Policy Watch: Keep Out! Restricted Access Only

The new auto policy seeks to protect existing players from competition, but not everyone is happy.

No Entry. That's the sign foreign car firms wanting to drive into the Indian market may well see next year. If a sneak preview of the final prototype of the Automobile Policy-Mark II is anything to go by, existing car manufacturers should be honking their horns in delight. Protecting them from new competition, the policy ups investment limits, insists on a $12.5 million research and development (R&D) outlay, hikes import tariffs, and vows to restrict the import of used cars (See The Old And The New). Behind the sheltered walls, the small car makers will have a smooth ride, but it'll be a bumpy road for those driving in the premium lane.

THE DRAFT COMPETITION BILL

THE OLD...
Auto Policy, 1997
Car manufacturers had to sign an MoU with the government agreeing to:
ť Minimum investment of $ 50 million
ť Upto 50 per cent indigenisation of components by the third year and 70 per cent by the fifth year
ť Export obligation to maintain foreign exchange neutrality.

...AND THE NEW
Auto Policy, 2001
ť No MoUs for new entrants
ť Stipulates minimum investment thresholds:
Cars: $250 million
Commercial Vehicles: $100 million
Two- and three-wheelers: $25 million
ť Minimum investment of $12.5 million in R&D
ť MoU will continue for older players unless they hike investments to the prescribed limits
ť Cars up to 3.7 metres in length will get an excise duty concession of 8 per cent
ť New import tariff structure:
Public transport and heavy commercial vehicles: 40 per cent
Cars, multi-utility vehicles, & two-wheelers: 100 per cent
CKD/SKD kits: 50 per cent
Auto components: 35-40 per cent
ť Second-hand car imports will be discouraged through tariff and non-tariff barriers

THE WINNERS...
ť All existing manufacturers since:
Import of new cars will be costlier
ť Second-hand car imports will be discouraged
Investment limit hike will put off new entrants
ť Excise duty concession for small cars will help Telco, Maruti, Hyundai, & Daewoo.

...AND THE LOSERS
ť Large and luxury car makers: Hindustan Motors, General Motors, Mercedes-Benz, Fiat, & Ford
ť General Motors, which will have to hike its investments or continue with the MoU
ť Auto-component manufacturers, since there will be no stipulations on indigenisation
ť Companies which want to bring in new models since duty on CKD/SKD kits will be higher.

Says principal, A.T. Kearney, Arindam Mukherjee: ''The message of the new policy is clear: we have enough capacity and enough players, so there is really no need for new entrants.'' Asserts an official of the heavy industry ministry: ''We must provide some breathing space to the existing players to gear up for global competition.''

Importantly, the GOI has also ensured that the new policy clears the World Trade Organization (WTO) test. A fortnight back, the WTO set up a dispute settlement panel on the current auto policy which had been challenged by the European Union and the US. The 1997 auto policy (under which firms sign a Memorandum of Understanding (MoU) with the GOI on indigenisation norms and export obligations to maintain foreign exchange neutrality), they argued, violated the agreement on Trade-Related Investment Measures (trims).

But the export obligations and the ban on second-hand cars are both set to go once Quantitative Restrictions (QRs) are withdrawn from April 1, 2001, exposing the domestic industry to increased competition. That's bad news for the existing players, none of whom is really driving in top gear. Barring, of course, Maruti Udyog, which has posted profits of Rs 330 crore and Hyundai Motors, which has just about managed to break even.

Manufacturers had, therefore, been lobbying for a new policy that would protect their investments, and found a willing ear in the GOI. Says an official involved in framing the 1997, policy: ''These people brought in investments when we needed it. How can we now let them down?'' Indeed, between 1991, when the sector was first liberalised, and now, 13 car firms had brought in Rs 12,500 crore of investment.

The shield comes in the form of stipulations on investment limit and R&D efforts, as well as higher import duty on new cars. Says an official: ''We want to encourage genuine manufacturers, not mere assemblers.''

The new conditions might throw plans of global auto majors out of gear. Czech auto major was waiting for the auto policy before launching its premium segment car, Skoda. Company officials, however, refused to comment on whether they would change their plans in the light of the new policy.

But industry watchers are not sure whether the restrictions will be effective or are even needed. For one, there's already a glut in the market. While the total capacity is around 11.5 lakh cars, only six lakh cars were sold last year. What's more, there are ways of getting around this. Says Anupam Majumdar, Senior Analyst, ICRA: ''The potential entrants may go in for mergers and acquisitions instead of setting up greenfield capacities.''

The glut is also likely to keep new car imports low. That's why manufacturers aren't excited by the high import duty. CEO of Ford India's, Phil Spender, points out that though cars currently attract 35 per cent duty, the effective rate including surcharges and countervailing duties, is 102 per cent. Agrees Ashok Leyland's Managing Director R. Seshasayee: ''Increasing the basic duty to 70 per cent would have been enough.''

This magnanimity disappears when it comes to used cars. Asserts Seshasayee: ''Unrestricted imports of second-hand cars will mean disaster for existing manufacturers.'' The components industry feels the same. Says President of the Automobile Component Manufacturers Association, L. Ganesh: ''Second-hand car imports can ruin an emerging car industry.'' The GOI is planning a series of non-tariff barriers like strict emission norms and banning use of left-hand drive cars, but there's serious doubt about whether this will really put the brakes on such imports. Old cars in Japan, Thailand, South Africa, and Australia are routinely refurbished with specifications of different countries.

In what should be good news for the existing players, the new policy provides an exit route from the MoUs and their stifling conditions. Not that firms were sticking to them. Commerce ministry sources say only Mercedes Benz and General Motors had been meeting their obligations. Some others were exporting software to get around this.

Now, new entrants will not have to sign MoUs, but existing players will have to fulfil all their obligations even after March 31, 2001. However, if they hike their investments to $250 million (Rs 1,100 crore), the MOU conditions will no longer apply. That, in effect, bids goodbye to the MoUs as all the existing players have far higher investments. General Motors, with just Rs 300 crore to show, is the only exception.

Happy with the policy for keeping new entrants outside the market, the industry is less than pleased with the proposed duty structure.

Take the move for an excise duty differential of 8 per cent for cars of up to 3.7 metres length. An obvious concession to Maruti and Telco's 3.66 metre Indica, it will rev up the small car segment, which already accounts for 81.5 per cent of the market, into high gear. Says Mukherjee: ''This will increase volumes by 17-18 per cent.''

Maruti's real money-spinners are its small cars (which provide 92 per cent of its revenue). While the 4.09-metre Esteem's sales have been declining, the 4.22-metre Baleno hasn't yet made an impact on the market.

Hyundai Motors and Daewoo Motors (both the Hyundai Santro and the Daewoo Matiz are 3.49 metres long) will benefit only partially. Though these cars account for 75 per cent of company sales, the gains may be offset by the big cars they roll out-the Hyundai Accent and Daewoo's Nexia and Cielo.

Understandably, manufacturers of large cars are upset. Says a senior official of gm (whose Astra and Corsa are both upwards of four metres): ''This will distort the market and come in the way of building volumes which is the key to becoming globally competitive.'' Warns Spender: ''The government will only succeed in reducing its own revenues.''

The reactions to the across-the-board hike in customs duty on CKD/SKD kits from 35 to 50 per cent is less harsh. The move will only push up the cost of cars where indigenisation levels are low, like the Fiat Sienna and Maruti Baleno. It could also slow down plans to introduce new models. GM, for example, which had planned to introduce the Accord and Sonata, may do a rethink, say sources.

But this is one area where the foreign and homegrown manufacturers don't see eye-to-eye. Seshasayee, for example, agrees with the proposed move. ''Bolting together CKD/SKD kits does not involve any value addition.''

The hike in customs duty on components is more modest, but the component manufacturers aren't really looking for protection behind high tariff walls. They've been facing competition from imports ever since components were put on open general licence in 1993, and have measured up fairly well. The indigenisation norms and the high quality of components had kept imports subdued 20 per cent of domestic production. Managing Director, Sona Steering, Surinder Kapoor, points out that existing manufacturers may not snap established ties with vendors. And with the rupee depreciating against the dollar, localising content also makes more economic sense.

The only source of worry is the fact that new entrants will not be under any compulsion to localise their products. But since there is a question-mark over the entry of more players, the component industry isn't losing any sleep over the new policy.

Unfortunately, there are many others who are. Not in the least the Indian consumer who wonders whether he'll be deprived of choice. It's over to the government now.