CORPORATE
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.