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Old 22nd October 2010, 12:12   #1
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Default Are VFM car makers actually making more money on the cars than overpriced imports?

In many discussions, the high price of CBU vehicles is often discussed, and also how such cars are not VFM, and people are actually paying money for just image and not substance.
That got me thinking.
While from a owner point of view buying, a CBU is less VFM, but from a mfr point of view, a CBU actually leads to income per vehicle as compared to the made in India counterparts.

For comparison, lets take the ex showroom price.
The Ex-Showroom price of the car is
Factory Price(set by mfr) + Excise + VAT in case of made in India car
For a CBU import its
Factor price(set by mfr) + Transport by ship(not so big when bulk shipping is done) + Duty(110%) + excise + VAT

For the sake of simplicity, lets assume, that in an Indian car, the govt takes 25% of the ex showroom price(full excise rate + VAT).

So a 12L Ex showroom Scorpio or Safari nets approx around 8L to the mfr

Now take the case of a 20L Fortuner.

Take away the taxes, and Toyota gets around 8L for the vehicle, same as what Mahindra and Tata get.

Of course, Tata and Mahindra manufacture in India, so a part of the income goes into developing the local economy, but thats another topic.

Now why is the duty an insane 110%? Why not a more sane 20% or even 30% as on most other goods?
Why are cars from abroad taxed so heavily?

The answer lies in lobbying by local car makers.
So next time you rue that the Santa Fe is so expensive, or Toyota overprices the Fortuner as compared to what it sells in Thailand, remember, more than half the cost of the vehicle goes to the Govt as Taxes.

Of course there are arguments of bolstering the economy, but the fact of the matter is, that this is a global economy. We cannot justify 110% taxes on our imports, and then cry to WTO if other countries start taxing imports from India(eg software) at the same rate.

What say? As consumers should we lobby for a more rationalized tax regime? If Tata/Mahindra can compete with toyota at same parity in countries it exports to, let the war begin in India too. All in all, its more power to the consumer!

As for the argument that Industry will go away from India if rates are lowered, I think its more of fear mongering. Hyundai makes small cars in India, and exports them to the world.
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Old 22nd October 2010, 12:20   #2
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The observations are very nice and quite valid, but the CBU example needs to be changed.

Fortuner is made in India and is not a CBU, and not CKD or SKD either. It is manufactured on the same line as the Innova. Yes some components are Imported and the % is higher than in case of India manufactured Items, but the Indian manufactured cars to import a fair bit.

Outlander and expecially the CRV are better examples of CBU.
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Old 22nd October 2010, 12:34   #3
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Okay, thats news to me. But the argument holds good for cars like Grand Vitara(16L approx), Captiva, Outlander etc.,
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Old 22nd October 2010, 12:40   #4
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Quote:
Originally Posted by ACM View Post
The observations are very nice and quite valid, but the CBU example needs to be changed.

Fortuner is made in India and is not a CBU, and not CKD or SKD either. It is manufactured on the same line as the Innova. Yes some components are Imported and the % is higher than in case of India manufactured Items, but the Indian manufactured cars to import a fair bit.

Outlander and expecially the CRV are better examples of CBU.
Hi

I really thought that Fortuner is CKD and the engines are coming from Thailand. Can you please give the extent of Localization done in case of Fortuner & Endaveour.

Thanks

Amit
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Old 22nd October 2010, 12:43   #5
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Honda makes fat profit margins on every city sold. The cars overpriced by approx 1.5L than its manufacturing cost/ equipment to price ratio suggests.
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Old 22nd October 2010, 12:50   #6
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Every mfr does the same. Vehicles from Maruti, Tata, Mahindra have been sold for many years now, and the profit margins are very fat. Due to old dies they win a lot due to depreciation etc.,
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Old 22nd October 2010, 13:01   #7
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Although your points are valid, there is a different view to your argument.

The Indian auto industry employs lakhs of people directly and indirectly.
Reduction in taxes in CBU cars may see a larger influx of cars into the Indian Market which may hinder the growth enjoyed by the Indian auto industry.

Also this taxation is a important source of revenue for the govt which I feel will not be reduced on the same lines as reducing the duty on motor fuels.

IMO, the current taxation policy on importing automobiles has had a positive effect for the industry.

Indian Market is too large to be ignored by the major players and that is the reason we are seeing major players like BMW, MB etc setting up manufacturing plants in India which fuel the auto ancillary industry as well.
And with increasing competition we are witnessing higher percentage of localization planned by these manufacturers to reduce costs.
Case in point, Toyota looking to localize upto 70% of the parts for their upcoming etios hatchback and sedan.

In the meantime the Indian auto players are also entering into new segments in a phased manner with new products like Aria, the new world SUV by TATA and a similar product by Mahindra. Compared to their rivals these products offer far better equipments and features at a lower price range. Sure the niggles may be present but over time these issues will be ironed out to provide us with a competent product matching their rivals.

The end effect of this is we as consumers have a wide range of options when we are in the market for our next purchase.

I do agree that most manufacturers make a fat margin, but hey they are in business. Its not a charity.

Last edited by speedmiester : 22nd October 2010 at 13:03.
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Old 22nd October 2010, 13:02   #8
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Quote:
Originally Posted by tsk1979 View Post
Every mfr does the same. Vehicles from Maruti, Tata, Mahindra have been sold for many years now, and the profit margins are very fat. Due to old dies they win a lot due to depreciation etc.,
Precisely my point

But on the question of making money its all in the sales. For simplicity assume every car manufacturer makes about 50% profit for every car being sold, then

1. VFM car + profits + sales tax = Price of car
2. CKD car + profits + sales tax + import duty = Price of car

Any manufacturer can play only with the profits he wants. In our country, since the income levels have just risen, obviously everyone are able to afford only for category 1. Thanks to the fact on local manufacturers being shielded by import duty.

Infact, the guys who're importing the vehicle have to keep their margins low, IF, they're to target the mass group, until then, they've to target the elite group in this country, which also means, their numbers will also be low. Until then, its gala time for all local manufacturers.

@speedmiester - Adding one more point to your post on heavy import tax. Imagine the plight of our roads when the superbikes are sold at the price of 5-6L & 400cc sold at 2-3 Lakhs range.

Last edited by aargee : 22nd October 2010 at 13:05.
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Old 22nd October 2010, 13:16   #9
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I have the same view as speedmiester, the idea is not to mint money, but to restrict the incoming cars in such a way that these companies invest in India.

Suppose, a car manufacturer (just for ex Subaru) decides to sell cars in India, if duty were low, they will sell with CBU and make handsome profit, as it is all the sales are done by dealers, if they donot see much profit they pack up and leave. Then what will happen to others who have done investments for that company eg dealers. What will happen to the parts for the car owners ?

How can we forget how FIAT went away, also Renault.

It should be must for them to invest in plants etc so that their seriousness is seen in the market and they are here for a longer term.

The reason number 1, it helps the local market where consumption is happening, more production from a Thai plant for imports into India will create more jobs in Thailand with manufacturing company + parts suppliers. Why not do something that a similar setup is done here, so that more jobs are created in India.

Now the point is when should a manufacturer plan a CKD OR local assembly route instead of CKD ! When the sales justify the numbers.

Till then, whomsoever wants the product, pays more and gets it. Others wait for it to hit second hand market.

Last edited by tanwaramit : 22nd October 2010 at 13:21.
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Old 22nd October 2010, 13:36   #10
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A Link mentioning that the Fortuner is Made / asembled in India

Toyota Fortuner Versus Rivals - Gaadi.com India
The Fortuner promises to change this with its brute diesel force , robust design , amazing off-roading capabilities and the legendary Toyota reliability. An added advantage is that it is being made in India and is based on the tried and tested (and how!) Innova platform.

Actually there is a fine line between manufcturing and Assembling.

CBU duty rates are much higher, than CKD and SKD, rates A lot of the fortuner components are imported and then the vehicle is assmbled on more or less the same line as the Innova so it does not attract the full CBU rate, and is more an CKD (Completely Knocked Down Kit) with Indian components as well (especially ones common to the Innova - some of which also are imported.)
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Old 22nd October 2010, 14:05   #11
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Quote:
Originally Posted by tsk1979 View Post
So a 12L Ex showroom Scorpio or Safari nets approx around 8L to the mfr

Now take the case of a 20L Fortuner.

Take away the taxes, and Toyota gets around 8L for the vehicle, same as what Mahindra and Tata get.
Going by your example, manufacturing cost of Scorpio is similar to that of Fortuner (or some such). Why then is there a huge difference in quality of the vehicle??
Say, if 3-series were to be manufactured in India, will its price be close to 12L? It doesn't look like one for sure!

PS: fully agree with @speedmiester and @tanwaramit. I think the duty is well justified
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Old 22nd October 2010, 14:18   #12
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While the argument of higher duty and thus protecting local manufacturers is a valid one, this should be slowly removed so as to make the market more competitive. What we are missing out by not doing so is the chance for us the middle income folks to enjoy on a lot of the models that the middle income group of other countries enjoy. Why should an American drive a better car at a lower cost to what I do?
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Old 22nd October 2010, 14:53   #13
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I think we have got 2 topics mixed here:

1) Do we need to tax CBUs? - I believe everyone agrees the answer is yes. That is what will force these manufacturers to setup shop in India. Should they be taxed at 110% or lower is a different question and purely one on economics of what price point pushes a manufacturer to setup shop in India.

2) Do Indian manufacturers really offer VFM and / or do they have fat profit margins? - Now this is a question we have touched upon in other threads as well. The answer to that is that they either have fat margins or very sub-optimized process costs - meaning that for the same amount of money spent they are not able to produce a vehicle of equivalent quality as compared to the International manufacturers.
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Old 22nd October 2010, 15:45   #14
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I am not saying do not tax CBUs, all I am saying is the 110% tax is insane. Tax levels should be at par with other industries. Why is the Auto industry getting 106 or 110% tax benefit on imports, when there are many other industries, which face foreign competition, and yet import duties are much lower.
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Old 22nd October 2010, 16:12   #15
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The case of Vento is very interesting. It is a current model, and manufactured in just 2 countries, Russia (Rs 5.6 lakhs) and India (Rs 10.5 Lakhs).

What is the justification in price differences? Is it the high import content? If so will the prices equalize when the local content becomes the same as that of the Russian product (which it will, a conclusion easily reached after seeing the investment in plant ). If past history is any indicator, the indigenising exercise will see no reduction in prices.

Right now, it seems that the manufacturers are given a free hand in pricing, because the government benefits any which way, receiving monies both from the tax on the profit the company makes, as well as from the taxes on the purchase by the end user. So the higher the price, the more the tax...
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