Indo-Thai FTA is causing concern

It is never easy to negotiate and conclude free trade agreements. The governments and negotiators concerned have the hard task of weighing the current and future of all industries put up on the table. The aim is a win-win solution for both. But chances are that a government is more likely to be criticised than praised for its efforts.

India’s FTA with Thailand is a case in point. There are 15 automotive items out of the 82 items under the Early Harvest Program (EHP) which came into effect on September 1, 2006. Under the EHP, India offered a 50 percent tariff reduction in the first year. This subsequently increased to 75 percent from March 2005 onwards and was ultimately brought down to zero in September this year. This is the first such agreement India has signed with an ASEAN member state while it is also currently holding parallel FTA negotiations with the 11-member ASEAN group. It is hoped that a comprehensive FTA with Thailand covering all items will be in place by 2010.

Looking at trade figures post-FTA, Indian exports to Thailand during fiscal 2005-06 rose 16 percent to Rs 4,703 crore whereas imports were up 37 percent to Rs 5,320 crore. Furthermore, a newspaper report puts the component industry’s estimate of auto parts exports to Thailand during 2005-06 at Rs 751.5 crore, a whopping 86.5 percent increase. Similarly, Indian exports of car spares were three times more at Rs 349 crore largely driven by Toyota. More importantly, ACMA (Automotive Component Manufacturers Association of India) expects import of items like engine parts, leaf springs , pumps and lighting equipment from Thailand to either decrease or stay stagnant this fiscal.

Not everyone is happy though. Despite the improving trade figures, Indian vendors are wary of more auto components being imported from Thailand. In fact, a June 2005 survey by the Federation of Indian Chambers of Commerce and Industry (FICCI) said 48 percent of respondents believed more Indian companies will outsource products from Thailand while 21 percent felt local companies would set up bases in Thailand.

The survey also importantly pointed out that India’s higher import duties did not favor local vendors. For example, the import duty on stainless steel and alloy steel used in transmission assembly here is 10 percent versus a five percent duty in Thailand. Another concern is the inverted duty structure certain manufacturers face post-FTA. Here, a 15 percent duty is levied on items like transmission assembly, bearings and rubber parts.

Even though auto exports to Thailand are on the rise, the component industry says the clear winners here are Toyota and Honda. For instance, export of gearboxes to Thailand has grown 98 percent, largely a result of Toyota’s gearbox exports to its IMV (International Multipurpose Vehicles project) operations there. And these exports would have taken place even if India had not signed a FTA with Thailand. Already, Toyota Kirloskar Auto Parts has plans to increase production of manual transmission parts to 2.3 lakh units next year.

##### HONDA IMPORTS

Honda Siel, on the other hand, is importing eight to ten items from Thailand including cylinder blockhead, body panels and some other components. Still, the importance of local procurement cannot be forgotten. The local content in the City stands at 80 percent while it is 68 percent in the case of Civic. “The FTA would help us expand the export parts from Thailand and could encourage productiveness of each country,” Tatsuhiro Oyama, president and CEO, Asian Honda Motor Co Ltd, told Autocar Professional. “We don’t have a plan to export parts produced in India at the moment,” he added.

This year, Honda set up new spare parts companies in Thailand and India. Asian Parts Manufacturing Co Ltd (APM), a new subsidiary, is located in Thailand’s Ayutthaya province. APM will begin production in June 2007 with a capacity of nearly 5.5 lakh pieces of large/medium and small sheet metal parts. These will be body panels for use as service parts for global models including the Honda CR-V and Jazz (Fit) for countries in Asia-Oceania as well as in Europe and Japan. A majority of these will be medium panel parts (excluding bulkhead, etc.) and large panel parts (excluding door, fender, hood, etc.). Honda though is yet to decide which service parts will be exported to India.

“With APM, Honda will consolidate its production of stamped body panel service parts into a single location. This is to ensure the highest quality, reduce costs and improve logistics within the region inclusive India,” said Oyama.

Honda is also consolidating its spare parts business in India under Honda Motor India. “Honda Motor India is a spare parts logistics company to reinforce the parts supply system in India. It’s not a manufacturing company. So we will not have any change in parts supply structure between Thailand and India,” explained Oyama. Clearly, India’s FTA with Thailand has been more beneficial to vehicle manufacturers. Only a few larger component makers have taken advantage of the tariff concessions under the FTA or have plans to set up base in Thailand. There are still others who say that their business plans are not dependent on the government’s FTA initiatives.

More recently, the component industry discovered another challenge. China has been included in the Bangkok Agreement whereby China-made components will receive tariff concessions of up to five percent starting September. These 11 items include air hoses, catalytic converters, spark plugs, rubber mats for vehicles, toughened safety glass and laminated safety glass.

This is a step back for Indian vendors and ACMA is urging the government to delete auto components from the list of items covered under the Bangkok Agreement and wants the sector to be put on the negative list for all trade pacts with China.