Buyers May Not Gain From Local Manufacturing of Costlier Cars.

Overseas car makers that plan to save taxes by making costlier models locally may not pass on the benefits to customers.

Car firms have decided to manufacture these models in India, instead of importing them, after the government decided in the last budget to raise import duty on pre-assembled or completely knocked-down units to 30% from 10%.

“We are already taking a hit on our margins. The move is basically to mitigate the duty impact,” said Sandeep Singh, deputy managing director, Toyota Kirloskar Motor Pvt. Ltd. “So there is no question of any price cut or anything.”

Import of cars into Asia’s second-fastest growing car market attracts a 60% tax, making it cheaper to manufacture vehicles in India. Cars that are imported with a pre-assembled engine and gearbox have to pay a 30% duty. If the components of the car are further knocked down and assembled in India, the import duty is reduced to 10%.

Toyota will start local production of its luxury sedan Camry from the second quarter of next fiscal, Singh said. So far, it was importing the car from Japan.

While Hyundai Motor India Ltd had already started manufacturing its premium Santa Fe sports utility vehicle (SUV) in India last year, a new version of its Sonata sedan will follow suit soon as the depreciation of the rupee against the South Korean currency has made imports expensive.

“There will not be any price cut for Santa Fe,” Arvind Saxena, director of marketing and sales, Hyundai India, said in an interview last month. “We are already selling it at minimal margins.”

Local manufacturing of the Santa Fe has helped the company increase supply and meet demand from buyers. On an average, Hyundai sells 225 units of the Santa Fe a month.

The new Sonata will mark the company’s re-entry into the premium sedan segment, which saw sales of 15,000 cars in 2010. The model will compete with Toyota’s Camry, Honda Siel Cars India Ltd’s Accord and Volkswagen India Pvt. Ltd’s Passat, among other models.

Among luxury car makers, Mercedes plans to locally assemble its S-Class sedan and M-Class SUV. The company is planning to make fresh investments into its Chakan plant in Maharashtra to be able to make more of its cars locally, Mint reported on 3 January.

Luxury car makers import engines for some models and assemble other parts within the country. The engine accounts for at least 15% of a car’s cost.

“Local manufacturing will definitely provide some room for price cuts, but the companies may not prefer doing that because they would like to make up for the losses, which they suffered last year due to rupee depreciation,” said Mahantesh Sabarad, an analyst at Fortune Equity Brokers (India) Ltd. “Secondly, the companies would not like to dilute the brand equity of such models (new Camry, Santa Fe, new Sonata) by reducing the price. Moreover, pricing is not an issue for customers in that segment.”

The rupee weakened 16% against the South Korean won and 22% against the yen in calendar year 2011. The Indian currency lost 17% against the dollar in the same period.

“It is difficult to say how much they will save,” Sabarad said. “It may vary on what is the import content in a particular model.”

Source : livemint.com