Automobile companies are going to face challenging times ahead due to the rupee’s depreciation , which will increase the cost of mostly-imported electronic components.
Costs of electronic components are expected to go up by 15-20 per cent in the next few months, said an official of a leading chip manufacturing company on the condition of anonymity.
Electronic components account for over 25 per cent of the average cost of automobiles and their prices are expected to increase by over 50 per cent in the next three years, said Subu D. Subramanian, Managing Director and CEO, Defiance Technologies, part of the Hinduja group.
It is inevitable that auto majors, particularly multinationals, consider an increase in vehicle prices, as their import content is still significant. Local auto companies may follow suit. This will make an already depressed automobile market even more challenging for domestic companies as it will hit their volumes further. They will have to carefully consider the situation before taking the final call, Subramanian said.
They will, however, benefit due to exports as the rupee’s depreciation will improve their margins, he added. However the volume of exports for both multinational companies and domestic auto companies, barring a few, are not significant yet. This will motivate multinational companies to further move their assembling, manufacturing, R&D and design activities to India for the cost advantage. This could take the form of captive, joint venture partnership or outsourcing, mostly in electronics, connected car solutions, product design and engineering programmes, he said.
R. Sethuraman, Director, Finance and Corporate Affairs, Hyundai Motor India, said since the the rupee began losing value 12 months ago, there has been tremendous pressure on overall input costs. “We are closely watching the situation and market trends and expect the situation to improve in the coming months.”
Hyundai’s indigenisation strategy has reduced its dependence on imports, limiting it to items such as special grade steel, diesel engines, high-end petrol engines, auto transmissions, and a fewsome critical electronic and electrical items, Sethuraman said.
Surjit Arora, Research Analyst, Institutional Equities, Prabhudas Lilladher, said that ideally, the prices of vehicles should increase given their lower localisation levels. However, this will impact multinational companies such as Toyota and Honda. They will not be able to increase prices to fully offset cost pressures given that demand continues to be soft both for cars and utility vehicles.