Auto makers upbeat on peak duty cut

MINI BUDGET 2004

The cut in the peak customs duty rate from 25 per cent to 20 per cent and the abolishment of the 4 per cent special additional customs duty is expected to have a positive impact on manufacturers of passenger cars and utility vehicles.

The cut in the peak duty rate will result in a drop in the cost of steel, which is likely to reduce the cost of domestic auto components.

According to CRIS INFAC, a large part of the benefit of this reduction is likely to be passed on to original equipment manufacturers (OEMs), resulting in a reduction in the input costs of local manufacturers such as Tata Motors, Hindustan Motors and M&M as well as foreign manufacturers such as Maruti, Toyota Kirloskar Motors and Hyundai Motors.

"The reduction in peak custom duties will benefit auto assemblers more than auto manufacturers. Manufacturers who have a high level of inidigenisation like Maruti, Tata Motors and Hyundai will see a very marginal impact. I would peg the total cost reduction it at around 1 per cent for a company like Hyundai after factoring in the difference in the cost of inputs like steel etc," said BVR Subbu, president, Hyundai Motors.

The cut in duty is also expected to result in a drop in the cost of imported completely knocked down (CKD) kits, imported completely built units and critical components such as engine parts and parts of the transmission systems which are imported by most foreign OEMs.

As a result, this will benefit mainly foreign OEMs such as Toyota Kirloskar Motors, SkodaAuto India, General Motors and Honda Siel Cars India.

As per CRIS INFAC, if the drop in steel prices will be around 10 per cent and this is largely passed on to the automobile OEMs, the benefit to passenger car manufacturers will be in the range of 1.6 per cent per unit or Rs 4,000 to 6,000 for a compact car and around Rs 7,500 -Rs 9,000 for a mid-size segment car.

Analysts feel that though they don't see any of the auto-makers lowering prices immediately, most manufacturers will at least put off the impending price increase that they have been contemplating for some time now.

The pressure of the increasing costs of inputs will ease considerably. The overall impact of the peak duty cut and the abolishment of the 4 per cent SAD will have a neutral impact on manufacturers of automobile components. This is for two main reasons, according to CRIS INFAC.

The reduction in the prices of steel will result in a decrease in the input costs of auto component manufacturers.

However, a large part of the benefit will have to be passed on to OEMs due to competitive pressures, resulting in a marginal benefit to component manufacturers such as Bharat Forge, Wheels India, India Pistons and Automotive Axles.

Secondly, the reduction in peak duty will also result in a 7-8 per cent decrease in the cost of imported components, which will increase the competition for local component manufacturers, especially for critical components such as parts of engines and transmission systems and some electrical parts.

This will have a marginally negative impact on companies such as MICO, Ucal Fuel, Bharat Gears and Lucas-TVS in terms of higher competition from imported components.