• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

C.R. Sukumar

Mr S.N. Tripathi

HYDERABAD, Feb. 24

IF you think that Chinese companies can give stiff competition to their Indian counterparts in any manufacturing segment that is material and labour-intensive,your assessment needs a correction, at least in the case of room air-conditioner and refrigerator industry.

Research and survey reports by consultancy majors like McKinsey suggest that all that the Indian producers need is a competitive duty structure, on par with global levels, to take on the Chinese onslaught. It is the price elasticity that has been deciding the fortunes of both refrigerator and air-conditioner industry in the country.

In an interview to Business Line on various issues confronting the industry, the Executive Director and Chief Operating Officer of Voltas, Mr S.N. Tripathi, said the McKinsey reports projected a double-digit growth for the room air-conditioner industry .

Excerpts of the interview:

Q: How do you look at the penetration levels of room air-conditioners in the country vis-à-vis the leading competitor China?

A: The penetration level is currently very low in India at less than 0.5 per cent. While countries like China manufacture 23-million room air-conditioners per annum, we are manufacturing only 7.5 lakh pieces. This is attributed to the earnings capacity of the population. Today in China, one can buy a room air-conditioner with a one-and-a-half month's salary, whereas in India it is currently the salary of three months and even more.

Q: What measures do you think would lead to spurt in Indian industry?

A: What the survey reports say is that if the prices of room ACs were brought down from the current average level of Rs 18,000 to a level of between Rs 11,000 and Rs 12,000, there can be an exponential growth. Towards that they recommended the Government to bring down the duty structure on ACs in line with the other consumer appliances.

Q: How is the duty structure in our country compared to other countries?

A: All the consumer durables in the country are currently attracting a duty of 16 per cent. As against this, ACs attract a high duty of up to 32 per cent. Theyare still considered as luxury goods in the country. Mostly air-conditioning is being used in the processing industries and for food storages. Millions of rupees worth milk and food items in the countryside are still being wasted because of highly unaffordable prices of ACs. Though the Government keeps promising various issues pertaining to food processing in the rural areas, things do not materialise owing to the high duty structure on ACs.

Q: What was your industry's plea to the Government on this issue?

A: Our recommendation to the Government was to make the duty structure on par with global standards. In China, the total duty on ACs is around 17 per cent, while in India, the overall tax along with sales tax and Octroi goes up to 70 per cent. If the Government brings down the tax structure on ACs to around 16 per cent and prune down the VAT and CST and also make the duty structure uniform across the country, the AC manufacturers can also increase their production levels and achieve economy of scale. It needs the efforts of both the Government in cutting down the duty and of the industry to cut down material and manufacturing costs. This could help the industry grow to anywhere between three to four million pieces per annum by 2005-06 from the current level of 0.7 million. The domestic sector sales would also grow if the quality of power and uninterrupted supply were ensured.

Q: Do you think the Indian AC industry can compete with cheaper imports?

A: The Indian market can be considered highly competitive compared to China. The McKinsey research reports have compared both refrigerators and room ACs. In the case of China, the manufacturing cost of a 165-litre refrigerator stands at $115 per unit, while in India it is about $80 . In the case of room ACs also, if the Indian Government can bring down the duty structure on both components as well as basic raw material on par with global standards of ten to 15 per cent and ensure uniformity in duty structure across various States (finished goods duty of around 20 per cent in line with the WTO guidelines), there is no scope for any threat to the Indian producers from the Chinese. If the Government considers AC industry on par with other consumer durables for the duty structure, then the industry would be poised for a substantial growth in the country.

Q: You say that the cost of manufacturing of refrigerators was low in India compared to China, then why is there a negative growth in the domestic refrigerator industry?

A: In the case of refrigerators industry, there was a negative growth of between six and 11 per cent during last fiscal. However, the growth this year was between four and six per cent. The negative growth was mostly owing to the general economic conditions in the country. The major problem is that the demand is too low compared to the supply levels. The installed capacity of the Indian refrigerator industry is over five million pieces, whereas the total sales is hardly three million. Most of the Indian refrigerator manufacturers were operating at a capacity utilisation level of 50 to 60 per cent only. Unless you utilise the capacity to the optimum level, the unit would not be economical.

Another interesting point is that the current prices of refrigerators are in the range of those that prevailed in 1989. Even after 13 to 14 years, the prices are almost stagnant or even lower. As against this, the material cost has grown significantly.

This is the reason why most of the Indian refrigerator manufacturers were incurring huge losses. I do not think that there is any company in this country that is earning profits on its refrigerator manufacturing business.

A majority of the refrigerator manufacturers in the country are currently incurring losses. A couple of them are able to show profits, thanks to other income. None of the manufacturers are currently in a position to decide the prices. It is the market, which is dictating the prices.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Bid to give a fillip to over-the-counter sales — Dr Reddy's ties up with Leiner Health

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line