CKD rules to make luxury cars dearer

The Indian automotive industry heaved a sigh of relief when the Budget passed last fortnight did not hike excise duties as it was widely expected to. That is understandable. The Indian auto sector has benefited from the current 10 percent excise duty that is levied on small cars. It is arguably the single most important decision that has enabled India to transform itself into a small car hub. An increase in excise duties would have led to higher car prices and likely affected sales. With carmakers already buffeted by increasing input prices, carmakers were worried. The small car sector is growing at a turbo-charged rate of 30 percent; clearly, no one wants the good times to end.

But what got the industry in a bind was the government’s decision to make a change in the definition of Completely Knocked Down (CKD) imports. The original Budget proposal was the CKD 60 percent levy. The new rule is of particular relevance to the luxury carmakers. Here carmakers like Audi, BMW and Mercedes-Benz bring in luxury models in kits by paying a 10 percent customs duty.

By now including pre-assembled auto parts such as engines, gearboxes and transmissions within the ambit of CKD, the new rule effectively means that a company would have to pay a customs duty of 30 percent. The dilemma the companies face is whether to pass this hike on to the customer or absorb a part of the hike in order to keep products affordable. Higher car prices could also likely affect sales.

BMW, for example, was able to bring in its X1 and price it at about Rs 22 lakh because it was assembled at a plant in Chennai. For the consumer, it was good news bringing a world-class brand within the reach of so many more buyers. However, another issue that had companies worried was the fact that they have made key investments in plants to assemble these cars. If higher prices affect sales, it would ultimately impact profits.

While BMW India set up its assembly line near Chennai, Audi has used Skoda’s Aurangabad unit to assemble a trio of models. Mercedes-Benz assembles the S, C and E- class at its Chakan facility it inaugurated last year. Only after the industry and SIAM took this up with the finance minister, were they granted a concessional rate of 30 percent for engines and engine parts that are pre-assembled. SIAM has made no official comment. While this new levy alleviates the initial hit that the industry faced, it will certainly impact prices of luxury cars should the carmakers pass on the hike to the final customer.

One issue that worried the sector was that it would be quite an "impossible" task to invest and set up facilities for engine and transmission assembly of cars that have low volumes. The new rule would also affect upper end C-segment cars like the Volkswagen Jetta which has imported engines. To a lesser extent, it does impact the Mahindra Logan where the imported engine accounts for 30 percent of costs.

Mahindra & Mahindra has already said it will localise the engine in an attempt to lower costs. The Logan platform will be re-worked to manufacture a model that is under four metres. Local assembly of the engine would certainly help manage costs More relevant to M&M is what Dr Pawan Goenka, president of M&M’s automotive and FES sectors, said — that engines of the to-be-launched Ssangyong Korando C and the Rexton (which will be assembled at the Chakan plant) will be imported.

Will luxury carmakers revise sales estimates?

It is too early to say this even as companies have gone into a huddle, and have been in touch with their headquarters to decide the future course of action.Luxury carmakers like Mercedes-Benz, BMW, and Audi have seen their sales go up thanks to local assembly, which helps them price their models more competitively. Jaguar Land Rover plans to bring in the Freedlander and assemble it in Pune. Audi is evaluating the Q3. What it will finally cost the buyer is most likely being worked out anew in the light of the new CKD ruling.

Of these brands, Mercedes is in a relatively better position, as the engine and transmission of its C and E-class models are assembled in India. A company source said it is already adhering to the new proposed CKD norms for these two models. Where it will take a hit is the S-class which will be a lot dearer, depending on which engine option is chosen. The luxury car segment’s potential has been estimated at between 9,000-12,000 units per annum. Whether the numbers will dip or be flat will be seen in the months to come.

The new rules apply to bikes as well. So far the only one affected will be Harley- Davidson which has set up a CKD plant in Haryana. The company has already said it will not increase prices for the two models assembled there.The government’s new CKD rule will, in all probability, boost the companies’ localisation strategies. But this will not likely happen overnight. Many years ago, Ford India was able to localise the engines for the Ikon which took time but helped bring down the cost and increase sales. That’s the likely way forward.

From a macro point of view, more jobs will be created and companies will have to spend on hiring and training will be a task that they will have to handle.