|
Hyundai’s threat to relocate it production centre to other countries is like a storm in the tea-cup. In fact, no other country in the world can claim to produce cheaper cars like India.
Most of high-profile car manufacturers in the world look upon India as the Mecca of Manufacturing low-cost cars. In the recent past, even the Renault-Nissan chief Carlos Ghosn was gung-ho about India, as he optimistically opined that India was best place in the world to produce low-cost small cars. The chief went on to prove his point by forging alliance with Bajaj Auto. Tata Motors has reinforced India’s cost-efficiency factor with launch of Nano. Even Suzuki Motor Corporation has been invariably bullish about India, as it has set up its sole production centre in India and is gleefully exporting cars to both European and non-European markets from this centre. Hyundai, has been exporting more than half of its 120,000 120s manufactured in India. Consequently, India had the opportunity to export more than a fifth of its total car production in India. So even when the domestic front was facing slow growth rate due to global meltdown, exports grew overwhelmingly by 45 percent.
So it came as a shocker when, a few days back, when Hyundai Motors India Limited Managing Director HS Lheem declared that very soon manufacturing cars in India and exporting to Europe markets would turn uncompetitive for the company, if the reported Free Trade Agreement between Korea and the European Union is put into action. What was unsettling was, Lheem’s announcement came after the company had faced a labour agitation which was eventually solved with government involvement. Even in May, when a labour strike cropped in Hyundai’s Chennai plant, the company had threatened to shift part of the i20’s production to Europe, since there would be no logistics costs involved while exporting to Europe— and unlike the Indian cars, they wouldn’t have to pay any import duty. However, some experts believe that Hyundai’s threats are simply aimed at controlling the unrest among the employees and probably to get some concessions from the government on exports. Hyundai’s point of contention is that Indian cars have to pay an import duty of 6.5% in Europe (the actual duty is 10%). On the top of it, if local taxes have to be paid, this increases the cost of production in India by another 10%. So, once FTA is implemented, it will comparatively cheaper to manufacture cars in Korea, and the icing on the cake being it can be exported duty free to Europe.
Hyundai argues that producing cars in India helps them reduce cost by nearly 3 per cent as compared to Korea, however Indian cars have to pay higher import duty, so this margin of profitability gets offset once the FTA between Korea and Europe is implemented. However, other internationally renowned manufacturers have a different story to tell. European producers like Fiat, Renault and Volkswagen have apparently suggested EU to cut down on the number of cars, imported from Korea. Moreover the cost of shipping is also in favour of India. It is 2% in case the car is shipped from India, while it is 4% if shipped from Korea. However, India’s biggest plus point being it has cheap labour costs.
The automobile experts reveal that cost of labour for producing a car worth $ 5698 is around $213 in India, while the labour cost for producing the same car in Korea would be $1,068 and around $ 1,150 in Eastern Europe. So, labour cost in India is just 3.8% of the total car cost, while in Korea it is just 16% and 23% percent in East Europe.
So manufacturing car in Korea will cost Hyundai around $854 more while producing car in India( Including the import duty of 6.5%) will cost around $370. Simply put, India unarguably has cost advantage over Korea and Europe- once you take into consideration the freight differential. It is almost 10% cheaper to produce in India and export it to Europe. And about the empty talk of producing the cars in East Europe, this could never happen, as there is a difference of 20% or so between producing in India and there.
Even Japanese car makers, don’t deny the fact that producing cars in India is lot cheaper than Japan. According to RC Bhargava, chairman of Maruti Suzuki, wage costs in Japan are almost six times higher as opposed to India. However, Bhargava adds that enhancing productivity will only add to the difference in costs.
|
