Firms find new ways to reduce the impact of rising input costs

Firms find new ways to reduce the impact of rising input costs

New Delhi: At Samsung India Electronics Pvt. Ltd’s manufacturing plant in Noida, the difference between rolling out of two television sets has come down to 4.5 seconds from 4.9 seconds in the past few weeks.

The company has also replaced the conventional screws in its television sets with cheaper locking moulds. Also, instead of using two integrated circuit chips, the company now uses only one, which has some additional features.

While the Korean chaebol won’t divulge any numbers, it says measures such as these have helped it check the rising cost of manufacturing television sets.

Like Samsung India, most consumer durable makers in India are “value engineering" or using innovative techniques in their conventional manufacturing to check the impact of rising inflation—which last week touched a 13-year high of more than 11%.

“The Indian consumer durables market is one of the toughest in the world," says Abheek Singhi, partner and director, Boston Consulting Group, India.

“Prices of very similar products in India are cheaper than any other part of the world. That puts a lot of pressure on makers. Over the past three years, the prices of commodities used to make durables have at least doubled but the prices of the products have not been raised in proportion," he adds.

According to data from the Multi Commodity Exchange of India Ltd, or MCX, in the past one year, prices of raw materials such as steel, aluminium and copper used in manufacturing durables have gone up by 50%, 20% and 18%, respectively.

Yet, most of the durables companies have desisted from passing on the burden to consumers, fearing that increasing prices might lead to a slowdown in consumer demand.

Industry experts say that the consumer durables sector is the first one to get hit in a tough economic environment. With increasing inflation leaving less loose change in most wallets, any increase in prices will further dent demand from consumers, they say.

With this in mind, “companies are either substituting raw materials or making fundamental changes in product design. Also, they are pushing for operational efficiencies to leverage the impact of rising costs," says Singhi.

To be sure, companies such as LG Electronics India Pvt. Ltd, Voltas Ltd and Mirc Electronics Ltd, among others, have either rejigged their manufacturing processes or introduced new engineering techniques to neutralize the impact of inflation on their turnover and profits.

Samsung India, for instance, hasn’t increased the prices of any of its products, except for a certain category of refrigerators where prices were marginally increased by 3%, in the past one year. And despite the benchmark inflation rate climbing to dizzy highs, the company still hopes to hold it prices.

“In the face of rising input costs, we have managed to hold the price lines on account of value engineering activities, localization initiatives and efforts in the direction of improving our productivity at our manufacturing facilities in Noida," says R. Zutshi, deputy-managing director at Samsung India.

Some companies are altering their distribution and marketing approach to fight rising commodity prices. “We are trying to consolidate our sourcing to get cost efficiencies. We are also tweaking our backend operations to get greater efficiencies," says V. Ramachandran, India director, sales and marketing, LG Electronics.

“We have also reduced the number of (promotional) schemes and have hiked the prices by only about 5-7% across categories in the past one year," he adds.

Apart from altering manufacturing process and reining in marketing costs, the consumer durable makers are also pushing their premium products, which command higher margins and thus, help in neutralizing the input burden to an extent.

“Voltas is pushing its higher end air-conditioner categories. It grew by more than 60% over last financial year," says Pradeep Bakshi, vice-president, sales and marketing, Voltas.

Even LG says that it is increasing focus on premium and higher margin products. These innovative steps have certainly helped companies in checking any erosion in their profit margins.

In some cases, they have also helped in boosting profits. Mint looked at the top six listed firms by revenues including Videocon Appliances Ltd, Whirlpool of India Ltd, Voltas Ltd, Mirc Electronics Ltd, Hitachi Home and Life Solutions (India) Ltd and Lloyd Electric and Engineering Ltd.

It was found that except for Mirc Electronics, the operating profit margins for the rest of the five companies grew between 30 basis points and 505 basis points in the 2007-08 financial year over 2006-07.

A basis point is one-hundredth of a percentage point.

In the case of Mirc, the operating margin fell by 28 basis points and now, the company is contemplating a price increase.

“We did not increase prices last year but will be forced to have a relook in the future," says Gulu Mirchandani, chairman and managing director, Mirc Electronics, the company behind the Onida brand.