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A U T O M O T I V E Wheels Within Wheels
The Indian auto industry today should be a worried lot. By April next year, the quantitative restrictions (QRS) on the import of the last 715 protected items will be lifted. Included in this list are second-hand passenger cars. For the first time since restrictions on used cars were imposed in 1947, Indians will be free to import as many of those as they want. Which means that your next fiscal year acquisition could be a pre-owned Toyota Corolla or Ford Taurus that will cost as little as the Zen, Matiz, or Santro. Understandably, the Rs 42,000-crore industry, which has 12 major players ranging from home-grown Telco to transnationals like Ford and Toyota, is keeping its fingers crossed. The lifting of restrictions will dramatically change the scenario. At the moment, used car imports are banned. But next year, the entire spectrum of the market will become vulnerable to imports. Even a high Customs duty of, say, 100 per cent will not help. That's because of the rock-bottom price of used cars in international markets. For instance, a pre-owned Toyota Corolla (which is the entry-level car in countries like Japan and the US) costs as little as $3,000 (Rs 1.38 lakh). The landed price after paying the Customs duty would be around $6,600 (Rs 2.97 lakh). Currently, a new car of comparable size and features costs around Rs 6 lakh. That apart, countries like Japan actually discourage ownership of cars older than three years by imposing penal tax, which makes it cheaper to buy a new car than pay the tax. Manufacturers, therefore, fear that imports will decimate a fledgling industry. Most of the Rs 50,000-crore investments in the passenger car industry are barely six years old. Except for Maruti Udyog, none of the manufacturers is making any profits. Besides, the local auto components industry-which employs 2.5 lakh workers and logs Rs 15,200 crore in sales-will go out of business. Says Rajat Nandi, 56, Executive Director, Society of Indian Automobile Manufacturers: ''Any country with a substantial vehicle manufacturing industry cannot have a free import regime of used vehicles.'' The Indian government has spent the last six months figuring out how to protect the industry. Raising tariff barriers is not an option because under the WTO agreement, India is committed to opening up its markets. What's the solution then? A mix of non-tariff barriers. While the government will not be announcing the new measures until March 31, 2000, BT learns that a mix of responses could be put in place. For starters, Chapter Five of the export-import policy could be amended to exclude second-hand cars from the product classifications allowed to be imported into the country. In the existing International Trade Classification (Harmonised System), there are different sections on imports of new and used cars. Post amendment, the section dealing with pre-owned cars will be knocked off. But sooner or later, somebody is going to notice that and ask questions. So, some other barriers could be erected. For instance, all used cars could need to be right-side drive, as against the left-side drive sold in most other parts of the world. Changing the drive side is expensive, and could make the whole import proposition unviable. The import of cars older than three years may also be banned. For instance, Japan has such a policy in place. Another rider could be linked to the mileage logged. The government could simply ban purchase of foreign-made cars that have done, say, 20,000 kilometres. In addition, the government could impose strict pollution norms like those of Euro II or make it mandatory for all second-hand cars to be certified by Indian testing agencies. Says B.V.R. Subbu, Director (Marketing & Sales), Hyundai Motor Company India: ''People have together made substantial investments in automobile and component manufacturing to build a domestic industry. We believe it's a question of industrialisation versus de-industrialisation. The government understands this reality.'' Will the government's plan work? It should. A number of developed countries themselves have rules that make it impossible to import old cars. Besides, the car companies backing the government's move are the biggest makers of cars likely to be imported. For instance, Toyota, Ford, General Motors, Honda, Mercedes-Benz, Suzuki, Hyundai, Daewoo, and Mitsubishi. Most of them are here with plans of tapping the local market. Although the auto industry is currently witnessing a sluggish phase, it is quite clear that the overall market trend is positive. By 2005, the passenger car market in India could be 8 lakh big. Going by the mood of the government and the car makers, there won't be any lemon doing the rounds at this party. -Ashish Gupta O
F F - B E A T Is it end of the road for the Madhya Pradesh-based Bhilai Steel Plant (BSP)-the profit-making unit of the Steel Authority of India Ltd (sail)? It could well be, if the state and Central governments are not able to find alternate sources of water for its four-million tonnes per annum (tpa) plant and its township consisting of 1.76 lakh people. Such is the water crisis in the plant that parent sail is considering shutting down one of its oldest units that is also the only one to manufacture rails. Says Shoeb Ahmed, 48, Chief of Corporate Affairs, sail: ''The country's biggest steel plant is facing its worst-ever water crisis.'' The 3.6 thousand million cubic feet of annual water supply to BSP is made from the state government's reservoir at the Tandula Complex, with support from the Mahanadi River Project. It is also the sole source of water supply for the plant, Bhilai township and surrounding areas. This year, because of poor monsoon, BSP has been unable to build up sufficient reserves in the storage facilities. And the Madhya Pradesh government, for no apparent reason, has yet to release sufficient amounts from the reservoirs of Mahanadi basin. The plant's safety rules require it to have a minimum of 15 days water stock when operational. When BT went to press, the plant had just five days of supply. Even to carry out a proper shut down of the gigantic plant, water supply for seven days, is needed. The steel-maker feels that the shortage could potentially damage the plant and equipment. A unit of Bhilai's size would today cost Rs 14,000 crore. BSP's closure could cost the ailing sail dearly. The Bhilai unit has been the only one among sail's seven plants to consistently deliver profits. The only other profitable plant is the Bokaro facility. For want of a nail, a kingdom was lost. The steel major's nemesis could prove to be water. -Ashish Gupta E
C O N O M Y As recent as in August this year, the inflation forecast for the end of 2000 was a manageable 6 per cent. Industry was breathing easy because it meant there wouldn't be any hike in interest rates or a slackening of demand. Chances were that fiscal 2000-01 would end on a happy note-as had the last two years. But all that was before the spiralling oil prices blew a hole in the country's oil import bill, forcing the government to raise fuel prices between 8 and 50 per cent. Petrol prices are up by Rs 2 or more per litre; LPG is dearer by Rs 36, and kerosene has been slugged with a 50 per cent hike. Since fuel is needed to make and supply products, the impact of the price hike will be immediate and widespread. Finance Minister Yashwant Sinha, is projecting a 1 per cent point increase in the rate of inflation to 6.5 per cent. Says a senior Finance Ministry official: "Inflation may touch 7 per cent in the short term, but will fall back to 6.5 per cent because of the seasonal drop in prices of essential commodities." Most economists believe that the ministry is being too optimistic. Based on the August data of the Wholesale Price Index (WPI), the Institute of Economic Growth had projected inflation rates of 5.95 per cent and 6 per cent-for the months of November and December. But, assuming a 10 per cent hike in fuel prices, the figures have been revised upwards to 9.1 per cent and 9 per cent for the two months. Says B.B. Bhattacharya, 53, Head, IEG: ''The exact figure will depend on the extent of price rollback. But the figures will be higher than our previous forecast.'' Trying to pin down the exact figure is a tricky affair because the eventual increase in wholesale or retail prices will depend on the market situation. If demand is robust, manufacturers can risk hiking prices. But if there is a softening in demand, as seems to be happening currently, then companies will want to sustain demand by absorbing the increase in costs. For example, in October, 1999, when diesel prices were hiked by 40 per cent, most companies decided not pass on the cost to consumers. Instead, they chose to sacrifice a part of their profit margins. Notes Saumitra Chaudhuri, 48, Chief Economic Adviser, ICRA: ''Chances of prices not going up this time are slim. Transporters have already hiked freight charges by 15-20 per cent.'' The government's argument that it has cushioned the blow by absorbing part of the additional burden, doesn't cut ice with its critics. Points out D.H. Pai Panandikar, 68, Economic Advisor, RPG Group: ''By forgoing revenues and increasing its contingent liabilities, it is hurting the fiscal health of the nation.'' But, then, politics has a way of turning a blind eye to economic realities. -Ashish Gupta A
C Q U I S I T I O N S For about a month now, the buzz in the malted food drinks (MFD) market is that Cadbury India is talking to Heinz India to acquire the ketchup major's Complan brand. Cadbury told BT that it is not. Even so, there's a compelling rationale for the chocolate company to eye the brown nutrition drink, Complan. Says Bharat Puri, 39, Director (Sales & Marketing), Cadbury India: ''Brown is a happening segment, which is why we have some interesting plans for Bournvita.'' Analysts say that Cadbury has been hard-pressed to retain the marketshare of its flagship MFD brand, Bournvita. That's despite the brown segment growing at 5 per cent a year and the white drinks category tailing it at 3 per cent. Part of the reason, some analysts believe, is the nutrition drinks giant, SmithKline Beecham Consumer Healthcare's (SKBCH) virtual stranglehold on the market. Its mega brands, Horlicks and Boost, have 61 per cent of the nutritional drinks market. Its other two products, Viva and Maltova-acquired from Jagatjit Industries for Rs 86.25 crore-have another 7 per cent. Worse, for Cadbury, SKBCH is making moves to widen the marketshare gap. Earlier this year it acquired Maltova, and before that had launched a chocolate version of Horlicks, which traditionally came in the white form. Another competitor, Nestlé, is pumping money into pushing its own contender, Milo. The only Indian brand of any significance in the MFD market is Gujarat Co-operative Milk Federation's Nutramul. In such a scenario, having Complan in its portfolio will help Cadbury. Incidentally, Complan-it has a 12 per cent share of the market-was acquired by Heinz from Glaxo, which since has merged globally with SmithKline Beecham. But why should Heinz consider selling its new acquisition? Apparently, it wants to focus on its core business of ketchup. Could it be possible that SKBCH is also in the fray to reclaim its brand? It's hard to say for sure. Watch this space, though. -Shamni Pande A
S S E T M A N A G E M E N T Call it chance or design, but the entry of transnational banks into asset management seems perfectly timed. On the one hand, stockmarkets are proving to be extremely volatile, with just about 20 stocks making or breaking Dalal Street's fortune. On the other hand, retail investors have tasted blood and are loath to swear off stocks despite their wild swings. ''Have money, will invest for you'' is what a clutch of transnational banks are saying to Indian customers. In June, 2000, ANZ Grindlays Bank (now acquired by the Standard Chartered Bank) was the first of those to set up an asset management company. Since then, others like HSBC, Citibank, BNP, Deutsche Bank, and ABN Amro Bank have either announced or are toying with the idea of launching their mutual funds. Given the sluggish growth in assets under management (and about 9 per cent decline in assets under management between March 31, and July 31, 2000) and existence of 30-odd competitors with Rs 1,03,089 crore in assets, is the arena getting overcrowded? ''There is room for more,'' feels Euan MacDonald, Managing Director, HSBC Securities and Capital Markets, which is planning to launch its first scheme in early 2001. ''We will be leveraging our commercial bank's distribution strength to push mutual fund products,'' says he. To differentiate themselves, the new entrants will likely offer niche products. For example, ANZ Grindlays AMC-as a specialist debt fund house-is focusing on a range of innovative debt funds. Its first fund, launched in June, was the Grindlays Super Saver Income Fund, where the primary objective is to generate long-term returns with low-risk strategy. Ergo, the portfolio comprises good quality fixed-income and money market securities. Similarly, HSBC's AMC subsidiary will focus on innovative equity products. Meanwhile, Deutsche Bank is negotiating with two or three Indian partners to launch an AMC. Having their own mutual funds will help these banks in two ways. One, it will diversify the range of services available to their customers. And two, it will boost income. Apart from the income on distribution of mutual funds, the bank will be able to charge up to 1.25 per cent in advisory fee. Having about Rs 1,000 crore in assets under management could, then, mean an additional income of Rs 12.50 crore. Trust bankers to find new ways of making more money. -Roshni Jayakar |
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