Rupee appreciation hits auto parts exporters hard

Rupee appreciation hits auto parts exporters hard

Mumbai: A sharp hike in the value of the rupee, which has climbed 12% against the dollar since the beginning of 2007, is throwing India’s small and medium auto component makers out of gear. On an average, a stronger rupee has shaved off 10% from the export revenues of many small component makers in this period.

“It is no longer profitable to be in the export business," insists Z.A. Sultan, managing director, Nishan Overseas Marketing Pvt Ltd, an exporter of automotive parts and spares to the heavy commercial vehicles segment with Rs10 crore in revenues. “Our profit margins have been completely eroded."

Nishan does not sell in India at all. Its exports are concentrated in Australia, Europe, West Asia and the Far East. Barring Europe, where the company bills in euros, about 80% of its export orders are dollar transactions.

When companies bill in dollars, each time the firm receives its payments and converts the money into rupees, it gets less of the local currency. In January, Indian exporters would have got Rs4,426 for every $100 of billings, while these days they would get only Rs3,943 for the same amount of dollars.

Meanwhile, even as the firms are making less money on their exports, interest rates and inflation at home have remained high. Goods are about 3.02% more expensive now than a year ago as measured by the wholesale price index and interest rates are at a five-year high, raising the cost of doing business and pushing up wage bills. And for exporters, there is no respite because they haven’t been able to raise their prices. “Our customers have resisted any price increases we have requested from them so far," Sultan said.

Smaller players who quote higher prices for future businesses risk being priced-out by competitors in countries such as China, whose economy thrives on its exports. The Chinese yuan is pegged to a fixed price range against the dollar, arresting large fluctuations in the currency.

India’s auto component industry had revenues of about $15 billion (Rs59,050 crore) in 2006-07, according to provisional figures from the Automotive Component Manufacturers Association of India (Acma). Small- and medium-sized enterprises make up almost 60% of the auto components sector in India. Exports account for 19.5% of total volumes at $2.93 billion.

Any further appreciation of the rupee, say to Rs36-37 on a long-term basis, might lead to the closure of some small and medium companies, particularly those who are concentrating only on exports and have marginal sales in India.

Many of the export contracts, especially those with vehicle manufacturers and top suppliers, are fixed-price contracts extending between one and three years, locking the suppliers irrespective of what happens to the rupee.

“Continued appreciation in the rupee is putting a brake on exports’ growth and could emerge as a big risk factor for the auto ancillaries," wrote Vaishali Jajoo, automotive analyst with Mumbai-based brokerage firm Angel Broking Ltd in her preview report for the quarter ended September.

The only exports that have not been impacted by a stronger rupee are to Europe where prices are quoted in euros, but this makes up only one-third of all auto parts shipments out of the country. The rupee has marginally appreciated by 2% against the euro since the start of the year.

“The perception of business has changed for companies that are purely export-oriented. There is now a new risk element in the form of currency fluctuations," said A.K. Taneja, immediate past president of Acma.

For small companies such as Nishan, the challenge will be to maintain their production costs as well as to diversify into new products and markets. With margins continuously eroded that’s proving hard.

Others such as Simmonds Marshall Ltd, which supplies nuts and bolts, have also been hit by the depreciation of the British pound since the UK is Simmonds’ biggest export market. The pound has weakened 7.36% against the rupee from its historical high of £88.4781 in December. The company’s exports, however, account for only 20% of its annual turnover of Rs24 crore achieved last fiscal.

“We are currently in a major expansion mode and have imported machinery which has offset some of the effects of the rupee appreciation on our bottom line," said managing director Navroze S. Marshall. Since the firm does not have many long-term contracts, it has been able to raise prices by less than 5% on its export products.

There has also been some market buzz that component makers have started negotiating their contracts in rupee terms. though this is not always possible or practical. “Transacting in rupees would mean that we would be subject to domestic issues...these are things our customers don’t want to hear about," said Sultan. He says customers rarely buy arguments on higher costs such as labour.

Component makers say while the government had promised some fiscal rebates to help exporters almost six months ago, the only solution is to make lean their own operations. And some are also looking at more pragmatic ways to hedge against a rising rupee.

“We may also have to look at including currency fluctuation clauses in our future contracts," said Sameer Pagnis, senior manager—business office & export sales, Tyco Electronics Corp. India (P) Ltd.