Maruti weighing car assembly in Sri Lanka as import duties soar

The Financial Express, New Delhi: Maruti Suzuki is planning to set up a car assembly plant in Sri Lanka with a local partner, marking its first step outside the country. The move was prompted by the Sri Lankan Government’s recent attempt to promote local manufacturing with tighter import norms and higher customs duty. Maruti wants to consolidate its considerable market share in the island nation with a local plant.

Sri Lanka ranks among the top five export destinations for Maruti. In 2011-12, Maruti’s sales there accounted for over half of the country’s new car market — it sold about 15,000 units in the country, while total new car sales stood at 29,000 units. The total car market size in the island nation for the same year was 59,000 units, of which 30,000 were refurbished cars.

In April, Sri Lanka raised car import duties from 120% to as much as 200%. In November, it increased the ‘minimum assessable value’ for cars to Rs. 7.5 lakhs, from Rs. 4.5 lakhs — meaning even if the Maruti Alto’s landed cost is Rs. 5 lakhs, the 200% duty will be calculated instead on Rs. 7.5 lakhs. The move has eroded Maruti’s cost-competitiveness and is poised to lead to a fall in exports to Sri Lanka this fiscal.

“We are assessing the need of setting up a completely-knocked down (CKD) plant in Sri Lanka since increased duty rates will affect our sales there this fiscal,” a company official involved in the planning process told FE.

Another Maruti official said that a R20-25 crore investment for a 30,000 unit Sri Lankan assembly plant has come up for discussion at the company’s board. The issue, however, is the high level of localisation (40%) required under Sri Lanka’s assembly norms, which are tough to meet because of low volumes.

“Even Osamu Suzuki, chairman of the parent Suzuki Motor Corp, has given his blessings to this plan. There is not much investment needed because of low mechanisation — it will basically be a sophisticated garage with a flexi-line for car assembly,” the official said.

Industry experts suspect that Sri Lanka’s move to set up high tariff barriers for imported vehicles could have been influenced by China to get a foothold in the country. This is because most of the car, two-wheeler and commercial vehicle segments are currently dominated by Indian players like Tata Motors, Ashok Leyland, Bajaj and Maruti Suzuki, but none have an assembly plant there. However, in October, Chinese car manufacturer Geely became the first to announce a $ 20 million assembly plant in Sri Lanka with local partner Micro Cars.

“There is virtually no vehicle manufacturing in Sri Lanka so they are looking to encourage local investments,” an industry executive said. Mumbai-based utility vehicle major Mahindra & Mahindra is also reportedly talking to its Sri Lankan partner, Ideal Group, to set up a local assembly plant at an investment of Rs. 11 crore.

Around 10% of India’s auto sector exports go to Sri Lanka.