Japan’s calamity unlikely to have immediate impact on production

The recent catastrophe in Japan may not adversely impact the production of automotives and auto components in India in the immediate term, but its impact over the medium to long term remains to be seen. The several challenges that could emerge in the aftermath of the earthquake and tsunami include: disruption in supplies of vehicles and vehicle assemblies to India; cost pressures arising from appreciation of the Japanese yen; delays in model launches; and delays in investment by Japanese players in the Indian market.

These challenges would only add to the difficulties arising out of; the increasing trend in the prices of raw materials, especially steel the rise in interest rates that Indian automotive manufacturers are already grappling with; and the increase in customs duty† on pre-assembled engine and gearbox or transmission mechanism that takes effect from April 1, 2011. Mr. Subrata Ray, Sr. V.P & Co-Head-Corporate Ratings, ICRA, says, “While the domestic automotive industry has posted strong growth across segments during 2010-11 so far, the cost-push factors such as higher commodity prices, foreign exchange volatility (especially with respect to the yen) and increase in the landed costs of imports (specifically for players with a high dependence on imported assemblies) are some factors that may adversely affect the financial performance of automotive and auto-ancillary players over the short term, given that the OEMs are unlikely to be able to pass on the increase in costs to customers immediately”.

Some of the OEMs (and the ancillaries) in the passenger car segment continue to have moderately high import dependence. The extent of import dependence in passenger cars is however a function of the scale of operations of these OEMs.

While production at the various sites of automotive OEMs and auto-ancillaries in Japan was halted for a few days beginning March 11, 2011 in the aftermath of the catastrophe and news came in of outbound shipments of some companies having got destroyed, ICRA believes that these events are unlikely to adversely impact automotive production in India in the immediate term as the various Indian importers maintain sufficient stocks (10-30 days’ inventory‡). Additionally, the Indian auto-ancillaries and OEMs are monitoring the developments and identifying alternative locations for sourcing electronic components (the most affected product segment). However, if the restoration of production in Japan takes longer, this may lead to shortage of select parts (technology intensive and proprietary parts, for which alternative locations may not be available) and impact the production levels of those models in India. Over the next few months, ICRA will be monitoring production at most automotive and auto-ancillary facilities in Japan, which would be a function of the reconstruction initiatives at plants and on the infrastructure front (roads, railways, ports), besides the availability of vessels for transportation and such other factors.

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