After the Bank of Japan maintained the status quo on rates, the yen surged to a 22-month high. The yen appreciation has impacted some of the Japanese subsidiaries across the globe.
Speaking to Bloomberg TV India , Maruti Suzuki Chairman RC Bhargava explains how the company has, over the years, tweaked corporate strategy to offset the impact of currency fluctuations. Over the years, Maruti has localised parts and that has reduced the impact of yen volatility on the company’s financials, he said.
The yen has always been a very volatile currency. We had substantial yen imports in terms of the inner parts that vendors require. Over the years, we have localised those parts. As a result the impact of yen volatility has reduced.
Not so long ago, the yen went below 100 to a dollar. After Japanese Prime Minister Shinzo Abe started his programmes, the yen went up to over 124 to a dollar. And now it has come back to 104, but it is still higher than what it used to be even a couple years ago.
We are used to this. But at this moment, the impact of the yen on us will be much less than what it used to be two years ago as we now have lower import content.
Also, from Brezza onwards, all the royalties are in rupees. For any new model introduced alongside Brezza and thereafter, the royalties will be in rupees. Therefore, when we convert the yen, there is no impact of its volatility in terms of the amount of rupees we have to pay. The third thing is, we have started exporting Baleno to Japan, and that provides a partial natural hedge to imports from Japan.
Your exposure to direct imports has reduced over the years. What percentage of your sales is direct imports and how much of it is yen-denominated currently?
I’m not in a position to give you the exact number. All I can say is that we have newer models, which have newer technology and higher import content.
The import content for older models, which we had a chance to localise, becomes lower. So if I look at import content levels, let’s say five years ago, on the inner parts, those imports today are at least 10 percentage points lower.
It used to be 25-26 per cent. But this has increased in the newer models, in which the technology is new and we have not been able to localise.
What percentage of your revenues is expected to come from Baleno in FY17?
I think it’s too early to predict because we have just shipped out one lot of Balenos. We have to get customer feedback from Japan as to how the vehicle is being accepted, how the sales are going on and how many new orders they are placing.
The royalties on upcoming models will be paid in rupee terms. How much of the current royalty amount that you have to pay in yen is hedged?
No, the impact of the yen volatility on the royalty continues as that’s not hedged; there are no imports which are set off specifically against those.
What lag does the company feel in terms of the currency fluctuation? When do we see the actual effect in terms of the financials?
There is a lag of at least one quarter. The average of the foreign exchange rate for one quarter is applied in determining the price adjustments to be made to the vender for the import content in the subsequent quarter.