Tax relief proposal for European cars draws flak from Asian rivals

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Dec 21 2011, 06:33am hrs
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Japanese and South Korean car manufacturers like Honda, Toyota and Hyundai have opposed any move by the government that exempts European car makers from paying any duty on import of their cars into the country. Such a proposal is currently pending with the government as part of the India-European Union (EU) free trade agreement (FTA).

The Japanese and South Korean car makers have demanded that the commerce and industry ministry provides them a similar facility by making the requisite change in the bilateral trade agreement. India currently has signed Comprehensive Economic Partnership Agreements with both Japan and South Korea. The apex industry body Society of Indian Automobile Manufacturers has supported their position and said it opposed any concessions that may be given to the Europeans as part of the FTA.

Honda Siel senior vice-president Janeshwar Sen said that Honda wants a level playing field vis-a-vis the European players. If any change is made in the current duty structure for auto products under the India-EU FTA, then a similar provision must also be made under the India-Japan FTA, Sen said.

A Hyundai Motor India spokesperson said that the company's stand was in line with that of Siam.

The strong opposition by the Asian companies could queer the pitch for the commerce ministry when it resumes negotiations with EU on the FTA in February.

At the core of the divide between the Japanese and South Korean manufacturers on the one hand and the Europeans on the other is the different business models being pursued by the two sides. While the Japanese and South Korean players are mostly present in volume segments, have set up manufacturing facilities in the country at huge investment costs and generated a large number of jobs, their European counterparts are mostly present in niche segments, sell limited numbers and so have smaller investments in comparison. They mostly import completely knocked down units and assemble them in the country.

This is the crux of the opposition from the Japanese, South Korean and even Indian manufacturers. At present, the import duty on fully-built cars is 60%. After adding duties like sales tax and value-added tax, the overall duty goes up to around 110% of the original cost. If the India-EU FTA happens, the manufacturers would not have to pay this duty and the cars can be sold in the country at relatively cheaper prices.

If investments made by the two sides in India is taken into account, it compares something like this: The cumulative investments made by top European car makers like Mercedes-Benz, Audi, BMW and Skoda put together is a little over Rs 1,000 crore or almost one-third of what Honda Siel alone has made.

Similarly, Skoda, a brand owned by Volkswagen, which has been in India for almost 10 years and competes in the voluminous small car market with its hatch Fabia, has invested Rs 625.7 crore, employing 816 people. On the other hand, Toyota, which operated only in the premium segment until it made its entry into the small car market earlier this year with the Liva, has invested over Rs 1,500 crore and has an employee strength of 3,500 people.

The only exception in this so far has been the European manufacturer Volkswagen, which has pumped in around Rs 3,800 crore since setting up operations two years back. The company's total workforce at present stands at 4,000. Though Skoda and Audi are brands owned by Volkswagen and they operate from the Chakan and Aurangabad facilities of the company, globally they operate as separate business outfits.

Among the European entities, Volkswagen stands out on the job creation front as well. The cumulative employment generation by the European car makers mentioned stands at 5,933, with Volkswagen accounting for 4,000. Quite in contrast, the Japanese and South Korean companies employ in excess of 11,000 people.

However, if the government levels the field by according a similar facility to the Japanese and South Korean, these players would also benefit as the higher-end models where their indigenisation levels are low can be priced more competitively.

After the EU started lobbying for reducing the import duty on fully-built cars, heavy industry minister Praful Patel had shot off a letter to Prime Minister Manmohan Singh earlier this year apprising him that any concession to EU would not only go against the Automotive Mission Plan drawn up in 2006 (which stated that import duties should not be relaxed till 2016) but could also reduce investment flow into the country.