Tata's Low-Cost Nano Hurt by Rising Steel Prices
Tata Motors has decided to absorb a significant portion of the cost increase of its Nano vendors. As a result of severe pressure put by the vendors on Tata Motors, the company has agreed to foot the cost difference that has risen as a result of increased steel prices.
"The vendors had been pushing for some relief for quite a while and Tata Motors has finally relented on the steel front," says the CEO of a Delhi-based auto component company which is supplying crucial parts to the Tata Rs 1 lakh car.
The nearly 50-60% increase in steel prices since last year has pinched vendors, particularly forging companies, and most are renegotiating contracts with auto OEMs.
These parts makers are also battling the 40% increase in prices of furnace oil, used extensively in the forging process. Forging components comprise roughly 15-20% of the total input cost of a car.
Not all vendors will get relief immediately though. The decision is a promise for some cushion depending on when the parts go on stream. Says Minda Industries managing director Nirmal Minda, "The changes in raw material prices have left us with no option but to ask all OEMs to absorb part of the increase.
We are in discussions with Tata Motors for Nano and its other models to approve some variation in prices. The company has involved us in the value engineering of Nano and we are looking at some concessions once the product (Nano) is close to production."
When contacted, the Tata Motors spokesperson said: "Terms between Tata Motors and its vendors, as in any other company, are confidential." Sources however say that the company management feels internally that these are difficult times and the 'pain needs to be shared'.
The pain-sharing is only restricted to material cost of Nano components. As for the project cost escalation as a result, sources say the Tata management is looking to see how it can manage project cost and look for efficiencies elsewhere.
Vendors are demanding more than just steel benefits. A vendor supplying engine head block for Tata Nano said: "There has been some relief from Tata Motors on raw material prices.
They have agreed to some concession cushion due to the steep increase in prices of steel, aluminium and other alloys. We are also concerned about energy prices, which have seen major increase in the recent past, and will factor in the changes in our future long term negotiations with automobile companies."
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