The recent rail freight price hike of 6.5 percent that has kicked up a storm over the end pricing of products will have only a marginal impact on the Indian automotive industry’s fortunes.
24 Jun 2014 | 2543 Views | By Shobha Mathur
The recent rail freight price hike of 6.5 percent that has kicked up a storm over the end pricing of products will have only a marginal impact on the Indian automotive industry’s fortunes. Industry captains and experts prefer to wait for the presentation of the Union Budget 2014-15 to see ...
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The recent rail freight price hike of 6.5 percent that has kicked up a storm over the end pricing of products will have only a marginal impact on the Indian automotive industry’s fortunes. Industry captains and experts prefer to wait for the presentation of the Union Budget 2014-15 to see what sops the finance minister offers to offset this price hike.
The fact is the majority of vehicle manufacturers in the country today use more of road transport to despatch their finished cargo – passenger cars, two-wheelers, three-wheelers and commercial vehicles from factories to retail outlets or ports of call. Use of the rail network is minimal as most vehicle OEM manufacturing facilities are yet to get rail sidings from their factories to major destination points.
For market leader Maruti Suzuki India, rail transport constitutes less than five percent of its total domestic sales with the balance handled by road transport. And Hyundai Motor India moves less than one percent of its sales by rail in India – around 3,600 cars per annum – and that too mainly to the North-East where there is a saving in terms of transit time of about nine days, R Sethuraman director (finance and corporate affairs), had told Autocar Professional in an earlier interaction.
Ford has been struggling a bit on its logistics front in the India market. In most of its global locations, the American carmaker has a direct rail link to its manufacturing facility. In North America, about 70 percent of its bulk volume of cars is moved by rail, but in India it is still trying to work out an affordable solution for rail through improved density of cars transported per carriage.
When contacted, most vehicle manufacturers remained non-committal about the likely impact of the rail freight price hike stating that it would be minimal as their cargo is despatched primarily by road. A Maruti spokesperson felt that the effect of the freight hike could be more visible in future if the volume of cars moved by rail climbs up. At present, with the current volumes, the impact is negligible to the company.
“The freight rates for transportation of goods through containers on rail remain unchanged. Moreover, the price of diesel for road transportation in the past year has risen more steeply than the size of the recent freight hike, so costing and margins of automotive companies will not experience any measurable change,” says Mitul Shah, senior research analyst of Karvy Stock Broking.
Interestingly, on March 5, 2014, Maruti and the Indian Railways flagged off a new high-capacity railway rake named flexi-deck auto-wagon to facilitate faster and flexible rail transportation of cars. This rake with 27 wagons has 20 percent additional capacity for transporting cars compared to the existing twin-decker rakes that can carry 265 cars via rail. Maruti has been using the rail transportation mode for over two decades, leveraging the double-deck container trains for transporting export vehicles from its manufacturing facilities in Delhi-NCR to the Mundra Port in Gujarat.
Avinnash Gorakssakar, head of Research Miintdirect.com, says the rail freight hike will affect all core sectors that use the railways but it might not have such a big impact on automobiles as rail finds a limited usage here, mostly for long-distance and inaccessible areas. “If the excise duty cuts are retained in the annual Budget, then this freight hike may have a marginal cost increase of around 3-4 percent of the total transportation component for heavy vehicles like CVs and tractors.” He feels that a lot of transportation happens between ancillary units and OEM factories, so auto component makers might feel the pinch.
Component vendors that Autocar Professional spoke to negated feeling any freight price-rise tremors. “The railway freight hike will not impact the Anand Group as most of our products are shipped by road,” says Sandeep Balooja, president (Business Development). “Due to our strategy of having multi-locational facilities within close proximity to customers, we may not experience any direct cost impact from the rail freight increase,” sums up NK Minda, chairman of the UNO Minda Group.
Overall, it’s quite clear that the Indian automotive industry prefers to adopt a wait-and-watch strategy for the big Budget announcements on July 10 before it rustles up its next gameplan.
Photograph: March 5, 2014. Arunendra Kumar, chairman, Railway Board and R C Bhargava, chairman, Maruti Suzuki India, flag off India’s first flexi-deck auto wagon rake.