Chennai: Indian vehicle makers facing sluggish domestic and overseas demand, are peering at a conflict-free Sri Lanka for a sales boost.
The recent escalation in conflict between the Sri Lankan army and the separatist Liberation Tigers of Tamil Eelam (LTTE) hurt exports of auto makers such as Ashok Leyland Ltd and Mahindra and Mahindra Ltd (M&M).
On 18 May, the Sri Lankan authorities declared victory against LTTE in a war that spanned over a quarter of a century.
“I do expect the overall investment scenario for Sri Lanka to improve,” said Nisha Taneja, professor at Indian Council for Research on International Economic Relations (Icrier), an autonomous think tank on economic policy. “From an India perspective, I foresee further expansion of connectivity to the northern region. This will open up a completely new route, which will reduce transaction costs and provide a corridor for easy linkage.”
Big fall: Workers assemble engines on an Ashok Leyland Ltd production line in Hosur, Tamil Nadu. The firm saw Sri Lanka’s contribution to its exports fall to 15% in 2008-09 from 50% in past years. Rogan Macdonald / Bloomberg
The auto industry has been riled globally by the economic slowdown. In India, sales of passenger and commercial vehicles slipped for the first time in seven years to 1.9 million in 2008-09, from two million the previous year, according to data from the Society of Indian Automobile Manufacturers. The country’s exports of such vehicles, though, climbed to 378,412 in fiscal 2009 from 277,395 earlier. Companies Mint spoke with, however, said exports to Sri Lanka fell in 2008-09.
The strife-ridden nation has been a key export destination for Indian firms. India’s auto exports to Sri Lanka in 2007-08, before the tensions mounted, had risen to $249.19 million, at least five times the $45.27 million figure in 2001-02, according to the Federation of Indian Chambers of Commerce and Industry.
M&M is already in talks with prospective dealers about starting a franchise in former LTTE strongholds.
“There had been some impact due to the conflict growing in recent months since we were not able to carry out our field activities aggressively, and also the impact was further aggravated due to the financial turmoil (global credit crisis),” said Pravin Shah, executive vice-president of international operations for M&M’s automotive business, via email. M&M’s Sri Lanka sales volumes fell 23% to 850 vehicles in 2008-09. It expects demand to grow by 20-25% in the coming months in the nation for its utility vehicles and pick-up trucks.
“It will be ideally suited for these regions where the road infrastructure is not yet developed,” Shah wrote. “We are actually focusing more on making the after sales service and spare parts availability rather than just having showrooms… We are sure of covering the region in next 6-8 months time.”
One of the worst-hit Indian vehicle makers in Sri Lanka has been Ashok Leyland. The Chennai-based firm saw Sri Lanka’s contribution to its exports crash to 15% in 2008-09 from 50% in past years, Ashok Leyland’s chief financial officer K. Sridharan told Mint over phone, blaming the conflict.
The firm’s average annual sales of about 3,000 vehicles in Sri Lanka halved to fewer than 1,500 last fiscal, Sridharan said. The company claims it has traditionally been one of the biggest auto players in Sri Lanka with a 65% share.
Icrier’s Taneja finds it hard to believe that companies whose businesses are focused largely around Colombo, have been hit by the recent complications. “I don’t think the escalation of the ethnic conflict affected trade between India and Sri Lanka,” he says.
One example is Maruti Suzuki India Ltd. India’s largest car maker claims to be unaffected by the heightened tensions between the Lankan government and Tamil rebels the past few months, though its exports to the country slipped.
The car maker said it lost its 2006 market-leader status as demand for bigger cars jumped following a concessional duty scheme for Sri Lankan government employees. It expects demand in the nation of 20 million people to grow as construction of new roads, bridges and buildings takes off.
Indian vehicle makers stand to gain as more trucks are employed to haul cement and machinery to aid infrastructure building, while better roads and better standard of living post war are expected to spur demand for passenger cars. Still, some observers see such outcomes to be hyped.
“I think rebuilding will be limited to certain pockets and there probably won’t be large-scale rebuilding as was the case after the tsunami-hit Sri Lankan coasts a couple of years ago,” said Mahantesh Sabarad, a senior auto analyst at Centrum Broking.