squeezed by 10-12% since March this year because of the rupee appreciation.”
Mathur says unlike the last decade, when component exports were being largely done to the after market, at least 70% of the exports now cater to original equipment manufacturers (OEMs) and Tier I suppliers. “This means contracts signed are long-term and they necessitate a gradual reduction in prices over a period of time. Also, most such contracts do not allow renegotiation in case of dollar fluctuation.”
This means component exporters are stuck with orders that cannot be renegotiated in any way. Also, at a time when the auto component sector is already struggling with various issues due to a Free Trade Agreement with Thailand, the rupee appreciation has dealt a double whammy. The FTA with Thailand, which now allows zero duty imports and exports of auto components to and from that country, has spawned an inverted duty structure, hurting the bottomline of component makers in India.
Mathur says at least five of the 82 tariff lines under the FTA deal with components. These include engine parts, ball bearings, lighting equipment, gear boxes and pumps. “Take engine parts which are made of aluminium. The duty on aluminium is 5-7% whereas there is no duty on the finished product - this is what we mean by an inverted duty structure”.
Not only is the FTA hurting component makers’ bottomline, Thailand appears to have used this agreement to its advantage by also promoting itself as the most attractive investment destination for component makers in Asia. This means India’s position as an attractive destination for attracting American or Japanese investors is weakened.
Already, companies such as NRB Bearings have decided to invest in setting up manufacturing facilities in Thailand and more Indian companies may follow suit.
The $35 billion auto component industry is projected to have a turnover of $145 billion by 2016, when exports would grow to almost nine times their present size to $35 billion.
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