Car majors & suppliers import Japanese vehicles and parts, hence much rides on where currency’s going.
As Japan looks to rebuild assets from scratch and pump more cash into the financial system to aid reconstruction, automobile makers in India are watching every move, as all this is expected to significantly affect the yen.
Right after the quake-tsunami, the yen had fallen sharply. It was then bought heavily on expectation of future yen demand from companies for the massive rebuilding exercise.
Maruti Suzuki, Honda Siel, Toyota Kirloskar Motor and Nissan Motor India depend on Japan for some critical automotive parts and fully built vehicles. They’re uncertain how the yen would behave in the wake of the twin natural disasters that hit Japan last week.
R C Bhargava, chairman of India’s biggest car maker, Maruti Suzuki India, said: "There is a substantial impact of the yen on our balance sheet. In addition to our own imports from Japan, which is less than 10 per cent now, we have our vendors who procure parts from Japan, too."
Every one per cent strengthening of the yen beyond a level of 83 against the dollar incrementally impacts Maruti Suzuki's margins by 27 basis points, as it procures some technology and parts from Japan, stated a report prepared by Citi. Maruti also makes royalty payments to parent company Suzuki Motor Corporation, for technology used by it while producing vehicles.
"We have no clue how the yen will oscillate now," added Bhargava.
While Maruti has achieved localisation of more than 90 per cent on some of its volume generating products, others such as Honda Siel Car India (HSCI) have a much higher exposure to the Japanese currency.
Jnaneswar Sen, vice president, marketing and sales, HSCI, said: "The yen has been strengthening again and this will have an impact on us. We will be affected significantly if the currency moves higher than what it is now. In addition to Honda's loss in Japan, there are suppliers who have been impacted by the disaster, too."
HSCI sells five models in India and imports the CR-V sports utility vehicle, while it assembles the Accord premium sedan with parts imported from Japan and other Asian countries.
Presently, the imported content in the Accord is as high as 65 per cent, with engines and parts coming from Japan. The Honda Civic has a relatively low imported content, of 26 per cent; the City and Jazz have more domestic content.
"We had a shipment coming for us which was dispatched before the earthquake hit Japan. There is still some time before we come to know the real extent of damage," added Sen.
Similarly, Toyota Kirloskar Motors imports models such as the Camry, Land Cruiser and Prado. It is also expected to get hit if the yen surges. The company presently imports CKD kits for the Fortuner SUV from Thailand and makes the Corolla Altis and Etios locally.
However, financial experts are also predicting that the 15 trillion yen ($183 billion) pumped into money markets by Japan’s central bank to assure financial stability could mean a weaker yen, if liquidity is found to be high.
The Japanese government will be trying to keep lending rates low, while increasing its spending on rebuilding of infrastructure. This, coupled with a weak economic growth and high fiscal deficit, may trigger a downward trend for the yen, say analysts.
Meanwhile, market research firm J D Power on Tuesday postponed its annual awards ceremony for the automobile industry, scheduled to be held this evening, on account of the tsunami and earthquake that hit Japan last Friday.
Executive Director, J D PowerAsia Pacific, Mohit Arora said, “The event has been postponed due to the tragedy in Japan, the aftershocks of which are still continuing. The major automobile players, Maruti Suzuki, Honda Siel, Toyota Kirloskar are all Japan based companies. In the current scenario we cannot have an awards ceremony.”
On Monday Japanese auto major Honda Motor Corporation (HMC) postponed the preview of its small car Brio in India, originally scheduled for March 17. Last week, Toyota, which is present in India through a joint venture with Kirloskar Group, too, postponed the official inauguration of its second Indian manufacturing facility at Bangalore.
| SECTORS & COMPANIES AFFECTED |
| OIL & GAS: Overall impact positive for Indian refineries, as refining margins are expected to go up, benefiting standalone companies like Reliance |
| STEEL: Overall impact limited. Overall damage to steel facilities in Japan is relatively light, hence impact on pricing should be limited |
| JSW STEEL: JFE Steel holds a 15% stake in JSW Steel. The money has already come |
| TATA STEEL: Its venture with Japan’s Nippon Steel might face delays |
| BHUSHAN STEEL: Sumitomo has an agreement with Bhushan Steel for sourcing hot rolled coils from the latter's new plant in Orissa. This could be impacted |
| COAL: Overall impact insignificant. The thrust on coal may increase due to delays in nuclear power capacity, |
| IRON ORE: Overall impact insignificant. Around 5% of India's ore is exported to Japan - NMDC being one of the bigger exporters |
| AUTOS: Overall impact limited. Specific companies impacted |
| MARUTI: Japan is a supplier. Every 1% strengthening of the yen beyond a level of 83 against the dollar incrementally impacts Maruti's margins by 27 bps. Suzuki holds 54% |
| HERO HONDA: High exposure to yen. Still pay royalty at 2.7% of sales. Strengthening yen will impact margins |
| CAPITAL GOODS: Overall impact insignificant. Renewed concerns on safety of nuclear power may increase resistance to these projects in India |
| Source: Citi Investment Research and Analysis |
The automakers are now assessing whether the calamity in Japan would stand to disrupt supply of components from the island nation.
“Till now, there are no reports of disruption in supplies. Sourcing is done on medium to long term and will not affect operations at present,” said Chairman, MSIL, R C Bhargava. The companies may, however, face a tough time if the situation worsens as buffer stocks are limited.
A spokesperson for TKM had clarified that production of Etios sedan will not be affected. “Engines and transmissions are shipped over medium to long term basis. Production process does not stand to be affected at present.”
Toyota imports engines and transmissions for the sedan from the parent company in Japan. Toyota Motor Corporation has closed two plants in Japan with a combined annual capacity to roll out 420,000 small cars following the earthquake and tsunami in Japan.
