Top sources told The Financial Express that the Skoda management, which is keen to make an investment in Maharashtra, is busy studying the effect of the budget proposals introduced by finance minister Yashwant Sinha. Company officials have held preliminary talks in this regard with both the state and central governments. The company has, in the meanwhile, decided to carry out test runs of the Felicia and Audi models within the next two months covering over 12,500 km all over India. Skoda has indicated to the centre that India will be a major export base for the cars proposed to be manufactured in Maharashtra. It needs to be seen whether thecompany will be able to stick to its manufacturing schedule in view of the changes in the tax structure, sources added.

Skoda's projections suggest that the company will be steadily increasing exports, rising to around 15,000 cars by 2005, which should translate into a annual export revenue of around Rs 350 crore. The phased plan shows that 5,000 cars will be exported in 2001. This is expected to go up to 10,000 in the following year, 12,500 in 2003 and 15,000 thereafter. The corresponding earnings from exports for each of these years is Rs 114 crore, Rs 228 crore, Rs 285 crore and Rs 342 crore.

"The amounts can only be given as an indication, as exports depend on the economic and political situation in the countries where exports are planned," sources said. The countries targeted for exports include Sri Lanka, Nepal, Myanmar, Kenya, Afganistan, Thailand, Malaysia, Indonesia, Pakistan and Bangladesh.

Skoda's mega India plan indicates that the company will eventually produce 60,000 cars in 2004. Theinitial output this year (1998), if everything goes according to plan, will see the company produce 3,000 cars. This will rise to 12,500 by the turn of the century, 35,000 in 2001 and 57,500 in the following year.

Effectively, this schedule reveals that Skoda will, by 2004, target sales of 45,000 vehicles in the local market after exporting 15,000. Experts say this is a realistic projection given that GDP growth after 2002 is expected to increase to around seven per cent. The cars will come in three models, the Felicia, Octavia and the Audi A6, all powered by diesel and petrol engines. This mix will also ensure that demand for the cars will be evenly spread. Current indications are that the luxurious A6 will be limited to an output of barely 5,000 cars in 2004.

Skoda plans to achieve a local content of 70 per cent for its vehicle range in the seventh year and "up to a minimum 50 per cent in the fifth year or earlier, from the date of clearance of the first import consignment of CKD/SKD kits." The companyhas reiterated that after the 70 per cent level is reached, there will be no need for an import licence. But it "shall discharge the export obligation corresponding to the imports made by them till that time."

Production and assembly of these vehicles will result in a forex outgo for the CKD imports. The present calculations show that Rs 65 crore will be the cost of importing 3,000 CKD kits in 1998, Rs 140 crore for 7,000 kits in 1999, Rs 219 crore for 12,500 kits in 2000, Rs 632 crore for 35,000 kits in 2001 and going up to Rs 725 crore for 55,000 kits in 2002. However, import costs fall in the next two years to Rs 615 crore and Rs 547 crore, indicating that localisation will have reached the 70 per cent level.

The company will achieve a broad neutralisation of foreign exchange over the entire period of the production in terms of balancing between the actual f.o.b. value of imports of CKD/SKD/components and the f.o.b. value of export of cars and auto components over the same period. The period of exportswould commence from the fourth year of the start of production.

The date of commencement of production would be deemed to be the date of the first release of consignment from factory after payment of excise duty. However, from the fourth year onwards (effective from date of release of first consignment), the company would do its best to export the equivalent of the f.o.b. valaue of imports made by it till that time for the remainder of the period. Apart from fully-assembled cars, the exports would include components and other items related to the car industry.

Insight

Export focus critical

The cautious approach adopted by Skoda is understandable given the recessionary backdrop of poor demand in the Indian automobile market. A nightmarish 1997 made many foreign car makers (some at their own expense) realise that India is not yet the market it is touted to be.

Another point Skoda needs to factor into its calculations is the fact that auto-manufacturers in India have planned capacityexpansions to take total production upto a staggering 11.81 lakh units per annum by 2000. Which, incidentally, does not include the current capacities of existing players like PAL, Hindustan Motors, Telco and Maruti Udyog (which alone has an estimated capacity of 2.5 lakh vehciles). Obviously, the question that needs asking is whether India possess such an enormous demand potential?

Going by the numbers available, the answer to this question is: not yet. Hence, Skoda's export-centric policy of utilising India as a sourcing base is fine. Moreover, growth in the mid-size segment which Skoda plans to enter has been stifling. With nine car manufacturers currently vying for a piece of this segment, this definitely is a crowded street. Only players with deep pockets and long-term commitments to grow the Indian market can hope to survive.