Difficult times continue to chase auto makers. Indian part suppliers are now demanding they be waived from an annual contract to lower prices by a certain fixed amount. Hectic parleys are still on, say many auto suppliers, as carmakers face their own set of financial woes and any reduction in costs is welcome in these tough times. The contracts between auto component makers and carmakers usually has a price reduction clause built-in and this is the first time in several years that there is an issue over such price cuts. “There is not much scope to reduce prices at the moment, unless steel prices go down. This is a fixed cost intensive industry and with volumes going down, our costs are higher,” says Santosh Singhi, chief financial officer at Amtek Auto. Till January this year, export volumes had dipped 40%, but since then there has been a slight revival. Auto makers such as GM and Toyota, themselves hit by the financial crisis, are engaged in negotiations with auto component players to reduce prices but haven’t been able to make much headway. “Negotiations are on but this year price cuts are getting harder to come by,” says Karl Slym, managing director, GM India, whose US parent has filed for bankruptcy. “It’s true that negotiations are not yielding the desired discounts,” says Shekar Viswanathan, deputy managing director (operations) at Toyota Kirloskar Motors. The firms facing tough times are mostly those who import some parts. “The depreciating rupee was their main problem because of which they are not in a position to give discounts,” he said. Both Mr Slym and Mr Viswanathan say that they are not going to push for discounts at the cost of the suppliers’ survival. “We will work with them to see ways to tide over this crisis,” said Mr Slym.
Last year, raw material prices raised 40-50%. While many auto component manufacturers asked for a corresponding price increase from their buyers, hardly anyone got it. But when price of raw materials came down, buyers wanted immediate price cuts. “This year probably will not see as much of a reduction,” says Rakesh Batra, national leader, automotive sector at Ernst & Young. Typically, year-on-year price reduction by auto component companies is in the range of 2-5%. This is productivity and volume-based reduction, excluding changes in raw material pricing.
ET