Global carmakers catering to the luxury segment of Indian auto industry are in a fix since Finance Minister Pranab Mukherjee, in his Budget for 2011-12, made certain alterations in the definition of ‘completely knocked down' (CKD) kit imports, bringing components like pre-assembled engine, gear box, transmission and chassis under the import duty ambit.
Subsequently, the import duty on certain components has gone up to 30 per cent from 10 per cent before this year's budget was announced. Mr. Mukherjee's aim behind this move is to strengthen the auto industry by promoting domestic manufacturing of these high-value components, currently imported, that would not only bring down costs of luxury cars but also add to the value of Indian car manufacturing industry, which is known as hub of small cars.
Car majors confused
But global car majors, particularly German luxury carmakers like Audi, Mercedes-Benz and BMW who have shown remarkable growth in their car sales in the last two years are confused, as they are unable to decide whether to pass on the enhanced import levy to its consumers or go in for manufacturing of these CKD components that would mean more investments.
Significantly, luxury car sales went up from around 7,500 units in 2009-10 to over 15,000 units in 2010-11.
As for Japanese carmakers, who are facing even greater problem in terms of production cuts post-tsunami disaster that struck Japan in March this year, they still have to ponder over it as the biggest challenge for them is to normalise their production and retain their leadership position in the Indian car market, which is currently under serious threat.
Passing on import duty to customers would mean steep hike in luxury car prices which, in turn, could affect their growth in the Indian market and hit their bottom lines.
On the other hand, committing more investments in India, which is primarily a small car market, in the current global scenario, particularly when these car companies are still recovering from the impact of global economic slowdown, would be a difficult task. It is a big dilemma for these luxury carmakers.
Though most of them have refrained from increasing their prices in a highly competitive Indian car market, for how long will they able to sustain is a difficult guess to make.
On its part, industry body Society of Indian Automobile Manufacturers (SIAM) was quick to take up the cause of these global car giants, urging the Centre to either reduce the duty or give these carmakers more time to prepare for more localisation of parts before imposing the revised duty.
Even Heavy Industries and Public Enterprises Minister Praful Patel has made an appeal to Mr. Mukherjee to give at least a two-year holiday to the auto industry to comply with the new import tax norms for CKD units. His ministry had already forwarded a formal request to the Ministry of Finance with the request from SIAM seeking at least two years to make fresh investments to set up facilities to have more indigenisation.
Commercially unviable
SIAM says the hike in import duty would make it commercially unviable for low volume products and it would become difficult to bring in more products.
And if these carmakers decide to pass on the levy burden to their customers, it could mean hike in prices of luxury cars, priced between Rs.30 lakh and 90 lakh, by at least Rs.5 lakh.
While Audi had already said it might have to rethink its India plans in view of the increase in import duty on CKD units, Mercedes-Benz is planning to hike prices of its products. “In the next few weeks, we might have to increase prices on at least one of our models as it has a high proportion of pre-assembled components, hence more tax,” Mercedes-Benz India Managing Director and CEO Peter Honegg told journalists at a recent event.
Similarly, Audi India CEO Michael Pershke says they are studying the government policy and will take appropriate decisions to amend their production strategy suitably.
On the other hand, BMW India President Andreas Schaaf says: “At this point of time, our CKD operations are fully fulfilling the new regulations. We are paying 10 per cent duty...there will be no price hike. In our engines, about 50 per cent of the assembly is done in India. So it is considered as locally produced.”
He has, however, expressed his disappointment on the government not consulting the industry before raising the customs duty. “We are of the belief that any regulation should not be changed overnight but should be implemented in a planned way over a period of time. So we are a part of the SIAM's request to extend the timeline,” Mr. Schaaf adds.
