India's largest exporter of cars is worried about competition from its Korean parent. Incredible as it may sound, the prospect of a free trade agreement (FTA) between the European Union (EU) and South Korea is sending shudders through the Chennai headquarters of Hyundai Motor India (HMI).
The proposed trade pact will allow Korean carmakers such as Hyundai, Kia and GMDAT to ship their cars to Europe without paying the 10% duty levied on imports, threatening to erode the competitive advantage enjoyed by Indian carmakers in their largest export market.
Hyundai's i10 and i20 and Maruti Suzuki's A-Star are in huge demand in EU, after the UK, Germany, Spain, Austria, France and Italy started offering cash incentives of e1000-3000 to buy fuel-efficient cars.
Indeed, the 10% duty does cover Indian automakers too, but a government incentive helps them offset the costs by 3.5%.
HMI, which exports half the cars it makes in India, and most of them (over 55%) to Europe, has already asked the Indian government to take steps to protect its interests. "The government needs to act fast to take some decisions on car exports. A 6.5% import duty that Indian carmakers face in Europe will make it virtually impossible to compete with Korea," said HMI managing director and chief executive HS Lheem. Mr. Lheem's sharp reaction is not without reason. Tax benefit for the Korean parent and its subsidiary Kia Motors in Europe could render HMI's business model unviable. While the parent firm doesn't offer competing models in the European market, Kia sells two hatchbacks-Picanto and Cee'd-pitted against HMI's i10 and i20.
Kia Motors is also the largest exporter of small cars from Korea. The duty waiver gives a benefit of the won-equivalent of Rs 30,000-45,000 to the Korean company.
HMI thinks any price difference between its products and Korean imports could adversely affect its sales in Europe.
HMI said it did not enjoy any huge cost advantage in India. The cost advantage on account of low labour costs translate into a price difference of only 2-3%, said a company executive who asked not to be named.
Indian manufacturers are also troubled by the inefficient tax structure, which increases the cost by 10-12%. "There are various local taxes on inputs that have a cascading effect. Infrastructure bottlenecks also add additional cost, which offsets the cost advantage on account of cheaper labour," said Price Waterhouse auto analyst Abdul Majeed.HMI's exports jumped 27% to 66,500 cars in the April-June quarter on the back of large orders from European countries.
Total car exports from India grew 45% to 97,519 cars in the first quarter with Europe accounting for more than 70%. In the first six months of the calendar year, export market for India cars grew 45-50% while the domestic market posted a sluggish growth at 1.45%.
Incidentally, Hyundai India has decided to shift production of premium hatchback i20 sold in Europe to the continent to save import duty and logistics cost, which add up to 10-15% of the car prices in overseas markets.
Maruti Suzuki said the FTA benefits to Korean firms will dent its margins, as it will have to offer freebies to compete against Korean carmakers. India's largest carmaker has doubled export target to 1.5 lakh cars in FY 2010 from 70,022 cars last year.