Automakers largely absorb the impact
THE LAST PART OF A FOUR-PART SERIES ON THE IMPACT OF A STRONG RUPEE ON KEY EXPORT-ORIENTED INDUSTRIES LOOKS AT THE AUTOMOBILES SECTOR
Exchange risk management & natural hedges offset part of pressure; some also benefit from significant import of inputs
One of every five cars and every 10 two-wheelers produced in this country gets exported. India also exports commercial vehicles and threewheelers in large numbers. In addition, automobile components worth ~70,000 crore get exported every year. Not to forget thousands of tractors and millions of tyres, to destinations across the globe.
So, any strengthening of rupee against the dollar hits the sector, reducing the export income of companies and putting pressure on their margins. The industry produced 3.79 million passenger vehicles (cars, vans and utility vehicles) and shipped out 758,830 units in FY17.
Hyundai, Ford and Maruti Suzuki are the top three car exporters. Hyundai did not respond to queries seeking a comment on the impact from the stronger rupee. R C Bhargava, chairman at Maruti Suzuki, said exporters cannot expect the exchange rate to be always favourable for them. “The rupee has strengthened but is still weak compared to what it was a few years ago. In today’s climate, the currency fluctuation is so frequent that any hedging only works for a short duration. Businesses need to take such fluctuations in their stride and adjust operations accordingly,” he said.
Maruti has a well-structured exchange risk management policy. “The company manages this risk by appropriate hedge instruments, depending on market conditions and the view on currency,” the country’s biggest car maker said in its latest annual report. Its risk on foreign exchange fluctuation, it said, was mainly on account of import of components, raw materials, royalty payments (to Japanese parent Suzuki) and export of vehicles. While royalty payments and the bulk of import happens in the yen, the export realisation would be in dollars.
“We absorb the impact of any fluctuation in foreign exchange. As the rupee turns stronger, there is a small decline in profitability to that extent. At our end, we try to push distributors in our export markets to expand volume. There is no other measure at this point,” said Roy Kurian, vice-president (sales & marketing) at Yamaha India. The company ships about 14,000 twowheelers or 18 per cent of its production every month.
The strengthening rupee has a significant positive angle as well for the industry. There is significant imported raw material content in cars, especially in the bigger and premium ones. These imports get billed in dollars; so, a weaker dollar is good. In recent quarters, car makers had taken decisions to increase prices in the domestic market, attributing the decision to a weaker rupee, among other things. A strong rupee now makes the margins better, unless companies pass on the gains to customers.
Toyota, for instance, imports almost 30 per cent of the content by value for its Innova Crysta and Fortuner bestsellers. The situation is similar with many others. Luxury car makers Mercedes-Benz and Audi will benefit more from the stronger rupee, as the content of imported raw material is more than 40 per cent in many of their products. While sourcing of components from local vendors brings a host of benefits and mitigates currency fluctuation risks, complete localisation is not feasible due to unavailability of desired technology or quality, both due to lack of economies of scale.
Motherson Sumi, the country’s biggest auto component maker, said it did not need to hedge, as most of its exports are in the euro and to subsidiaries abroad. “Exports continue to be steady. We have a natural hedge,” said G N Gauba, chief financial officer.
Series concludes