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MNCs reworking India strategy

The Hindu, Business Line, India

5 August 2004

MNCs reworking India strategy

By Neha Kaushik

New Delhi

EVEN though the finer implications of the Free Trade Agreement (FTA) with Thailand are yet to become clear, multinational players have begun reworking the economics of operating from India.

The FTA, that is set to come in to effect from September, would halve the duties on 82 items, including certain auto components, air-conditioners and refrigerators.

Hence the benefit, analysts point out, is clearly for players in the consumer durables and automotive segments who have not invested substantially in manufacturing in India and have a sizeable base in Thailand.

Sony India, for instance, recently decided to shut down production of audio products in India and has suspended production of CTVs in the country, which analysts point out could be because the company has a large base in Thailand that can be utilised for imports.

Similarly, air-conditioning company Daikin has decided against setting up a manufacturing plant in India. "The FTA was one of the main reasons for the decision," points out a company official. The company was earlier scouting for locations to set up a base in the country.

In the automotive segment, the situation is slightly different. Though most players have made significant investments in India, the FTA does open up an opportunity for a lower-cost sourcing base in Thailand with regards to certain components.

"Though we have a high level of indigenisation in India, we may look at sourcing certain components from Thailand if it proves cost effective. We could import certain high investment components that may help us speed up the introduction of new models, " Mr A.V. Srinivasan, Executive Vice-President, Yamaha Motor India said.

Toyota and Honda, who both have large manufacturing bases in Thailand, could well benefit from the FTA, especially for new launches.

In fact, industry sources point out that a number of automakers from India have already sent request-for-quotes to component manufacturers in Thailand for sourcing inputs for new models.

The domestic auto component manufacturers, meanwhile, are feeling the pinch on account of high raw material and input costs in India as compared to their Thai counterparts.

"There is a substantial difference in the cost of basic inputs for the Thai auto components industry and the domestic one. The domestic industry needs to be assured that reduction in duty on the finished product will only follow a duty reduction on raw materials,’’ Mr A.K. Taneja, Chairman, Auto Component Manufacturers Association and President of Shriram Pistons & Rings said. He also felt that Indian players had infrastructural constraints.

Thai manufacturers with their huge surplus capacities would quote `special’ low prices as an entry strategy into the large Indian market; hence a level playing field was needed for the domestic players.