Rigid labour laws and growing macroeconomic concerns like rising interest rates and withdrawal of a key export benefit scheme have led to TVS Motor deciding to shift two-thirds of its export production from its Chennai plant to China. TVS is the country?s second-largest two-wheeler exporter, shipping 200,000 units every year to countries in South Asia and Africa.
This is the second major instance of relocation of the export base out of India in recent times. Following a labour strike at its plant near Chennai last year, Hyundai Motor India had shifted production of i20 cars to Turkey. The development was significant since Hyundai happens to be the largest car exporter from India and had plans to make the country its small car hub.
The country?s third-largest motorcycle manufacturer, TVS Motor, has an annual production capacity of over 2 million units. Apart from Tamil Nadu, it has plants in Karnataka and Himachal Pradesh.
Shifting the export production base would be done in two phases, chairman Venu Srinivasan told FE. The first phase, which is likely to commence shortly, would see the company relocate 50% of its overall export production to China. In the second and final phase, the share would go up to 70%.
Srinivasan said that continuing export production from India was becoming ?unviable? owing to concerns on macroeconomic issues, which are adding to costs. ?We are in the final stages of shifting our export base to China. We are going to manufacture 100cc motorcycles there, which would be later exported to Latin American and African markets.?
Currently, TVS Motor does only contract manufacturing in China. This would be its first production facility in that country. Srinivasan, however, did not share the investment details of the move.
In shifting the major chunk of export production to China, TVS follows Bajaj Auto, India?s largest motorcycle exporter, with annual shipments close to a million units. The country?s largest two-wheeler manufacturer Hero Honda currently exports just over 100,000 two-wheelers a year. However, with the break-up of the JV with Japan?s Honda, the Hero Group will now fashion its export strategy afresh.
Bajaj Auto established an assembly unit in China in 2008 that exports assembled motorcycles to Afri-can countries. According to industry insiders, Bajaj had shifted a chunk of its exports to China because of the lower cost of production and availability of cheaper labour. According to analysts, cost of production in China is 15-20% cheaper than in India which makes the country an attractive investment destination for manufacturing units.
Rajiv Bajaj, managing director of Bajaj Auto, told FE that ?time will tell? how the withdrawal of the DEPB scheme, an export benefit programme, would impact two-wheeler exports.
Bajaj however, declined to comment on whether Bajaj Auto would increase focus of export production in overseas markets owing to the macro economic concerns in India and the discontinuation of the DEPB scheme.
In 2010-11, total two-wheeler exports from India stood at 1.5 million units with Bajaj Auto and TVS Motor contributing over 80% of the share.
Top CEO of an original equipment manufacturer (OEM) said: ?When you have companies shifting focus from India to China, what message are you sending??
He said that once TVS shifts its export base to China, it could prompt other two-wheeler makers like Hero Honda to follow suit. ?Labour laws have not been relaxed, interest rates are rising and the government is considering remo-ving the DEPB scheme. Life is getting tough for Indian exporters,? the executive said.
Under the DEPB scheme initiated in 1997, exporters are reimbursed on basic and special customs duty on the import content of the export product.
The scheme was expected to be scrapped by March this year owing to its impact on the exchequer. Under pressure from exporters, the scheme was extended till September.
According to finance ministry estimates, the scheme costs the government close to R8,000 crore per year in terms of tax reimbursed.
Over 50% of exporters in India are covered by the scheme.
Auto analyst with Angel Broking Yaresh Kothari said that the TVS move to gradually shift export production to China is a ?big development.?
Analyst with Mumbai-based brokerage Prabhudas Lilladher Surjit Arora added that since interest rates in India were climbing accentuated by lower growth forecasts, China offered cheaper cost of overall production which made it attractive.
In the last 15 months, interest rates have climbed almost three percentage points, boosting cost of finance.
As per the latest Index of Industrial Production (IIP) numbers, growth fell to a nine-month low of 5.6% compared to 8.5% in the corresponding month last year.