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Policy roadblocks test car makers in China, India

Policy roadblocks test car makers in China, India
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First Published: Wed, Sep 03 2008. 12 26 PM IST
Updated: Wed, Sep 03 2008. 12 26 PM IST
Mumbai: Foreign car makers chasing a larger share of fast-growing China and India are often hamstrung by patchy policy measures and overt protectionism, but the size and potential of the markets make such hurdles worthwhile.
China has long protected its local car makers, forcing foreign firms into joint ventures, while India is notorious for delays in implementing policy as well back-tracking on proposals.
But for auto makers seeking to rev up sales as Western markets shrink, the two Asian giants are vital.
“China and India are big markets, you can’t ignore either of them,” said Thomas Kaestelle, managing director and head of the automotive practice at investment bank Rothschild.
“Yes, their policies affect car makers’ decisions on investments, product lineup, joint ventures, R&D and technology transfer, but it hasn’t stopped anyone from coming in.”
China is already the world’s second-biggest auto market, while annual passenger vehicle sales in India are forecast to nearly double to more than 2 million units by 2010.
But the path to profits is rough: new tax rates in China aimed at encouraging sales of smaller cars may dent sales of Toyota Motor, Honda Motor and Nissan, while India is dragging its feet on planned emission and fuel norms, and has also recently raised taxes on larger vehicles.
“The industry is already passing through a tough time and this (tax) hike will adversely affect sales and hamper the growth of the entire industry,” said P. Balendran, vice president of corporate affairs at General Motors India
When India began opening its economy in the early 1990s, it moved quickly to liberalise the automotive industry, where restrictions on foreign investment were among the first to go.
But the government failed to draw up a comprehensive policy.
It took a public interest petition in the highest court to ban overloading of trucks in 2005, while the policy on automotive fuels has struggled because of a slow rollout, heavy subsidies for diesel and poor availability of alternatives such as LPG and ethanol.
“No one can doubt the good intentions of our policymakers, but what ails us is poor implementation and politics,” said Arvind Saxena, vice president of research firm TNS Automotive.
Cutting the excise duty on small cars was one such example, he said.
India cut the tax to 16% from 24% in 2006 and in February this year reduced it further to 12%. The move, aimed at making the country a small car hub, was cheered by consumers and some producers, but slammed by firms that did not make small cars, which make up more than two-thirds of sales.
Nearly every car maker has since announced plans to build a small car for India and other markets and take on Tata Motors’ upcoming Nano, priced at about Rs100,000 rupees ($2,250).
But where the government has failed is in going far enough.
“You can’t have a policy for small cars without also providing tax breaks for exports and incentives for export zones,” said Ashvin Chotai, an independent auto consultant based in London, pointing to Thailand’s example in making the country a hub for pickup trucks and now for eco-cars.
India is also guilty of withdrawing an export incentive, angering Hyundai Motor, the country’s top car exporter. Trade agreements with Thailand and Southeast Asia have also enabled imports of components cheaply, upsetting Hyundai and Maruti Suzuki, who have invested in parts manufacture.
“What if you were to commit resources and then have the government do a U-turn?,” Chotai said.
“The lack of clarity and transparency raises the risk premium for investors and changes can undermine investor confidence.”
But analysts are divided over what is a bigger hurdle: China’s protectionist policies or India’s poor implementation.
“In India the rule of law applies, so investors may feel it’s a safer investment bet,” said Rothschild’s Kaestelle.
China’s policy gives the government enormous power over foreign car makers that have ventures with local firms such as SAIC Motor Corp, Dongfeng Motor Grop and Chongqing Changan Automobile Co, Chotai said.
Foreign firms also are vulnerable to the Beijing’s plans, including an aim to consolidate the fragmented auto industry and create a few national champions to rival global producers.
“But it’s a consistent policy and everyone knows what they’re signing up for ... everyone knows the endgame,” Chotai said.
Companies are trying to balancing the risks and potential, such as Hyundai which has a big manufacturing operation in China, but uses India as its export hub, Chotai said.
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First Published: Wed, Sep 03 2008. 12 26 PM IST