Definition of CKD
When our Finance Minister tabled the union budget 2011, apparently, there is nothing to make headlines. Media termed this budget as dull and lacks push for any reforms. However many missed to read between the lines which has now become a point of contention. Many were expecting Finance Minister would levy special duty on diesel vehicles in due of subsidised diesel the cars use. But that did not happen and what worries the Harley Davidson and Audi India is the new clause on “CKD” – completely knocked down unit. Indian government levies 60% import duty on CBU (completely built unit) which actually becomes little over 100% duty including the countervailing duty on imported cars. If you import Ferrari car from italy, duties actually doubles the price of the car. Import and other duties are made to encourage local manufacturing and help indian vendors.
On CKD – completed knocked down unit in which manufacturer imports the car in parts and then assemble in India. The total duty is roughly around 60% (inclusive of all duties) which makes it cheaper compared to CBU. Many luxury manufacturers like Audi, BMW and Mercedes use this option. Instead of setting up a plant, they have made an assembly unit in India. Harley Davidson and JLR plans to follow this route to reduce price. However this year budget is said to have modified the definition of CKD. “A definition for ‘CKD unit’ of a vehicle, including two-wheelers, eligible for concessional import duty is being inserted to exclude from its purview such units containing a pre-assembled engine or gearbox or transmission mechanism or chassis where any of such parts or sub-assemblies is installed,” the Budget says.
This new definition will exempt the engine and other parts from falling under CKD route instead it would be considered as CBU. Audi india threatens to pull out of India if the CKD duty is not rolled back. Audi board member Peter Schwarzen-Bauer said, “Till now, there is no clarity on the new CKD norms and we are studying it at the moment. If the definition is changed, then one has to take a business decision.” Peter Schwarzenbauer, head of marketing and sales of Audi AG and member of board , Audi AG says, “We are little bit surprised about the timeline. Normally, producing a car is not something that is easy. It is a very complex process. Hence, to change regulation overnight is extremely complicated for our industry overall.”Harley Davidson which entered India after long lobbying is equally surprised and mulls various options. German trio – BMW, Mercedes and Audi will be the most affected if the proposal goes through. It is no surprise that German Ambassador is notified on the developments.
Inconsistent Policy by India government
Indian luxury car market at 5000 units is still at nascent stage compared to mature markets like China. Manufacturers claims that they cannot go and setup a plant in India for such low volumes. Many manufacturers have accused Indian government for following inconsistent policy continuously, which according to them will result in derailing the growth momentum. This recent change in the definition of CKD is one such classic example. As with lower duties, Indian government have been pushing manufacturers to assemble cars here. Manufactures have invested few million dollars to ride on the same. Now with the complete u-turn they feel its betrayal.
Pressure tactic by manufacturers
On the other hand, Indian government has the necessity to support the growth of its local manufacturers. Not only to reduce trade deficit with respective countries but to generate sustained employment and growth in the country. Many may look at China where most of these manufacturers follow illogical rules blindly – Foreign car companies in China are required to forme a partnership with a Chinese company to do business in China. Before making a deal for a joint venture, Chinese also insists on a willingness to transfer technology to China and employ Chinese in upper management. Chinese manufacturers to whom these global car makers tie-up have repeatedly come under strong criticism for rip off models (copycat). Even then global car models continues to happily work in china This has helped Chinese car manufacturers to learn quickly and manufacturers like FAW, Brilliance and Great Wall Motors have become formidable force in global car arena. While the Indian car manufacturers continues to face heat from global players in their home turf itself.
Protectionism Vs technology transfer
Many manufacturer may accuse Indian government of going to protectionist mode by invoking this change in definition. Nevertheless the mighty American government – leader of globalisation slashes addition tax on Indian IT players when it needs money. If the proposal goes through, it will atleast urge few luxury car makers to build a plant and thereby making indian ancillary suppliers to use better technology and develop good quality products. This would also indirectly help the indian manufacturers who often look for way to produce products with global quality standards. The flip side is till the manufacturers decides to set up plant here in India, you have to spend a lot to own Audi’s and Merc’s . If the government has given a thought about all the factors and looks forward for a long term play, then we wish the proposal goes through.