The Hindu Business Line : Rupee depreciation versus euro

MAJOR European automobile companies operating in India have decided to absorb the cost increases because of the appreciation of the euro against the rupee.

The Indian rupee depreciated by over 36 per cent over the last one year. During the first five months of 2003, rupee dropped to 55.38 against the euro as of May 30 from around 48 as of January.

"We have decided to absorb the cost," a spokesperson for Volvo India Pvt Ltd told Business Line. Volvo has been able to absorb the cost in view of the sourcing models adopted by it. This sourcing model includes purchases of components from non-euro denominated zones. This purchase model has allowed Volvo to keep cost escalations under control.

Similarly, SkodaAuto, a subsidiary of the Volkwagen AG of Germany has also decided to absorb the costs. Skoda has absorbed the cost escalation by switching from importing semi-knocked-down units to completely knocked-down kits. The company has put in a huge investment to convert SKD to CKD. As a result the company will not be affected by the changes.

A spokesperson for SkodaAuto said because of the rupee depreciating against the euro, there would be no change in prices for their customers.

The last time auto manufacturers decided to change the prices was when the government announced cut in excise duty by 8 per cent to 24 per cent during the presentation of the Union Budget. Most of the auto majors reduced prices of their models to pass on the benefit to the customers.

Daimler Chrysler, which makes Mercedes Benz cars, said that any fluctuations in the rupee value do not affect the company as it has committed investments. "Our investments are based on long-term plans. We take into account currency fluctuations while drawing up our investment plans," a company spokesperson said.

In percentage terms, Daimler Chrysler may not import more cars during the current year. On an average, the company sells between 130 cars and 160 cars in the CBU form. The company expects to sell around 1,500 cars during 2003. Of these, 460 cars including the CBUs have been sold between January and April. The company sold a total of 1,345 cars in 2002, 135 cars less than it did in 2001.

This is the second time, truck maker Volvo has decided against tinkering with the prices of its models. Volvo was one of the few companies which refrained from reacting to the reduction in excise duty because it said the duty cuts were more in the form of relief to the company. The import content in the trucks made in India is between 25 per cent and 40 per cent depending on the model. Volvo has so far sold a total of around 1,600 trucks. It has invested around Rs 300 crore out of the Rs 550 crore earmarked for the country.

If the European automakers had passed on the cost escalation to the customers, they would have been at a considerable disadvantage against the US manufacturers because of the appreciation of the rupee against the dollar.

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