03 Sep 2013

Indian Car Manufacturers Look to Localisation to Increase Sales

With the Indian Rupee depreciating over 20% in the last eight months, Indian car manufacturers have adopted the approach of aggressive localisation in order to take advantage of the devalued Indian currency to increase sales in new geographies. These include Hyundai India, Toyota, Volkwagen, Maruti Suzuki and Ford.

Volkswagen’s Indian subsidiary has opened up a new export market in Mexico, with the company planning to ship about 25,000 to 30,000 units of Vento, its popular sedan in the next 12-18 months.

For the German manufacturer’s Indian entity, this will be provide a huge boost as the proposed Mexican exports are expected to contribute almost 20-25% of its overall production. In addition, the company is considering exports to Malaysia and Indonesia in the near future.

Toyota recently shipped 400 units of its compact sedan Etios to Indonesia and is looking at other  overseas markets in which to increase exports. Hyundai is also planning to open up exports of Eon and i20 to more markets. Maruti Suzuki is incentivising sales in overseas markets to take advantage of depreciating rupee to boost market share in these territories.

Mahesh Kodumudi, president and MD of Volkswagen India, declined to mention specific exports market, but stated: “The primary intent for setting up the Pune plant was to cater to the domestic Indian market. However, with economic growth stalling, domestic demand for automobiles has weakened at a record pace. Besides, with the rupee plunging, we are forced to re-think our strategy. We are increasingly exploring more and more export markets. Currently, we are exporting CBUs and parts & components to over 30 countries with exports to many more countries in the pipeline.”

In an attempt to decrease imports, Volkswagen is also considering an option of assembling engines in India at its Indian plant, based in Chakan.

The company is aiming to increase its localisation in India from 70% to 85-90% in the next few years. “We are vigorously pushing forward activities related to increasing the extent and depth of local manufacturing of parts and components,” added Kodumudi.

The rupee deprecation is putting tremendous pressure on the margins and profitability, forcing companies to increase prices in the domestic market, which are already struggling.

“We are feeling the impact of the depreciation as the costs of our imports have gone up. With the automobile industry in a slowdown, raising prices has an adverse impact on sales. So, we are carefully studying the situation and the impact on our bottom lines,” said Jnaneswar Sen, senior VP (marketing and sales) at Honda Cars India.

However, a lot of companies in India pay for their imports in foreign currency. Similarly, they may use foreign currency for interest payments on their loans. A fall in the Rupee makes imports more expensive and forces companies to pay more interest on loans. This could have a negative effect on the ability of manufacturers to compete on the global market.

Despite this, politicians appear to be confident that things will return back to normal. Last week, according to FT.com, Prime Minister Manmohan Singh wearily defended his response to India’s growing currency crisis with hopes of a silver lining.

Speaking in parliament, he expressed confidence in one optimistic scenario: that the rupee’s rapid depreciation would now boost India’s languid exports, closing the current account gap and bolstering the currency.



 
 

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