Royal Enfield is considering setting up a completely knocked down (CKD) motorcycle assembly plant in Indonesia as it looks to overcome import restrictions and expand in one of the world's largest two-wheeler markets, according to Eicher Motors MD and Royal Enfield CEO B Govindarajan.
The company currently follows a distributor-led model in Indonesia but is evaluating local assembly after finding that exports from its Thailand CKD plant remain subject to import quotas despite the ASEAN trade framework, Govindarajan told investors after the company's first-quarter results.
"There is an ASEAN treaty, which we have been studying. First of all, in Thailand, we have a CKD plant. We thought from the Thailand CKD plant, we can actually send to Indonesia... But on ground, Indonesia has come back and then said quota restriction is still there. So we can't sell more than about 10,000 vehicles in a year in such a big market in Indonesia," he said.
Govindarajan said the company had identified a local assembler and was assessing whether to establish a CKD operation in the country. "So now what we have done is we have identified... an assembler... trying to see whether we can have a CKD operating plant out of Indonesia. That is in the cards," he said. “The local content requirement is very low. To that extent, the CKD plant can come at a faster pace. So that decision will be taken during this quarter."
Indonesia is the latest overseas market where Royal Enfield is evaluating local assembly. Earlier this year, the company said it was studying the feasibility of a CKD plant in Mexico after higher import tariffs prompted a review of its strategy there.
Royal Enfield currently operates seven CKD assembly units, one each in Argentina, Bangladesh, Colombia, Nepal and Thailand, and two in Brazil. These facilities have a combined annual assembly capacity of 150,000 motorcycles and form part of the company's strategy to expand internationally while keeping costs competitive.
The motorcycle maker has a presence in more than 80 countries through subsidiaries, seven CKD units and a network of more than 1,200 premium touchpoints.
Govindarajan said Indonesia is an attractive long-term market despite regulatory hurdles.
He cautioned, however, that local assembly alone would not eliminate all cost disadvantages. “Whether you have a CKD plant or no CKD plant, there is what was called as a luxury tax, which is about 140% plus," he said. "But if the CKD is there, the first hurdle is that I will not allow more than 10,000 in this country. That goes off."
The company said its international business continues to gain momentum, with overseas revenue crossing Rs 1,000 crore for the first time in the June quarter and accounting for about 15% of total revenue, led by strong growth in Brazil and other Latin American markets.