Now, auto industry faces heat from dull dollar & inflation
After a robust growth of 16 to 20% in the last three years, auto industry is expected to clock a single digit growth of 5% to 7% in FY-08. In pics: JLR | In Pics: Swift Dzire
After the textile and the leather industry feeling the heat of the rupee appreciation against the US dollar depreciation, it is the turn of Indian automotive sector. All of a sudden, forced to face adverse developments in quick succession, the auto industry is pushed to the wall.
First came the rupee appreciation affecting export competitiveness. Second, demand for vehicles slackened in the domestic market. Third, due to rising inflation, interest cost is going up affecting the new investments planned. On top of it, prices of iron products have gone through the roof and it is set to take the sheen off the automotive industry.
As if the declining trend in profit margins of auto companies in the second and third quarter was not enough, the north-bound prices of steel is proving to be a challenge that India Inc. is yet to come to terms with.
With the steel-intensive auto component industry reeling under the price hike, at stake is over 3 lakh jobs. The hike has taken place to the extent possible in the last three-to-fourth months and the worst-hit are the Tier II and III suppliers, Wheels India Joint MD and Automotive Component Manufacturers Association (ACMA), southern region chairman Srivats Ram told ET.
First came the rupee appreciation affecting export competitiveness. Second, demand for vehicles slackened in the domestic market. Third, due to rising inflation, interest cost is going up affecting the new investments planned. On top of it, prices of iron products have gone through the roof and it is set to take the sheen off the automotive industry.
As if the declining trend in profit margins of auto companies in the second and third quarter was not enough, the north-bound prices of steel is proving to be a challenge that India Inc. is yet to come to terms with.
With the steel-intensive auto component industry reeling under the price hike, at stake is over 3 lakh jobs. The hike has taken place to the extent possible in the last three-to-fourth months and the worst-hit are the Tier II and III suppliers, Wheels India Joint MD and Automotive Component Manufacturers Association (ACMA), southern region chairman Srivats Ram told ET.
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The three categories of products, castings (pig iron), forging (steel and long products) and sheet metal (flat steel) have borne the brunt. An increase of approximately 30% in sheet metal and forging and a 40% rise in pig iron prices have caused concerns, he noted.
The increase is so substantial that it will adversely affect vehicle demand at a time when the industry growth is muted at best. Considering the extent of rise, component units would need a full recovery of the cost to stay in business.
Worst hit are those dependent on truck and two-wheelers as the dip in demand and rupee-dollar exchange rate have dented their margins further.
Industry sources say export contracts finalised at $ 44 and $ 45 are now standing at $ 40, making companies ���lose their shirts.��� Export-driven companies have seen a significant decline in their profits. At the same time, imports have exceeded exports in the auto component industry.
���This does not augur very well for the current year. You can���t change the international market but the government can use its policy instruments, remove incentives that affect our national interests. All parts of the steel value chain have to be addressed,��� Mr Ram observed.
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After a robust growth of 16 to 20% in the last three years, automotive industry is expected to clock a single digit growth of 5% to 7% in 2007-08. Due to high inflation and rising interest cost, the Rs 28,800 crore fresh investment planned in the auto component segment is at stake. ���The situation calls for immediate intervention,��� he said.If India were to compare itself with other low-cost locations, then the dollar depreciation by 14% is significantly higher than currency movements in other emerging economies. ���It is a depressing scenario for the industry,��� he said not-ing that sourcing interest is based on competitive factors.
On top of this, large capacities have been put up by automotive companies and component manufacturers, which are threatened by the likely slowdown. The steel ministry has come out with some proposals that could help the industry. However, there is still work that can be done related to the policies governing inputs to the steel industry, according to industry sources.
While India may have rich iron ore deposits, the steel industry does not have a cost advantage as prices are fixed on export prices to countries like China, which have inadequate domestic iron ore resources. The price of steel in the Indian market is higher than the level in other countries which are in control of inputs required for steelmaking.
However, export taxes and prohibitive freight due to geographic distances make steel imports from these countries unviable, they added. While India exports iron ore to China in bulk, it imports coke from China. China has zero duties on incoming iron ore but has an export duty of 25% on outgoing coke. China is guarding its natural resources and restricting coke exports.
All emerging economies have large requirements of basic commodities. It is imperative that India looks at a quid pro quo arrangement with China regarding availability of coke. Similarly, the country can look at removing import duties on both inputs required for steel, and steel itself.
Steel and pig iron availability is an issue that will hit the overall economy, significantly, infrastructure, construction and automotive, Mr Ram said.
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