Sri Lanka Turning Sour On Indian Auto Firms

The automobile industry in India has been facing headwinds on account of unfavourable macroeconomic trends resulting in increased ownership costs caused due to high interest rates and steep fuel prices. While domestic cues remain subdued, exports too have been facing difficulties from various fronts. Proliferating duties in Sri Lanka, trade restrictions in Argentina, dollar trade embargo in Iran and political turmoil in the Middle East have all added to pressures from key export markets.

YoY Export Growth For Automobile Firms

These factors have caused erratic movement in YoY growth of exports for Indian automobile majors. Of these markets, Sri Lanka has been of particular concern lately. This market stands of great importance to Indian auto companies since approximately 13% of the total automobile exports are routed to Sri Lanka. Moreover, considering the fact that Indian firms account for roughly 95% of Sri Lanka’s auto market, the country’s recent steps raise a big question on what they are up to.

Import Duty Changes

In April 2012, Sri Lanka raised import duties across vehicle categories by a large extent. Auto firms had to pass this on to end customers by raising prices. Sales volumes in the price sensitive Sri Lankan market dried out majorly hampering exports.

This affected players like Hero MotoCorp which introduced its new brand identity last year and now the company has launched this in Sri Lanka. In an ambitious plan to escalate revenues from exports, Hero appointed the ABANS Group as the company’s sole distributor. Hero launched 14 models in its product portfolio and plans to channel these through 50 outlets in Sri Lanka. Considering recent developments, the execution of this strategy seems to be badly timed.

Excise Duty Changes

The latest development on the Sri Lankan front came in, in November 2012 when the government raised excise duties on Indian vehicles. Other than the above tariff increases, the excise duty on cars less than 1000 cc was raised by 47%. Also imposed was an absolute levy of Sri Lankan rupees 109000 on commercial vehicles, in addition to a 12% excise duty. This move is likely to further hamper the scene for Indian auto makers in Sri Lanka.

Initially, it was thought that these moves were towards an attempt to reduce the fiscal deficit of Sri Lanka. However, such a steep increase in duties has only been making vehicles unaffordable for the masses.

Moreover, it has been reported that Sri Lanka decreased duties for cars made in Japan at the same time when it increased them for India. An anonymous customs official said in a Sri Lankan daily, “technicality placed imports of cars from Japan at an advantage. While 90% of cars imported into Sri Lanka are from India and under 1,000cc engine capacity, no such vehicles are brought from Japan”. This brings us back to the question of what Sri Lanka is really up to.