The Hindu Business Line : Auto components: Relief in quick time

RELIEF has come in double-quick time for the auto components industry. It was only on Tuesday that auto part manufacturers complained to the media about the impact of rising steel prices on their margins and demanded a reduction in import duty on steel.

Their prayer has been answered now with the effective duty rate, inclusive of countervailing duty, dropping to 39.2 per cent from 50.8 per cent.

As a bonus, the duty on nickel has also been dropped from 10 per cent to 5 per cent. This will benefit engine components makers.

The margins of auto component companies, dented by the rising steel prices, will now get some relief if the drop in duties leads to a fall in steel prices in the domestic market, as it logically should. The impact on their margins will be felt fully from the first quarter of 2004-05. Some companies that will benefit now are Bharat Forge, Sundram Fasteners, Sundaram Clayton, IP Rings, Shriram Piston Rings, India Pistons, Jaybharat Maruti, Wheels India and Axles India.

The drop in peak rates will also mean that the duty on finished components, which was at 25 per cent earlier (effective rate of 50.8 per cent) will now fall to 20 per cent (effective rate of 39.8 per cent).

This may cause minor price pressure on component producers when they go back to vehicle manufacturers to finalise their annual purchase plans shortly.

The reduction in peak rate also means that car companies planning to import completely knocked down (CKD) kits will benefit in terms of lower duties. The duty on CKD kits is the same as on components and, therefore, will fall to 39.8 per cent now.

Those such as Audi, Volkswagen and Nissan, who are planning to import CKD models, will now benefit. The drop in component duties may also have a long-term impact on the localisation plans of multinational car companies in India. They can now afford to go slow on localisation till volumes increase.

In other words, scale economies for localisation will now increase as MNCs can import components at lower rates.

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