India?s export of cars to Europe, which has already slowed down in the last two years because of the economic slowdown, may face another blow from January next year with the European Union (EU) about to raise customs duty on them from 6.5% at present to 10%.
The move, which is expected to lead to a significant cost increase of around R15,000 per car, comes even as auto makers grapple with declining demand and profits at home. EU?s decision is part of its new policy of denying preferential tariff to exports from developing nations that have become sufficiently competitive that they no longer require a tax incentive.
EU is the single-largest trade block in terms of car exports from India. In FY13, about 40% of India?s total passenger vehicle (PV) exports of 5.54 lakh units went to the EU, 80-90% of which were small cars. Nissan-Renault, Hyundai and Maruti Suzuki, followed by Ford and Mahindra, are currently among the largest exporters of passenger vehicles from India to the 28-nation union.
EU?s decision is to graduate a host of exports from India such as motor vehicles, bicycles, aircraft, mineral products, chemicals, raw hides, skins, leather, ships and boats from its Generalised System of Preferences (GSP) as imports of each of these products from India have crossed 17.5% of overall import of these items into EU from developing nations.
In the case of textiles, the threshold for denying duty benefit is kept at 14.5%. Preferential customs duty to exports from developing nations under GSP is an exception to the WTO obligation of member states to give every other member equal and non-discriminatory treatment under the ?Most Favoured Nation? status.
A Maruti Suzuki executive told FE that though the share of EU in its total exports has come down to 35% from 70% four years back, it still remains the single-largest trade block. ?Of course there will be an impact of higher duties. EU sales are down because of the economic slowdown and the move will hurt margins further,? he said.
Hyundai Motor India director (finance) R Sethuraman added, ?There will be obviously impact because our costs will rise and EU is a very important export market for us. We are trying to de-risk our exports by developing other markets in Africa, South-East Asia and Latin America.? For Hyundai, India?s largest car exporter with about 40% of production meant for global sales, around a third of exports go to the EU.
Nissan Motor India?s CFO Sunil Rekhi confirmed that the impact will be significant as the company?s cost per car will go up by 150-175 Euros (about R15,000) on average. However, he said that Nissan will be able to absorb the higher costs because of the gains from the recent depreciation of the rupee versus the Euro.
?We cannot increase our prices because the EU market is very tough right now, but we have enough room to absorb it within our margins. With the higher import duty, EU is trying to encourage local manufacturing and blocking imports from developing countries. The good thing is that our exports to EU are up 20% in value terms in FY14 because of rupee depreciation,? he said.
For Nissan?s India unit, EU accounts for up to 20% of total sales. Nissan exports the Micra from its plant near Chennai, which is sold as the ?March? across Europe, while alliance partner exports the ?Duster? compact SUV from the same plant to the UK. Interestingly, Nissan has already decided to make the next generation Micra for Europe out of Renault?s plant in France from 2016.
Small cars have traditionally dominated India?s PV exports to the EU, though the trend is now changing in FY14 as exports of compact SUVs like the Ford EcoSport and Renault Duster have gained strength.
In fact, the growth in India?s total passenger vehicle exports, which were up 9% in FY13, has increased to 13.5% in April-October FY14 largely because of the SUV exports the addition of new companies like Honda, Toyota Kirloskar and Volkswagen to the list of car exporters from India.
Puneet Gupta, principal analyst at IHS Automotive said, ?The EU has been putting pressure on India to reduce import duties, so this may be seen as a negative reaction from them. This may force companies to look at other global manufacturing destinations for European exports, especially since margins on small cars are low.?