The rupee has been in free fall. It’s been touching new lows almost every other day. And an end to the mayhem does not seem in sight. In such a scenario, only firms that have invested in indigenous manufacturing or are net exporters (exports more than imports) will benefit. Since the rupee started falling in September 2011, some businesses have realised that it helps to go local.
From manufacturers of auto and consumer durables to mobile makers, companies are waking up to the pitfalls of an import-based business model.
In the last two years, the rupee has depreciated 39 per cent, sharply raising the cost of components and goods for import-dependent businesses. It puts them at a disadvantage vis-à-vis companies that are net exporters. For exporters, the depreciation has helped book more revenue per dollar of export.
Given this, it makes sense for companies to de-risk their businesses from forex volatility and, if possible, either turn net exporters or develop a natural hedge against imports. This can only be achieved if they scale up domestic manufacturing by investing in their own plants, equipment, and research and development (R&D).
Visible gains
The gains are already tangible in companies that became net exporters long back. For instance, a third of Bajaj Auto’s revenues come from exports.
This has cushioned the two-wheeler maker during the slowdown, while the rupee’s depreciation has made it more competitive in overseas markets where it competes with Chinese and Japanese motorcycle makers.
Ditto for South Korean auto maker Hyundai, which set up its first manufacturing facility in Sriperumbudur, near Chennai, back in 1997. It followed up with another one in 2008. Today, Hyundai is India’s largest exporter of cars. The auto maker does not, obviously, have to lose sleep over rupee depreciation. In fact, it only benefits the company as every dollar brings more rupees to its coffers. Its export revenue — Rs 7,959 crore, which is nearly a third of its total revenues in FY12 — also helps it finance the royalty owing to its Korean parent for the use of technology and brand.
In contrast, auto market leader Maruti Suzuki has been a late entrant into the localisation rally. It relied heavily on its Japanese parent for import of auto components and even basic materials like steel until 2010. Figuring out that it was almost unsustainable to continue imports, Maruti embarked on a localisation drive three years ago. It is now also roping in component makers in the ‘go local’ initiative, assisting them in setting up processes to make components. That has cut costs. Not surprisingly, Maruti now boasts about its localisation initiatives every quarter.
More players
Maruti and Hyundai are not alone in betting big on localisation. Yamaha dreams of exporting a ‘made in India’ bike to its African markets while Japanese AC maker Daikin (with a manufacturing plant in Neemrana, Rajasthan) wants to procure 65 to 70 per cent of its components locally in a bid to cut costs.
German luxury car maker Audi is keen on manufacturing some car models in India whereas Maxx Mobile is looking to re-start its production facility in Haridwar that had to be shut down due to a duty structure favouring imported handsets.
So while rupee depreciation seems to be painful in the short term, it may turn out to be a blessing in disguise for the Indian manufacturing sector in the medium to long term.
A cheaper rupee will incentivise Indian companies to export more besides helping them substitute some of the costlier imported goods in the domestic market with local products. The opportunity, if grabbed appropriately, can provide Indian companies with additional revenue streams in an otherwise tough demand environment.