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Brexit breeds uncer­tainty in In­dian auto com­po­nents in­dus­try

PKC Group plans to tap CV, lo­co­mo­tive mar­ket in In­dia

The eco­nomic and po­lit­i­cal con­se­quences of Brexit, or Bri­tain’s vote to leave the Euro­pean Union, con­tin­ues to re­ver­ber­ate around the world. Questions are be­ing asked about its im­pact on In­dian econ­omy and in­dus­try. Re­search agencies and in­dus­try ex­perts are di­vided on the im­me­di­ate and prospec­tive im­pact of Brexit. There are also peo­ple who view the de­vel­op­ment as an op­por­tu­nity to de­sign a more prac­ti­cal global tem­plate for com­mon mar­kets.

Ac­cord­ing to the rat­ing agency Crisil, Brexit can af­fect com­pa­nies hav­ing a pres­ence in the UK and Europe. There can also be im­pact on the bal­ance sheets through un­hedged over­seas bor­row­ings. The sec­tors that could be vul­ner­a­ble to Brexit, Crisil says, are au­to­mo­tive, in­for­ma­tion tech­nol­ogy, tex­tiles, phar­ma­ceu­ti­cals, leather and met­als.

“Within the au­to­mo­tive space, com­po­nent sup­pli­ers will be more ad­versely im­pacted than the orig­i­nal equip­ment man­u­fac­tur­ers. Around a quar­ter of In­dia’s auto com­po­nent ex­ports are to Europe. The UK has a share of 5% in over­all ex­ports. Any damp­en­ing of prospects due to eco­nomic uncer­tainty and de­pre­ci­a­tion of the pound would have a cor­re­spond­ing im­pact on the rev­enues of these com­pa­nies. Com­pa­nies with plants in the EU/ UK would also have to con­tend with trans­la­tion losses,” the Crisil re­port has said.

ICRA anal­y­sis

Mean­while a re­port by the ICRA Re­search Ser­vices says that Brexit is un­likely to have any ma­jor im­pact on In­dian auto com­po­nent man­u­fac­tur­ers. Ac­cord­ing to the ICRA re­port, the im­pact of Brexit on In­dian auto com­po­nent man­u­fac­tur­ers could be: Im­po­si­tion of trade re­stric­tion be­tween EU and the UK, which could hurt au­to­mo­tive OEMs as well as their sup­pli­ers in ei­ther ge­ogra­phies; Po­ten­tial slow­down in the Bri­tish/ rest of EU econ­omy could im­pact per­for­mance of auto an­cil­lar­ies de­pen­dent on UK/ EU mar­ket. Based upon for­eign ex­change hedges, there could be near- term MTM losses for In­dian auto an­cil­lar­ies; and the de­pre­ci­a­tion of pound could off­set im­pact of trade re­stric­tion. This could in turn make ex­ports from /man­u­fac­tur­ing in UK com­pet­i­tive.

Im­pact on auto sec­tor

Ac­cord­ing to the re­port, While EU ac­counts for 36% of In­dia’s auto com­po­nent ex­ports, the share of the UK is a mea­gre 5%. Ger­many, in the EU, is a big­ger des­ti­na­tion for In­dian auto com­po­nent ex­ports. Hence, the im­pact of a po­ten­tial slow­down in the UK pas­sen­ger ve­hi­cle (PV) mar­ket on di­rect au­to­mo­tive com­po­nent ex­ports from In­dia is likely to be lim­ited.

The UK PV in­dus­try has been grow­ing at a healthy pace dur­ing the last few years and has achieved its ten-year-high

an­nual pro­duc­tion of 1.6 mil­lion in 2015. How­ever, the UK’s PV in­dus­try is pre­dom­i­nantly ex­port - ori­ented, with 77% of its to­tal cars pro­duced be­ing ex­ported to over­seas mar­kets. Of that 57% goes to EU alone.

Sim­i­larly, only one out of 7 cars reg­is­tered in the UK is man­u­fac­tured there, the rest be­ing im­ported (1.7 mil­lion), mainly from EU. On the sup­ply chain front, only 33% of au­to­mo­tive com­po­nents re­quired for the UK’s PV in­dus­try were sourced lo­cally with the rest 67% im­ported, pri­mar­ily (94% of im­ports) from EU. This high­lights the strong in­ter­de­pen­dence of the UK and EU au­to­mo­tive in­dus­try.

How­ever, a few In­dian auto an­cil­lar­ies have set up man­u­fac­tur­ing bases close to their cus­tomers in EU (in­clud­ing UK) to avail of the lower tar­iff and lo­gis­tics over­heads. ICRA Re­search says that the In­dian auto com­po­nent man­u­fac­tur­ers have a much higher ex­po­sure to Euro­pean CV and PV OEMs than to the UK-based OEMs. The com­pa­nies sup­ply­ing to EU from / EU or to the UK / from the UK will not have any ma­te­rial im­pact, un­less there is over­all slow­down in Euro­pean econ­omy. There is also suf­fi­cient time, 2 years, for com­pa­nies to plan their fu­ture growth plans and mit­i­ga­tion strate­gies.

Among the UK-based car OEMs, In­dian an­cil­lar­ies have rel­a­tively higher de­pen­dence on Jaguar Land Rover (JLR) owned by Tata Motors. JLR, a Bri­tish icon, was ac­quired by Tata Motors in 2008. With over 500,000 units ev­ery year, it is the largest car pro­ducer in the UK. JLR pro­cures nearly 40% of its parts from the Con­ti­nent and as­sem­bles them into fin­ished cars for ex­port back. It is ap­pre­hended that Brexit would dis­rupt its sup­ply chain, which de­pended on the UK mem­ber­ship in the EU. JLR con­trib­utes the max­i­mum to the Tata Motors’ net profit. Any im­pact on the Bri­tish unit would squeeze its re­sults and even af­fect its medium-and long-term busi­ness strat­egy.

New trade pact

There are in­di­ca­tions that there could be a sep­a­rate trade agree­ment be­tween In­dia and the UK. The Union Com­merce and In­dus­try Minister Nir­mala Sithara­man is re­ported to have said that the 2 coun­tries were ex­plor­ing the pos­si­bil­ity of a free trade agree­ment (FTA). If the UK re­turned to World Trade Or­gan­i­sa­tion rules for trade with Europe, it could re­sult in a 10% tar­iff on ex­ports and an im­port duty of 4% on com­po­nents. How­ever, the UK could ne­go­ti­ate ac­cess to the Euro­pean Union mar­ket as Euro­pean Free Trade As­so­ci­a­tion (EFTA) mem­ber. For in­stance, Nor­way is still not a mem­ber of the EU but it has favourable ac­cess to the Euro­pean Com­mon Mar­ket, be­ing an EFTA mem­ber.

An Asian De­vel­op­ment Bank (ADB) re­port ti­tled `Asia 2050: Real­iz­ing the Asian Cen­tury’ pre­dicts that with 3 bil­lion newly af­flu­ent cit­i­zens, Asia will ac­count for over half the world’s GDP, al­most dou­ble that of 2011. This po­ten­tially promis­ing fu­ture for the re­gion is re­ferred to as the ‘Asian Cen­tury’. It is said that Brexit and the sim­mer­ing dis­con­tent in other Western coun­tries might speed up the ar­rival of the `Asian Cen­tury’ led by the rise of China and In­dia.

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