Renault-Nissan chief Carlos Ghosn said India was the best place to build a low-cost small car and that’s why he tied up with Bajaj Auto to do just that. Ratan Tata has proven this with the Nano. And even though the A-Star is not a low-cost small car, Suzuki Motor Corporation has made India its only production centre in the world and exports this car to both European and non-European markets. Hyundai planned to export more than half its 120,000 i20s manufactured in India. As a result, India exported more than a fifth of its total production of cars last year. Indeed, while the domestic market slowed in the first quarter of this year, exports grew a staggering 45 per cent, substantially neutralising the slower domestic growth.
So it came as more than a surprise when, a few weeks ago, Hyundai Motors India Limited Managing Director HS Lheem said the prospects of a Free Trade Agreement between Korea and the European Union would make it uncompetitive for cars produced in India to be exported to Europe. What was curious was, of course, that Lheem’s statement came just a few weeks after the company had suffered a labour agitation which was settled after the government intervened. A few months prior to this, in May, when a labour strike crippled production in Hyundai’s Chennai plant, the company said it would shift part of the i20’s production to eastern Europe since there would be virtually no logistics costs while exporting to Europe— nor would there be any import duty of the type that cars from India have to pay when imported into Europe.
Automobile experts argue Hyundai’s threats are aimed at keeping its volatile labour unions on a leash and perhaps extracting some concessions from the government on exports. Hyundai denies this while arguing for some concessions for exports.
| GIVING IT A COMPARATIVE ADVANTAGE | |||
| Country | Cost of Small Car (Euro) | Labour cost (Euro) | Labour cost to total (%) |
| India | 4,000 | 150 | 3.8 |
| South Korea | 4,600 | 750 | 16.3 |
| East Europe |
5,000 | 1,150 | 23 |
| Source: Automobile Industry | |||
Hyundai argues that Indian cars pay an import duty of 6.5 per cent in Europe (the actual duty is 10 per cent but India gets a concessional rate). Add to this the cascading impact of local taxes in India, the company says, and this increases the cost of producing in India by another 10 per cent or so. So, once the FTA comes into being, it will be cheaper to produce the car in Korea, the argument goes, and then export it duty free to Europe.
Hyundai says the advantage of producing in India is limited to reducing costs by around 3 per cent or so relative to cost of production in Korea, and this is more than offset by the higher import duty than Indian cars have to pay when exported. Figures collected from different manufacturers, including those with overseas operations, however, indicate that this isn’t quite correct. Apart from the possibility of European producers like Fiat, Renault and Volkswagen pressuring the EU to put some limit on the number of cars coming in from Korea, the cost economics don’t match up. The cost of shipping also adds to the benefit of producing in India (this comprises around 4 per cent when the car is exported from Korea and could be around 2 per cent of the cost of car when exported from India). But India’s biggest advantage lies in its vastly cheaper labour costs.
According to automobile experts, the labour cost for manufacturing a car valued at ¤4,000 ($ 5,698) in India is around ¤150 ($ 213), or around 3.75 per cent of the total cost. The cost of labour for manufacturing the same car in Korea would be ¤750 ($1,068) and around ¤1,150 ($1,638) in eastern Europe — that is, while labour costs are around 3.8 per cent of the total cost of a car in India, they are around 16 per cent in Korea and 23 per cent in East Europe.
To get back to the manufacture-in-Korea-export-to-Europe plan, producing a car in Korea will cost Hyundai around ¤600 ($854) more while the import duty (6.5 per cent) of a car produced in India will be around ¤260 ($370). In other words, India is still cost competitive despite the FTA between Korea and Europe — once you take into account the freight differential, it is roughly 10 per cent cheaper to produce in India and export it to Europe. As for producing in East Europe, as was once envisaged by Hyundai, that’s pretty much a non-starter given the difference of 20 per cent or so between producing in India and there.
Even Japanese car makers, who do not have any FTA with Europe, say that there is no denying that costs in India are much lower. RC Bhargava, chairman of Maruti Suzuki, points out that wage costs in Japan are at least six times higher than those in India. And, he says, India has not lost it competitiveness in manufacturing small cars at all. Small cars can be manufactured in India at costs which are at least 20 per cent lower than those in Japan. Bhargava, however, points out that productivity needs to improve further in India — this, he adds, will only increase the difference in costs.
