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Wednesday, Feb 04, 2004

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Indo-Thai free trade pact — `Thai imports may hit auto component cos'

Raghuvir Srinivasan

Chennai , Feb. 3

THE Thai threat to the Indian auto component industry is real. That is the conclusion of consulting agency ICRA Advisory Services, which studied the possible impact of the Indo-Thailand free trade agreement (FTA) on the auto component industry.

ICRA, in its report presented to the Automotive Component Manufacturers' Association (ACMA) last week, says that there is a significant threat of imports from Thailand and cites three reasons to support its conclusion.

First, Thailand enjoys a significant manufacturing cost advantage in relation to India. Second, there is surplus capacity available in Thailand that can be used to produce for exports. And finally, vehicle manufacturers with a presence in both countries may decide to source specific components from Thailand under the FTA for assembly in India.

According to ICRA, imports could begin in a year or two unless the Government made "systemic corrections in policy and operating conditions for the components sector".

The study reveals that Indian companies suffer a cost disadvantage of 15-20 per cent of the total cost over their Thai counterparts mainly due to the adverse tax structure and higher infrastructure costs.

If the components industry believed that the FTA could help it by promoting exports to Thailand, well, ICRA has some bad news there as well. The report says that Indian companies have limited opportunities for exports to Thailand, as the purchase strategies of Thai vehicle manufacturers will be dictated by their strong links to Japanese majors. Japanese companies such as Toyota, Honda, Suzuki and Isuzu dominate the Thai auto market.

The report also says that there is a possibility that auto component manufacturing could move base from India to Thailand. Such a shift could happen in the medium term, especially with the FTA in place, as Thailand is a serious contender for being a global outsourcing hub. The potentially lower cost of manufacturing compared to India coupled with Thailand's existing status as a manufacturing hub for some vehicles are seen as factors supporting this view.

ICRA has made some recommendations to increase the competitiveness of Indian companies and also to make the country an outsourcing hub. It recommends that special auto parks be promoted that will offer concessions such as low customs duties on raw material imports and value-added taxation structure to companies that set up units there.

The idea is to offer companies the same taxation conditions that their counterparts in Thailand face. There are four such parks being recommended at Delhi-Gurgaon, Mumbai-Pune, Chennai and Kolkata. ICRA says that such a concept is compatible with the WTO regulations.

Besides this, the consulting agency has also recommended implementation of value-added tax on a priority basis and reduction in import duties on basic raw materials.

The Executive Director of ACMA, Mr Vishnu Mathur, told Business Line that the report reflects the views of theACMA members. "We are happy that the Government has reduced import duties in a fashion that corrects the lop-sided structure that was prevalent till now," he said referring to the reduction in duties on specific raw materials and components effected last week.

ICRA was commissioned by ACMA to do the study and the report has been sent to the Government for further action, he said.

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