The Hindu Business Line : Slow-speed reform for auto MNCs

THE Government has finally decided to do away with export obligation requirements for automobile companies, after the US and the EU cornered the Government at the WTO's Dispute Settlement Body. They alleged that the clause was designed to deter market entry. The imports of completely knocked down kits (CKDs)/semi-knocked down kits (SKDs) have, thus, been liberalised by the withdrawal of export obligation against imports of such kits for joint venture auto-makers which had signed the Government's MoU-based auto policy in 1997. The decision to withdraw has been taken even as the export clause has become redundant in the current auto scene.

When the Government opened the automobile sector to MNCs in the late 1990s, a flood of entrants poured in over a billion dollars in investments in a matter of three years. Under the MoU arrangement, MNCs intending to invest in the Indian automobile market, had to sign an understanding with the Government for each of the passenger car models being planned for launch. Through the policy, the Government thought it fit to impose annual export obligations for balancing any imports of components or CKDs/SKDs the multinational auto companies may have brought in.

The policy was opposed by a number of automobile companies, including the ones that, despite the export obligation clause, eventually entered the Indian market (due to the attractive future potential). By ensuring that the companies export cars or components commensurate to the amount of imports, the Government felt that the value addition, even if it was just assembling automobiles, would be retained within the country.

Imperative for exports

Before the liberalisation of the automobile industry, the market was a sub-one lakh units per annum market and exports would have been unviable. Even full-blown production of cars would not have been profitable for new entrants. In fact, even today, only Maruti Udyog Ltd (MUL), Hyundai Motors India and Tata Engineering, can claim to be operating at global scales.

However, the deepening of the market, the rapid development of a strong vendor base and the import of newer technologies by the auto companies over the past five years, have meant that producing cars is becoming a viable option for many manufacturers. The phenomenon has been aided by the entry of Tier-I component suppliers, such as Delphi, Visteon, Lear Corporation, who are preferred suppliers to the world's top car-makers.

The Government's decision to withdraw the export obligation is even more immaterial now because of this very reason. Exporting cars produced in India is fast becoming imperative for auto companies for two reasons. One, most of them have set up huge capacities, while actual sales are less than half that level. So, utilising the idle capacity will make their operations economical. With improvements in quality, the `right quality at the right cost' formula is achievable.

An example here would be Ford India, which cumulatively exported 12,179 CKDs of its mid-sizer, the Ford Ikon, for April-July 2002, while cumulative domestic sales for the same period was just 5,138 units.

Two, global automobile giants, such as Toyota, Ford, GM and Hyundai are increasingly seeking ways of cutting development and production costs by globally sourcing specific parts and models.

So, Maruti Udyog (now a majority-owned Suzuki subsidiary) wants to export the Alto more, Hyundai is looking at the possibility of making the Indian plant the single source for the Santro, and Ford wants to export more Ikons. This cuts across other segments too. In the CV segment, Volvo India is looking at exporting to the neighbouring countries. Among the two-wheeler makers, Honda Motorcycle and Scooter India, a Honda subsidiary, wants to export its latest offering, Dio, to the world market.

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