BUSINESS STANDARD: The country’s largest car maker Maruti Suzuki India (MSIL) will take a final decision on setting up an assembly unit in Sri Lanka by the end of the current financial year. The facility, if commissioned, would be the first facility for the small car giant outside its home base in India

R C Bhargava, chairman, MSIL said, “Sri Lanka keeps changing its tax rates. When rates were low, it was a big market for us. We were exporting 17,000-18,000 vehicles to the country every year. In 2012, when tax laws were changes, duties became very high and sales dropped dramatically. We are studying whether it would be viable to set up assembly operations there. A final decision would be taken by the end of the fiscal.”

Maruti Suzuki sold around 15,000 vehicles in Sri Lanka in 2011-12, accounting for nearly half of the 29,000 new cars sold in the country that financial year. The total size of the car market stood at 59,000 units in the period, with the remaining numbers coming in from sales of preowned vehicles. But after duties on automobiles were raised last year, Maruti Suzuki’s exports to the country have dropped sharply.

In a bid to contain the rising fiscal deficit, the Sri Lankan government had sharply increased the import duty on automobiles with effect from 1 April, 2012. While the import duty on cars was raised to 200-350 per cent from 120-291 per cent; on three-wheelers, it has gone up to 100 per cent from 51-61 per cent, and on two-wheelers to 100 per cent from 61 percent. Excise duties on automobiles were also raised by the local government a few months back. The selection of a country to commence assembly operations will depend on two or three factors, Bhargava informed. First, local volumes would have to be large enough to justify setting up assembly operations. Second, there would have to be a distinct advantage in starting completely knocked-down (CKD) operations over exports. He added, “This will depend both on volumes and the taxation policy of the country.”

Suzuki Motor Cororation (SMC) has recently transferred to Maruti Suzuki the responsibility of developing, producing and marketing cars to Africa, West Asia and some Southeast Asian markets where it doesn’t have operations. Suzuki will focus on Europe, China and the rest of the markets. If manufacturing/assembly units have to be set up in the regions assigned to Maruti Suzuki, the Indian subsidiary would take the lead in investing for parent SMC.

Industry experts informed that Sri Lanka’s move to raise customs as well as import duties on automobiles could have been prompted China’s intent to expand its footprint in the automotive sector in the country. The Sri Lankan automotive market is largely dominated by Indian passenger, commercial and two-wheeler manufacturers such as Maruti Suzuki, Tata Motors, Bajaj Auto. In October last year, Chinese car maker Geely announced an investment of $ 20 million to set up an assembly facility with local firm Micro Cars. “There is hardly any vehicle manufacturing that takes place there. The Sri Lankan government is trying to encourage local manufacturing by raising import barriers”, said an executive at a leading automobile company.

According to industry body Society of Indian automobile Manufacturers (SIAM), Sri Lanka is the largest export market for Indian automobiles. In 2011-12, out of India’s $6 billion worth of auto exports, Sri Lanka accounted for $800 million.