Hoping for a roadblock

Source : Business standard

New Delhi, Jan 31: The auto industry is deeply divided about India�s free trade
agreement with Thailand.

It�s a move that Delhi-based auto component manufacturer Vivek Mehra wouldn�t have
dreamt about a year ago. Mehra, a partner of small component manufacturer, Rising
Sun International, has, for the last few weeks, been studying the pros and cons of
shifting his factory to Thailand.
He insists that the harsh alternative is to close shop, mainly because steel costs
are higher in India. �How can I compete with Thai manufacturers?� he asks
plaintively.
Once upon a time Bangkok and Pattaya were holidayspots for a quick vacation. Now
businessmen in a range of industries are turning their attention to Thailand and
reaching for their pocket calculators.
It isn�t only Thailand that businessmen will have to take into their new
calculations. During the last few months the government has raced into overdrive to
sign free trade agreements with a clutch of countries including Thailand, Singapore
and other Indian Ocean countries like Bangladesh, Sri Lanka and Myanmar.
What will be the result of these free trade agreements? Obviously, India, once one
of the most closed countries in the world, will be opened to imports from these
nations like never before.

As the free trade agreements come into force, duties will be slashed on a range of
products from these countries. Over a few years duties will finally be brought down
to zero.
The day of reckoning is close at hand. From March 1, Thai manufacturers of a range
of items including auto components, cordless phones, colour television,
refrigerators and air-conditioners amongst others, will be able to import their
wares at half the duty they were forking out on January 1.
That�s for starters: tariffs on these products will be brought down by 75 per cent
on March 1, 2005. Finally, by March 2006 these products will be imported free of
duty.
That may seem like a dramatic change from the past. But the Government is already
working on similar agreements with a host of other countries including Singapore,
Brazil and the South Asia Free Trade Association (Safta) countries. Most of these
agreements will be signed later this year.
Most industries seem resigned to the changes that are just round the corner. But as
the Government gets ready to sign a deal with Thailand, it�s the auto sector that�s
getting a bad attack of nerves.
That�s because Thailand has a robust auto industry (both passenger cars and auto
components) which includes over 2,000 companies including giants like Suzuki,
Honda, Toyota and General Motors. The auto components industry alone has a turnover
of $2.4 billion.
Inevitably, the auto industry is sharply divided about whether the FTA will provide
a new window of opportunity or whether it will virtually drive them out of
business. Opinions differ depending which side of the fence you are on.
The Japanese carmakers, for instance, which have large production bases in Thailand
favour the FTA. On the other hand, the Koreans who don�t have a strong base in
Thailand are vehemently opposing it.
Take a look at Toyota which insists that the deal will benefit both countries � and
Toyota itself. Says a senior Toyota executive: �We will benefit two-fold � we have
put up a engine transmission plant in India and the low duties will help us in a
major way of exporting to our production bases in Thailand at competitive prices.�
The Japanese giant also imports over 30,000 Qualis engines from Thailand and hopes
that the vehicle�s cost will fall in the long run.
But the Korean carmakers are singing a different tune. They argue that FTA will
result in a flight of capital investment from India to Thailand. Says a senior
executive of a Korean company: �It was stupid for us to have invested money say on
a press shop in India. I would rather utilise the large surplus capacity available
for press shops in Thailand which are ready to undertake work at marginal costing
and take advantage of 5 per cent import duty on steel compared to 20 per cent
here.�
Similar fears are being expressed by Automotive Component Manufacturers Association
(ACMA) which, unlike Toyota does not see any opportunity opening up for its members
in Thailand.
To take one example, ACMA points out that 60 per cent of the Thai market is
dominated by one-tonne pick-up trucks. In India the market for such vehicles is
negligible. So Indian component manufacturers cannot currently manufacture
components for such vehicles.
Worse, Thailand doesn�t have a small car market. This is one field where Indian
component manufacturers have a cost advantage. Points out a auto component
manufacturer: �So while we don�t get any advantage in terms of access to the Thai
market they can sell their components in India because we have a vibrant passenger
car and component market.�
It should be noted that the auto industry and the components aren�t united in their
fears about Thailand. The two-wheeler manufacturers are, in fact, already exporting
in a big way and aggressively seizing any opportunity that comes their way.
Bajaj Auto, for instance, is planning assembly operations in the Philippines and
Indonesia. It hopes the FTAs will enable it to tap the entire Asean market.
Says R L Ravichandran vice president, Bajaj Auto: �Free movement in the Asean
region can provide us with a opportunity to tap a large market. Also Kawasaki
(Bajaj has a tie-up with Kawasaki) has a plant in Thailand and we could source say
engines of 250 cc quickly at lower duties than developing it here.�
Bajaj does not see imports from Asean as a threat because these countries mostly
make step-through bikes which aren�t popular in India.
But the auto component companies are looking at everything differently. For a
start, there�s the problem of steel. Says Surinder Kapur, chairman, Sona Steering:
�We are internationally competitive with Thai component manufacturers. But in the
domestic market we should be put at par with Thai manufacturers. While they can
import raw materials at 5 per cent why should we pay 10 per cent to 20 per cent on
our inputs.�
Even the small-scale units are nervy. Points out Kamal Sharma who controls Horizons
International a SSI unit: �Our clients are already saying, please reduce costs or
we will go to Thailand and source components.�
Some smaller companies, however, believe the FTA will throw up new opportunities.
Says a senior executive of a component manufacturing unit: �We could, for instance,
import sheet metal components from Thailand where it�s 20 per cent cheaper than in
India, value add it by bounding rubber here. Then sell it to our European buyers.
Surely we will be more cost competitive.�
At a different level, ACMA believes that investment in the booming components
sector will suffer for two reasons: firstly, auto companies will source cheaper
products from Thailand. Secondly, foreign companies with units in Thailand won�t
transfer technology to India.
So how serious is the threat? Tariffs on about seven key components (including
engine parts, ball bearings, fuel injection and transmission equipment amongst
others) will fall to 12.5 per cent (from 20 per cent) this March and drop to zero
by 2006.
ACMA�s views are backed in a study carried out by ICRA for the components industry.
The study concludes that a lot of investment which is heading to India might be
diverted to Thailand.
The Government says this fear is overstated. �The industry is making unnecessary
noise. A company like Maruti or Bajaj which has existing tie-ups is not going to
change its vendor overnight.�
The Government also dismisses other industry fears. �Flight of capital is not going
to happen till the time the Indian market reaches saturation point. Ulltimately,
even if investments go abroad, to say Thailand, profits will come back and new
technologies will come in.�
The Government has, in fact, considered the objections raised by the auto industry.
�If there is a company which does not have a vendor in India, then it can go to
Thailand for a vendor or can use its vendors in Thailand, Toyota stands to benefit.
But Mahindra, GM, Fiat, Maruti, Tata and the others have their ancillaries in India
and Thai companies are not going to benefit at the cost of their Indian
counterparts.�
What do the Thais have going for them? Mainly the fact that duties on raw materials
used in components is lower than in India. One important example of this is steel.
Some component manufacturers argue that it would be cheaper to import steel from
India to Thailand, value add there and export finished components at nominal duty
rather than make it in India. The reason: because of incentives the export prices
of steel are lower than domestic prices.
Also, domestic manufacturers incur numerous hidden costs which do not exist in
Thailand � for instance, the Thais have a value-added tax system (in India VAT
implementation has been delayed), and Indian manufacturers have to pay octroi and
other local taxes with a cascading effect on cost.
The Government, for its part, points out that VAT will be introduced in due course.
Also, Government officials say there were genuine worries about about the inverted
duty structure (where duties on raw materials are higher than on the finished
goods) which have been taken care of.
For instance, tariffs on various steel products which go in the making of auto
components have been recently been brought down to 10 per cent � in line with Thai
tariffs. Also the Government is working on stiff value addition norms so that
companies do not use Thailand as a conduit to export goods from other countries.
Nevertheless, every company recognises that FTAs are going to be a fact of life in
the coming decade. The key question is how far the Government will be able to
balance the interest of local manufacturers while reaching out to Asia.