Rupee slide, demand slump a double setback for consumer electronics firms

The depreciating rupee against the US dollar has amplified concerns for consumer electronics brands and retailers already coping with a slump in consumer demand brought on by the economic slowdown. The rupee breached the 80 mark against the dollar on July 19, and had depreciated 25% since December 2014, finance minister Nirmala Sitharaman told the Lok Sabha on July 18.

“The rupee slide is the biggest pain right now for manufacturers and brands both,” said Arjun Bajaj, chief executive of Daiwa, a homegrown TV brand. Industry analysts told Mint the slide in the value of the rupee has made it difficult for brands to lower prices.

“The strong dollar has had a clear impact on consumer electronics prices staying high, due to high costs in the supply chain,” said Navkendar Singh, Research Director at IDC India. 

A high dollar price means that components will become significantly more expensive, points out Tarun Pathak, research director at Counterpoint. With renewed focus on manufacturing, firms in India import components like integrated circuits, memory chips and displays. These components make up a significant part of the cost of manufacturing consumer electronics products.

For instance, for some smartphones, the display accounts for 80% of the phone’s total bill of materials cost. Since manufacturers have to spend more on procuring components, it eats into their margins for products. 

That said, not everyone is sure that the situation is as grim as it seems. Anand Ramanathan, partner at Deloitte India, said that the rupee’s slide may not have an immediate impact on consumer prices. He said the rupee depreciated by 5-7% but it was offset by a 12-20% fall in the price of certain metals such as copper, steel, and aluminium — raw materials used in producing electronic components.

Bajaj said that even though the cost of manufacturing may increase, “brands might absorb” this increase depending on the demand for a product.

However, demand too is at a low. Manish Khatri, partner at Mahesh Telecom, a Mumbai-based electronics retail chain, said that footfalls in stores have come down since consumers are facing a cash crunch. He added that “a lot of hype” is needed for the festive season next quarter.

Both brands and retailers are counting heavily on the festive season sales to overcome the huge backlog of devices. According to Pathak, India is currently sitting on an inventory of close to nine weeks for the overall electronics market, including smartphones, TVs, and appliances, which is much higher than its typical 3-4 week average.

Analysts said that some brands may even run “pre-festive” sales in order to clear the inventories. While they usually aim for the Diwali season, this year’s sales may begin in August and September only.

Product roadmaps for phone and laptop firms usually include new launches in the August-September period, which enter India just ahead of the Dussehra and Diwali festivals. So it makes sense that older inventories will have to be cleared beforehand, to avoid cannibalizing new products.

More importantly, old products were manufactured and imported before the rupee’s current slide, which means the margins on these are higher. “Since the existing inventory did not bear the additional cost of the surge in dollar prices, retailers will attempt to clear this inventory with upcoming deals and discounts in the next few months,” said Pathak.

Festive season sales account for nearly half of all sales in consumer electronics, as per IDC’s Singh. If the festive season sales are weak and brands fail to clear inventory, demand for electronics may decline in the last quarter of 2022 and the first quarter of 2023.

To be sure, demand for smartphones has already declined. Deloitte’s Ramanathan said that demand in May was 9% less than that seen last year. He added that the drop is more prominent in the budget segment since premium device buyers are “insulated against inflationary pressures”. 

The combined impact of supply chain constraints and the rupee’s slide may not ease in 2022 either. Analysts like IDC’s Singh said that the firm sees consumer demand for smartphones going back to normal in the second half of next year on the back of 5G rollouts by telcos.