MNCs find it difficult to offer ‘local’ prices

Purvita Chatterjee Mumbai | Updated on November 25, 2017

High excise duties, poor infrastructure and input cost inflation are playing spoilsport

Though some global companies engage in local manufacturing, they are unwilling to drop prices.

High excise duties, poor infrastructure and rise in input costs are playing spoilsport, offsetting many of the benefits of local manufacturing, claim multinational players across fast moving consumer goods (FMCG), footwear, apparel and even toys.

Take the case of Nivea India. Since the time it floated its own subsidiary, the company has been importing almost half its portfolio, and has not been able to drive down prices.

Today, despite its new plant coming up in Sanand, Gujarat, the company is not sure if it can afford to shed prices purely because it has started manufacturing in the country. The Germany-based skincare company is non-committal when it comes to an imminent change in its pricing strategy.

Rakshit Hargave, Managing Director, Nivea India said, “It would be an indication of our future strategy if we were to disclose anything about dropping prices.”

UK-based Clarks Footwear is facing a similar situation. “Taxation and raw material costs offset the benefits of local manufacturing. Excise duty, in the case of footwear, is almost six-nine per cent of the retail price. This compensates for any drop in prices,” said S Ramprasad, Managing Director, Clarks.

Incidentally, MNCs can take advantage of local manufacturing only if they achieve a certain critical mass in their operations.

Scale matters

As Jacob Mathew, Managing Director, MAPE Advisory Group, a mid-market investment bank, said, “Companies that import products initially and then go in local manufacturing, can derive advantages provided they have considerable scale in their operations.”

French apparel brand Celio, which has already got Foreign Investment Promotion Board clearance to up its stake to 100 per cent has been sourcing 54 per cent of its products from local manufacturers. However, the company is not ready to roll down its prices.

“While the cost of manufacturing is cheap, it is not always possible to rationalise prices in an inflationary environment, with input costs increasing,” says Rajiv Nair, Chief Executive, Celio Future Fashion.

The same holds true for Germany-based Simba Dickie Group, with its subsidiary Simba Toys, which has been having second thoughts about setting up a manufacturing base in the country.

“We were hoping prices would drop by 15-20 per cent given local manufacturing, but issues like lack of power and transportation costs, along with high excise duties would not enable us to do so. We continue to be import dependent today, as the viability of local manufacturing looks bleak,’’ says Shree Narayan Sabharwal, Business Head for Simba Toys.

According to Siddharth Bafna, Partner and Head of Corporate Finance at Lodha and Co, a boutique investment firm, “While there clearly may be a cost advantage for MNCs setting up manufacturing facilities in India, the question of whether to pass it on to the end consumer would depend on the kind of demand for a particular category.

For categories like toys, manufacturing in India may be less relevant, as imports from China at very low rates dominate the market.”

Published on June 25, 2014

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