Impact auto comp
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    Impact auto comp Impact auto comp Document Transcript

    • 1.1.1 Indian auto component industry Global comparisons The Investment Information and Credit Rating Agency of India (ICRA) 2003 studies the competitiveness of the Indian auto component industry, by global comparisons of macro environment, policies and cost structure. This has a detailed account on the evolution of the global auto component industry. The United States was the first major player from 1900 to 1960, after which Japan took its place as the cost-efficient leader. Cost efficiency being the only real means in as mature an industry as automobiles to retain or improve market share, global auto component manufacturers have been sourcing from the developing countries. India and China have emerged as favourite destinations for the first-tier OEMs since late 1980s.There are only a few dominant Indian OEMs, while the number of OEMs is very large in China (122 car manufacturers and 120 motorcycle manufacturers). According to this study, the major advantage of the Indian economy is educated and skilled workforce with knowledge of English. Our disadvantages include poor Infrastructure, complicated tax structure, inflexible labour laws, inter-state policy differences and inconsistencies. India is in a better state. Based on comparisons of cost composition to pinpoint the areas in which the Indian auto component industry is at a disadvantage, this study recommends a VAT regime, speedy procedures, and imports duty cuts on raw materials, common testing and design facility, labour reforms, up gradation of design and engineering capabilities and brand building. ICRA (2004a) analyses the implications of the India- association of south east Asian nations (ASEAN) Free Trade Agreements for the Indian auto component industry. ASEAN economies are globally more integrated than India. The current size of Indian and ASEAN market for auto component is more or less the same but the Indian market has a larger growth potential than the ASEAN market due to the low level of penetration. The labour cost is low in India but the stringent labour regulations erode this advantage. The level of infrastructure is better in India than Indonesia and the Philippines but worse than that in other ASEAN countries. The financial and banking sector is better in India than in the ASEAN countries. The study notes that there is a huge excess capacity in ASEAN countries, in comparison with that in India, which will help them to tackle the excess demand that may arise in future. The study finds a 20-30 per cent cost disadvantage for Indian companies on account of taxation and infrastructure and 5-20 per cent labour cost advantage over comparable ASEANmember-based companies.
    • ICRA (2004b) analyses the impact of Preferential Trade Agreement (PTA) with southern common market, which compromise Latin American countries (MERCOSUR) on the auto component sector in India. This study finds a significant threat of imports in subcompact and compact cars and certain auto-components. There is huge excess capacity and intense competition in MERCOSUR countries, propelling them to look for export opportunities. This is true especially of Brazil, which has a well developed auto component sector with huge economies of scale. Further, weak currency in all MERCOSUR countries provides a natural tariff barrier. In addition, MERCOSUR countries have an equitable arrangement within themselves to have a balanced trade, with fair level of exports and imports. The Indian auto component industry could gain from this PTA with MERCOSUR only if it is assured of the balanced trade, as MERCOSUR countries practise among themselves. ICRA (2005) studies the possible impact of FTA with South Africa on the Indian automobile industry. The study finds that there are a few policies in South Africa that indirectly subsidise the auto industry, unlike India, in terms of financial grants. Hence it is suggested that India could minimise losses only if it goes for inclusion of certain auto components, which involve huge logistic costs of imports, creating a natural protection (for example, stampings, glass, seats, plastics and tyres) and those in which India enjoys economies of scale and is costcompetitive (e.g. castings and forgings) in this FTA. If South Africa is ready to discontinue the schemes such as Motor Industry Development Programme (MIDP), India could include all auto components in this FTA. There should be a minimum local content of 60 per cent and the agreement should not be trade balancing as India will not gain much in that case. FTAs only affect the output flows of the automotive sector’s supply chain. Most of the vehicles traded in the region have benefited from preferential tariffs offered under these FTAs, reflected by the very high utilization rate for vehicles on both the import and export sides. The rate is approaching to 100 percent whereas the average utilization for AFTA is less than 30 percent (Kohpaiboon, 2010)i (Kohpaiboon 2010) demonstrates the FTA effect on supply chain of Thailand’s automotive industry with emphasis on the recent changes in its composition and the impacts of FTAs.They conclude that FTAs have contributed to the recent changes in the nature of Thai automotive supply chains, but only for outputs, not inputs. In particular, the preferential tariff
    • offered under FTAs with ASEAN and Australia has facilitated regional vehicle trade. All vehicles traded between Thailand and ASEAN members, and Australia, applied for preferential tariff rates offered in the FTAs. Furthermore they find that FTAs do not have any significant impact on auto parts regional trade. While changes in the international trade pattern were observed,such changes naturally happen, without any influence from FTAs. The low FTA utilization rate was due to the low tariff margin and the restrictive effect of ROO on auto parts trade so that the role of FTAs on these trade flows seems to be limited. FTAs have the potential to promote trade for items which remain subject to high tariffs, such as CBU vehicles. (ICRA2010) Analyse India ASEAN and India- South Korea Free Trade Agreement At present, the cost competitiveness of Indian players is constrained on account of infrastructure inefficiencies; higher cost of power; upward pressure on wages and inflexible labour laws. The elimination of customs duty on several auto components under India ASEAN and IndiaSouth Korea Free Trade Agreement (FTA) and forthcoming India-EU and India-Japan FTAs would further diminish the cost competitiveness of Indian suppliers. India continues to be a net importer of auto components with its trade deficit for automotive components have expanded to USD 4.4 billion in 2009-10 from USD 210 million in 2004-05. (IDC 2008) reported Indonesia implemented the AFTA in 2002. Implementation of AFTA had a high impact on the Indonesian automobile industry. Manufacturers have been able to bring down their costs through the ASEAN Industrial Cooperation Scheme (AICO) scheme, in which traded automotive components within ASEAN are subjected to a maximum tax of 5.0 percent. The AICO was a prelude to the formation of the AFTA. The trading countries however, need to have at least 30 percent local interest or equity. Participating companies must also fulfil 40 percent local content requirement. Tariff rates for components have been reduced to 0-5 percent under the Common Effective Preferential Tariff (CEPT) agreement, an AFTA mechanism. Both these arrangements reduced the cost of production and have led to lower vehicle prices in Indonesia
    • Deloitte (2012) EU-Japan Free Trade Agreement Impact Assessment on the Automotive Industry in there summary report conclude that The EU-Japan FTA will reinforce the trade imbalance in the auto industry, in favour of Japan.This would mainly bring economic benefits to Japanese car manufacturers, whilst the EU automotive industry as a whole would not benefit.EU-Japan automotive trade shows a structural surplus in Japan’s favour, which an FTA would only exacerbate. More over , Japanese car manufacturers would benefit financially, boosting their competitiveness to the serious detriment of the EU industry. The elimination of the EU tariff would represent an average benefit of €1,500 per imported vehicle. Only premium manufacturers would derive some limited gains from improved market access in Japan. These exports will not offset EU additional imports due to the projected decline in the Japanese market. How ever ,The simultaneous accumulation of unbalanced FTAs with countries (Korea, Japanand India) with protected automobile industries will put the EU automotive industry under severe pressure. Such FTAs have a multiplier effect on the impact of each subsequent FTA. The share of imported vehicles could increase from 17.4 % today to 23% in the future. If those conditions hold, we expect 92,000 to 193,000 jobs to be put at risk. Athukorala, P. and Kohpaiboon, A. (2010) ‘China and East Asia Trade: the Decoupling Fallacy, Crisis and Policy Challenges’, in R. Garnaut, J. Golley and L. Song (eds), The Next 20 Years of Reform and Development, Joint publication by Australian National University, Brookings Institution and Social Sciences Academics i