Trump's tariff shock may boost Indian auto parts exports

Spoiler alert—the 25% tariff imposed on auto and auto parts is likely to have little negative impact on India. Automobile tariffs would take effect from April 3, and tariffs on auto parts would take effect "no later than May 3, 2025," according to MEMA, the Motor Equipment Manufacturers Association of the USA.

Firstly, on automobiles, India’s total exports to the US, at around $10 million, would roughly equate to a rounding error in Japan’s automobile exports to the US and is completely insignificant.

On automobile parts, India is a more serious contender, with $2.2 billion in exports to the US, comprising nearly 30% of India’s total automobile component exports. But placed in context, this is under 3% of the US' total automobile parts imports. This is not really what Donald Trump is targeting but could become collateral damage in his assault on the big exporters of parts to the US—Canada, Mexico, China, and others.

However, the likelihood of being collateral damage is minimal. The 25% tariff is being applied uniformly to all countries, so every nation’s competitive advantage is impacted equally. Auto parts companies in India do not fear being underpriced by competitors on this account. What they do fear is pressure from importers to absorb at least a part of the cost, thereby eroding profitability significantly. Some companies anticipating this possibility have already started a cost-reduction drive.

The other possible threat is local manufacturers in the US using this shield of 25% to set up production in the US and outprice imports. This is probable against high-cost countries like Germany, Japan, and Canada, which would lose out completely to US manufacturers. However, the equation is different in the case of low-cost countries like India, Vietnam, China, and some East European nations. Even with the 25% advantage, US manufacturers would find it challenging to match the prices of components from low-cost nations.

The reason is that the cost advantage enjoyed by low-cost countries due to labour arbitrage is not in percentages but in orders of magnitude. While a worker in auto components is paid Rs 30,000 to 40,000 per month in India, a typical US worker would be paid at least $4,000 per month. This translates to a 10:1 cost advantage in labour, but the wage advantage is offset by higher productivity in the US. This could be anywhere between 2:1 and 3:1. This is not because workers in the US work three times as quickly as Indians. Human productivity due to physique is a factor, and machine speed is another, but what is significant in the productivity difference is automation. This results in man-machine ratios that could be 1:2 or 1:3 in the US versus 1:1 in India.

Additionally, Indian companies tend to employ larger numbers of indirect labour compared to the US, where material movement and other indirect activities have a larger element of automation. This extends even to factory staff. Factory management productivity is higher in the US due to leaner organisations. Indian factory managements typically tend to have more supervisors and middle management. However, even after offsetting the productivity advantage of the US, India would have a labour advantage versus the US, with total human costs being anywhere between 300% higher or more.

After this, there is the consideration of what percentage of the total cost the human cost comprises to determine the impact on total cost. In this, we need to club all three categories—direct labour, indirect labour, and staff salaries. All this put together would normally be at a minimum of 12–15% of the total cost, even in material-intensive products. If the total labour cost advantage is 300%, then the total cost advantage would still be 45%. This can be calculated for illustration as follows: The Indian product would be 85+15, versus the US product’s 85+60, so Indian products have some cushion against US products even after the 25% tariff.

This calculation is only for illustration, as there are cases where the total human cost is as much as 40%, making it well-nigh impossible for local US companies to compete. However, if there is a double whammy in terms of very low labour content and abysmally low productivity, then that company could lose out, as the OEMs would expect at least a 10% advantage for importing products versus buying locally. However, in most cases, the 25% advantage, even clubbed with the 10% cost differential sought by OEMs, can be overcome by Indian companies.

Another factor that should make Indian exporters comfortable is that US manufacturers would be wary of setting up capacity to take on Indian products, not knowing how far we can go in dropping prices. This is in addition to the fact that these low-cost imports represent a relatively smaller slice of the market. Local manufacturers would first look at the low-hanging fruit, i.e., large volumes of high-cost imports from high-cost nations.

However, instead of looking at this defensively as to how we can protect our position, the administration should be looking at how this situation can be used as an opportunity to aggressively expand our exports to the US by striking a deal. Why this should be a difficult exercise, given the above cost factors, is baffling. Even if the duties on every single manufactured product from the US were reduced to zero, US products could not outprice Indian products.

US products will be bought for value, not price. If the duty on a Harley-Davidson, for instance, is reduced to zero, there is unlikely to be even one buyer of a TVS Apache or Bajaj Pulsar who would switch to a Harley. Similarly, even the lowest model of a Tesla couldn’t compete on price against Indian cars. The same is true for every other product I know of. The government's tariffs are not meant to protect Indian manufacturers but to generate revenue from the “rich” buyers of these products (“If someone wants a Harley, he will pay twice the price to get it”). Soaking the rich in this context is outdated thinking from the Nehru era, which has no place today, either in economics or, as here, in geopolitics.

In conclusion, while the 25% tariff poses little threat to Indian auto component makers, it provides an opportunity the government should seize and capitalise on. The question is whether they will rise to the occasion. From 1947 to 1990, India saw the dark ages until the P V Narasimha Rao-Manmohan Singh government. They were up against the wall but used the crisis well to liberalise the economy.

India then saw an inflection point. We can hope that the present government will do the same under compulsion. It should, as it has taken several steps to promote Indian manufacturing in the past. As Winston Churchill (or Rahm Emanuel) said, “Never let a good crisis go to waste.” So, Trump’s tariffs could well be good news and another inflection point for the Indian economy.

The author has an IIT-IIM education and over 20 years of experience leading auto parts and manufacturing companies in India and abroad.