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BMW, Mercedes step up local sourcing of parts

Livemint:  February 04, 2015

New Delhi: German luxury car maker Bayerische Motoren Werke AG’s ( BMW ’s) local unit said on Tuesday that it will start procuring components from at least seven India-based auto parts makers in response to Prime Minister Narendra Modi ’s call to multinational companies to “make in India”.

The move by BMW India Pvt. Ltd marks the beginning of localization efforts at the car maker, which entered India in 2007 and has continued to sell its products as partly assembled (complete knocked-down) units or as fully imported (completely built) units.

Pune-based Force Motors Ltd, which already assembles engines for BMW rival Mercedes-Benz, will now produce engines and gearboxes for BMW.

BMW will source door panels and wiring harnesses from Draexlmaier Manufacturing India Pvt. Ltd; exhaust systems from Tenneco Automotive India Pvt. Ltd; heating, ventilating, air-conditioning and cooling modules from Valeo India Pvt. Ltd; and MAHLE Behr India Ltd; and seats from Lear Automotive Pvt. Ltd.

Philipp von Sahr, president of BMW’s India operations, said the newly selected vendors will play a key role in the company’s growth strategy in India as it sets its sights on selling 30,000 cars a year. “This is the next phase of BMW India’s growth, which will be sustainable,” Sahr said. “More and more models will be produced in India but there will be absolutely no compromise on quality."

“With the addition of these partnerships, the level of localization at BMW plant in Chennai will increase to approximately 50%,” he added.

Sahr declined comment on investments that its new vendors will make to set up plants in the vicinity of BMW plant in Chennai.

BMW’s arch rival Mercedes-Benz India Pvt. Ltd said it, too, had intensified localisation efforts. “We strongly believe in the ‘Make in India’ programme. Mercedes-Benz India’s current localization level is, on average, 35-40%, for all the five models which we manufacture here locally,” its managing director and chief executive Eberhard Kern said in an email.

“We assemble the axle, the engine, the dash board and the flooring at our production facility in Pune,” Kern added.

Force Motors and Motherson Sumi Systems Ltd are Mercedes’ local manufacturing partners.

An email to Audi India seeking comment remained unanswered.

BMW’s decision to source more parts from India comes even as India’s customs department is investigating whether the German luxury automaker misrepresented its customs duty obligations on automobile parts imports since March 2011.

According to a 2013 report by news agency Press Trust of India, the customs department was considering fining the company Rs.650 crore.

On Tuesday, BMW said the case is yet to be closed.

“The inquiry is in process. We are cooperating with the agencies,” a BMW spokesperson said.

Sahr said the customs case had no connection with the firm’s decision to source parts locally.

Through localization, the local arm of BMW is also expected to save on taxes, which go up to as much as 120% on an imported car and 60% on a partly assembled car.

This could give it the upper hand on the pricing front against Audi India and Mercedes-Benz India, which have pushed BMW India to third position in the luxury car market.

The company sold 6,812 cars in 2014 as against Mercedes’ 10,201 and Audi’s 10,851.

“The localization efforts will reduce the waiting period and accelerate the servicing process of our cars as we had to (previously) depend on our plants overseas for supply and will help us on the pricing front,” Sahr said.

“But a decision to that effect will be taken in accordance with market conditions,” he added.

“There will also be room for savings on the duty front. But, it depends if BMW wants to pass on the benefits to consumers and increase sales or increase profitability without doing it. Either way, it will make money,” said Pradeep Saxena, executive director at consultancy TNS Automotive.

Sahr of BMW India said the company’s sales performance had suffered in the last two years because of a gloomy economic scenario in the country and that it spent those years in devising a strategy for the future.

“Economy was lousy... exchange rates were lousy and there was a lot of pressure on retaining monthly number one position. We have done away with that attitude and the focus is on profitable growth as the Indian market is looking up,” he said. “I don’t have a sales target. (But) I can tell you we will not be number one this year."

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.

x IBEF : India Brand Equity Foundation