Automakers such as Hyundai, Toyota and the premium-end BMW and Mercedes may see a significant rise in costs due to a new provision in Budget 2011-12 on ‘Completely Knocked Down' (CKD) kit imports.
Higher customs
The new proposal on CKD imports has excluded all vehicles with pre-assembled engines and transmissions from availing of a concessional import duty of 10 per cent, which in effect could make most CKD operations classify as ‘Completely Built Unit' (CBU) imports and attract higher customs of 60 per cent.
“For the purposes of this exemption, CKD unit means a unit having all the necessary components, parts or sub-assemblies for assembling a complete vehicle but does not include a kit containing a pre-assembled engine or gearbox or transmission mechanism; or a chassis or body assembly of a vehicle on which any of the component or sub-assembly viz. engine or gearbox or transmission mechanism is installed,” a customs notification dated March 1, 2011, stated.
Premium carmakers
While premium carmakers like BMW, Mercedes-Benz and Audi that assemble their more popular models from CKD kits could be most impacted, even mass segment carmakers like Hyundai and Toyota could fall under the same bracket as they import fully built engines for some models.
“According to the new definition almost all CKDs would qualify as CBUs. It will severely affect all companies, even domestic firms who have international divisions. We are trying to understand the details and will approach the Government soon,” Mr Vishnu Mathur, Director-General, Society of Indian Automobile Manufacturers (SIAM), told Business Line .
However, Hyundai and Toyota feel that the new regulation should not affect their operations. “We are seeking further clarity on the matter and are approaching the Government through SIAM. On the face of it, the new rules look confusing,” said a Hyundai spokesperson. A Toyota official added, “There is confusion on the interpretation, but it does not look as if we should be affected.”
Domestic companies
Domestic companies like Tata Motors and Mahindra with foreign arms may find it more expensive to sell a few models, the engines for which have been made abroad. In 2011, Mahindra expects to launch a few models through the CKD route from Ssangyong, a South Korean company whose acquisition it expects to finish by April. Tata Motors also sells made-in-Europe Jaguar Land Rover cars in India and is planning CKD operations for it.
A top Government official said the new regulation will bring into its net many foreign carmakers that have been using the CKD route for lower duty, but not doing any real manufacturing in the country. “This is good for India. The new norms will help the Government generate higher revenues from the sector, increase local value addition and help meet the target of increasing the manufacturing sector's share in GDP to 25 per cent from 16 per cent over a period of 10 years,” said the official.
Mr Abdul Majeed, auto practice leader, PwC, said, “Manufacturers will now be forced to bring in their engine operations and localisation is a good thing for a sustainable business model. Otherwise, automakers will also have to bear most of the increased cost as customers won't pay the huge difference in price.”