India turns the screw on luxury car makers

The Indian government has increased import duty on CKD (complete knock down) car imports to 30% to persuade car makers to build in India.

India’s economy is growing almost exponentially, as a result of which it has a big, rising middle-class with much the same aspirations as the middle-class in the West.

Those aspirations include the accumulation of status symbols considered worthy of representing their success and new wealth, none more so than a good set of wheels.

So it’s no surprise that the mainstream luxury car makers – Jaguar, Land Rover, Mercedes, Audi and BMW – are ready, willing and able to provide exactly what India’s middles classes are looking for. But there is the small problem in India of enormous import duties on luxury cars – over 100% in some cases.

To get round the import duty car makers have taken to importing cars as CKDs (Complete Knock Down Kits) and putting them together in India. BMW do it with the 3-Series, Audi with the A4 and Land Rover – from this year – with the Freelander, which is going to be bolted together at Tata’s Pune facility.

But there’s a big difference in terms of commitment, investment and local employment between putting together CKDs and investing in full manufacturing facilities. Unsurprisingly, the Indian government would much rather these companies commit to full local manufacture. So it’s set about ‘persuading’ them.

In the recent budget India announced it would be increasing the rate of import duty on CKD from 10% to 60%. Which, not surprisingly, had the car makers up in arms.

Some severe lobbying in recent weeks has seen that rate reduced to 30% – still a three-fold increase – after it became clear that the hike was too much in one go, and would probably have resulted in job losses as manufacturers pulled out – something Audi apparently suggested was likely if the 60% rate was ratified.

In light of the hike in import duty we asked Land Rover if their plans for Freelander production in India are affected. They were fairly non-committal, but did confirm that their plans will continue. They will be looking at the exact definition of what constitutes a CKD to see if there’s any room for manouvre, but they are already heavily invested so the plans continue.

So for now, there’s a compromise. But long-term it’s clear that the Indian government will continue to use tariffs to persuade car makers to manufacture in India.

Which, of course, is exactly what they’ll end up doing.