The rupee has depreciated against the US dollar by more than 10% in the past year, making it more expensive for Indian companies to import the components and materials they need to manufacture technology products.
The situation has led to a sharp increase in production costs, making it difficult for Indian companies to compete with global rivals. This article will delve into the intricate relationship between foreign exchange rates and tech manufacturing costs.
Impact of Currency Fluctuations on Tech Manufacturing
Currency volatility holds the potential to unmask hidden costs in tech manufacturing. The fluctuation in exchange rates between the Indian Rupee and major international currencies, such as the US Dollar, plays a pivotal role in shaping tech manufacturing expenses.
These fluctuations can impact the cost of raw materials, import and export prices. To effectively manage and mitigate the risks associated with currency fluctuations, tech manufacturers in India may rely on relevant currency indices and performance indicators.
One of the performance indicators the tech manufacturers can rely on for assessing and anticipating currency movements is the DXY or the US Dollar Index. The chart tracks the performance of the US Dollar against several major currencies globally. With the insights obtained from the chart, manufacturers can better understand the strength or weaknesses of the US Dollar and make informed decisions regarding their manufacturing costs.
Factors Influencing Manufacturing Costs:
In addition to currency fluctuations, several key factors contribute to the overall manufacturing costs in the tech industry in India. It is essential to consider these factors alongside foreign exchange rates to understand the cost structure comprehensively. The cost of raw materials is crucial in determining manufacturing costs in India’s tech industry. Electronic components, semiconductors, metals, plastics, and specialised materials are essential for production.
According to a report by The Economics Times, India is projected to consume semiconductors worth around USD 70-80 billion to manufacture electronics products valued at USD 300 billion by 2026, as stated in the government’s vision document. Global market forces, supply and demand dynamics, and commodity price fluctuations influence the prices of these raw materials.
Additionally, energy expenses, including electricity rates and oil/natural gas prices, significantly impact manufacturing costs. Infrastructure costs, which encompass facilities, utilities, transportation, and logistics, are also vital for tech manufacturers to have well-equipped facilities, efficient supply chains, reliable transportation systems, and access to essential utilities such as water and electricity.
Mitigate Foreign Exchange Rate Risks in Tech Manufacturing:
Foreign exchange rate risks can significantly impact the profitability and competitiveness of tech manufacturing companies operating in the global marketplace. Therefore, developing a comprehensive currency risk management plan is a good approach to minimise the negative impact of currency fluctuations. And equally, enhance the operational efficiency in tech manufacturing.
To begin, the company needs to identify and assess its exposure to foreign exchange rate risks by analysing the nature and extent of currency-related transactions, such as imports, exports, foreign currency-denominated contracts, and overseas investments. Understanding the degree of exposure enables the company to formulate strategies to manage and mitigate these risks.
One strategy is enhancing operational efficiency by streamlining supply chains, which includes evaluating and restructuring them to reduce reliance on foreign suppliers and minimise exposure to currency risks. This can be achieved through diversifying suppliers, localising production, or negotiating contracts in the company’s base currency.
The Indian rupee’s value against the US dollar significantly impacts tech manufacturing costs in India. A weak rupee makes it more expensive for Indian manufacturers to import components, which can lead to higher prices and job losses. A strong rupee makes it cheaper for Indian manufacturers to export, which can lead to increased sales, profits, and jobs.
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