Luxury carmakers betting on local assembly

Customs duty makes importing CBU models expensive, prompting luxury carmakers into cutting local assembly costs.

                     

Stung by high import duties on Completely Built Units (CBUs), which went up from 60 percent to 75 percent in the 2012 Budget, India’s luxury carmakers are gearing up to locally assemble strategic models instead of merely importing them.

Under the Completely Knocked-Down (CKD) kit route, a carmaker has to pay only 30 percent customs duty on the car, provided it comes with a pre-assembled engine, gearbox and transmission. If the components are further knocked down and assembled locally, the OEM pays a 10 percent duty.

Luxury carmakers are already assembling most of their key models in India to attract 10-30 percent duty (depending on the level of localisation) as this is a prerequisite to be price- competitive in the market.

The challenge with high-end models is that they sell only in small volumes and often don’t justify the investment for setting up a CKD assembly operation. However, the increase in customs duty on imports has widened the price gap with locally-assembled cars, which were spared of a duty hike and, as a result, fully-built up cars are getting priced out of contention.

Jaguar has been hurt the most with the recent import duty hike as none of its cars are locally assembled. However, Ratan Tata in an exclusive interview to Autocar India said, “We will look at assembling the XF in India if there is a business case for it.” In fact, the only way the XF can compete on price with the 5-series and E-class is if it is locally built. Land Rover already assembles the Freelander 2 at Tata’s Pune plant.

In fact, the increasing demand for high-end luxury SUVs is prompting manufacturers to build them from CKD kits. Audi is already assembling the Q3 and Q5 in its Aurangabad plant and the flagship Q7 which, is being imported until now, has been added to the list. Mercedes has aggressive plans in the SUV segment and will localise both the M-class and the big GL, thus bringing down their costs substantially.

At the top-end of the luxury car saloon segment, only the S-class is currently assembled in India but BMW plans to start assembly of the facelifted 7-series when it goes on sale at the end of this year. “We can expect more products to be locally manufactured but they must also have a reasonable business case,” says BMW India’s president, Andreas Schaaf. 

However, there doesn’t seem to be a good business case for local assembly of the Audi A8, the 7-series’ main competitor. “The A8 has an aluminium body which makes it difficult to build in a CKD operation,” says Michael Perschke, Audi India’s boss.

The buzz in the industry is that Volvo plans to acquire around 100 acres in Karnataka for a CKD operation of its models like the S60, XC60 S80 and XC90. Along with Jaguar, Volvo is currently the only car brand that imports all its models.

While cars built from CKD kits obviously cost less, the final price that the buyer pays depends on how much of the reduction is passed on to him by the carmaker. Quite often, the investment in a CKD operation cancels out the savings in duty. However, some states slap imports with registration charges that are significantly higher than on locally-made cars.