Vehicle makers agree to pay more for parts

Vehicle makers agree to pay more for parts
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First Published: Thu, Jun 05 2008. 11 50 PM IST
Updated: Thu, Jun 05 2008. 11 50 PM IST
Mumbai: Automobile component makers who have been hurt by an increase in raw material prices may have wrangled increases of up to 10% in the prices of parts from vehicle makers, making it one of the steepest hikes in many years.
Vehicle makers say they don’t have much of a choice in the matter as some suppliers, especially those using steel, were holding out and refusing to supply the parts unless prices were upped. Four vendors Mint spoke to, who did not want to be named since their negotiations with auto makers are confidential, said they have managed better deals with car makers such as Tata Motors Ltd and Mahindra and Mahindra Ltd. Some two-wheeler makers have also given in to demands from vendors and agreed to pay more for parts.
The component price increase ranges 4-10%, with the steepest increase being reserved for steel parts.
The price increase comes after months of negotiations between vendors and firms after commodity prices globally spiked on demand. Prices of crude oil, whose by-products are used to make tyres and glass, have soared, as have prices of other commodities such as steel and aluminium. In the past 12 months, the price of steel and plastic has gone up by 40% and 15%, respectively.
“Vehicle makers realized so-mething had to be done,” said the head of an auto parts firm that makes a range of engine components. He said he had managed to negotiate better prices but wouldn’t give details.
Not all vendors have managed to do so. Many are still negotiating with their customers. And some vendors, whose products don’t have too much steel, are expecting a price increase of at least 4%, which will keep them afloat for now.
India’s auto makers are bracing for tough times ahead. They have already been slammed by higher interest rates, a spike in petrol and diesel prices, and tighter credit for vehicle loans. Indian consumers are also grappling with inflation, which is at a three-and-a-half year high.
Most vehicle makers have said they expect sales to be dull this year. The higher prices they have to pay vendors will likely hurt them further.
“Our customers tend to draw out the (negotiation) process for as long as they can to minimize the impact on their costs,” said a vendor who spoke on the condition that he not be identified. “It can be a highly emotional drama at times, depending on the extent to which vendors can absorb the rise in input costs.”
Auto makers also agree that times are tough, but did not specifically say whether they had agreed to price revisions with their vendors. “Like any other company, the terms between Tata Motors and its suppliers are confidential,” said a Tata Motors spokesperson.
Mahindra officials were not available for comment.
The profitability of vehicle makers is already looking wobbly. A Mint analysis of Tata Motors, Maruti Suzuki India Ltd, Mahindra, Ashok Leyland Ltd and Eicher Motors Ltd in the past eight quarters showed that growth in operating profit, a key yardstick of a firm’s performance, has been constantly slowing year-on-year in each quarter. The growth in combined operating profit for these firms was down from 36% in the quarter ended June 2006 to a decline of 10% in the three months ended 31 March.
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First Published: Thu, Jun 05 2008. 11 50 PM IST