A1] Legal Definition of the MNCs:
There is mo universally accepted definition of the term Multinational Corporation. According to an ILO report, “The essential nature of the Multinational Enterprise lies in the fact that its managerial headquarters are located in one country (referred to for convenience as the ‘home country’). While the enterprise carries out operations in a number of other countries as well (‘host countries’)”. It means a corporation that controls production facilities in more than one country such facilities having been acquired through the process of foreign direct investment.
Multinational activity falls in to the category of Foreign Direct Investment (FDI). It entails buying or selling firms abroad, or the establishment of entirely new production facilities abroad. Thus, when we say the German electronics manufacturer Siemens buys an American electronics firm or sets up a new electronics plant in the USA
According to the IBM World Trade Corporation, the MNC may be defined as a company that meets five criteria:
1) It operates in many countries at different levels of economic development.
2) Its local subsidiaries are managed by nationals.
3) It maintains complete industrial organisations, including R/D and manufacturing facilities in several countries.
4) It has a multinational central management.
5) It has multinational stock ownership.
In the opinion of James C. Baker, a multinational company is one:
- That has direct investment base in several countries.
- That generally derives from 20% to 50% or more of its net profits from foreign operations; and
- Management that makes policy decisions based on the alternatives available anywhere in the world.
In India
a) Is a subsidiary or a branch or has place of business in two or more countries or territories;
b) Carries on business or otherwise operations in two or more countries or territories.
Thus a MNC may be defined as an enterprise which operates in a number of countries and which has production and services facilities outside the country of its origin. In simple words, a MNC owns and controls assets in more than one country. The essence of such firm is that it takes its principal decisions in global context. For this reason, the decisions taken are often outside the countries in which it has operations. The profit maximization objectives take no account of the repercussions of its operations in the countries falling in its orbit.
Terms such as International Corporation, Multinational Corporation, Transnational Corporation and Global Corporation are often used as synonyms. However, several multinationals have evolved into certain advanced stage of transnational organisation and operations. Hence it is necessary to draw some distinction between these terms.
Multinational Corporations and Transnational Corporations:
It would be useful to draw a line of distinction between a multinational corporation and a Transnational Corporation. A Transnational Firm (TNC) is one that has no identifiable national base. It organizes the production facilities it owns without regard to national affiliation or interest. A transnational is truly global firm. Multinational firms, by contrast, maintain national affiliations. Earlier we referred to Siemens as German Multinational. This is not just a means of labeling. Siemens has material characteristics that make it identifiably German. In a TNC ownership, control are so dispersed internationally that there is no principal domicile and no one central source of power. Examples of TNCs are Royal Dutch Shell and Unilever.
It may be pointed out that some marketing and management experts add some essential dimension to the term global corporation, although it is not accepted by many others. According to them, a global corporation is one which views the entire world as a single, homogeneous market which should be catered to by globally standardized products. In their context we may quote Prof. Theodore Levitt, “The Multinational Corporation operates in a number of countries and adjusts its products and practices in each at a high relative cost”. The global corporation operates with resolute constantly a low relative cost as if the entire world (or major region of it) were a single entity it sells the same thing the same way everywhere.
Many of the multinationals have transformed themselves to transnational or global corporations. Whatever may be differences in the nomenclature or the views regarding the strategies of the multinational, it has reached a new watershed in its evolution.
We can conclude by quoting John H. Dunning. According to him; ”From behaving largely as a confederation of loosely knit foreign affiliates, designed primarily to serve the parent company with natural resources or local markets with manufactured products and services, to its maturation over the years as a controller of a group integrated value adding activities in several countries, the MNE is now increasingly assuming the role of an orchestrator of production and transactions within a cluster, or network of cross border internal external relationships, which may or may not involve equity investment, but which are intended to serve its global interests.”
A2] Modus Operandi of the Multinational Corporation Activities:
Multinational Corporations because of their enormous size, enjoy massive economic and political power which enables them to dictate terms to the under-developed countries. They are able to manipulate prices and profits and restrict the entry of potential competitors through their dominant influences over new technology, special skills ability to spend enormous fund on advertising etc.
MNCs organize these operations in different countries through any of the following five alternatives:
1. Branches.
2. Subsidiaries.
3. Joint Venture Company.
4. Franchise Holders.
5. Turn-Key Projects.
1. Branches: The simplest form of extending business operations is to set up branches in the developing countries. Such branches bring with them the technology of the parent company and are linked up with it.
2. Subsidiaries: Multinationals also operate by setting up national affiliates as subsidiary companies. A subsidiary in a particular country is established under the laws of the country. Such subsidiary companies take advantage of the financial, managerial and technical skills of the holding company and also benefit by the international reputation that latter enjoys.
3. Joint Venture Company: At times, multinationals enter into a joint venture with an indigenous firm or agency. Under this arrangement of MNC makes available machinery, capital goods and technological expertise to the indigenous firm. This form of organisation is adopted in those countries where the law requires control by local nationals.
4. Franchise Holders: This is a special kind of arrangement by which an affiliate firm produces or markets the produce of a multinational firm after obtaining a license from that firm. A formal contract is entered into between the affiliate firm and the multinational firm which specifically mentions the rights that are transferred to the affiliate firm and lays down the compensation (usually in the form of royalties) that it has to pay to the parent firm.
5. Turn-Key Projects: Under this organisational form, the multinational undertakes to complete the project from scratch to the operational stage. When the project is ready it is handed over to the host country. Frequently underdeveloped countries invite tenders for construction of certain projects requiring high technical skill. With their huge resources and managerial and technical expertise the multinationals are most suited to carry out this job.
Through these various methods of operations, MNCs carry their technology to the developing countries. If MNCs set up a branch or a subsidiary company, it is claimed that there is a direct injection of foreign experience and expertise in the developing country. The branch or the subsidiary company can provide a channel for the transmission of the latest improvements from the developed to the underdeveloped countries. In the words of A. K. Cairncross,” There is no question that the branch factory is a highly effective way of importing technology. It usually provides, along with the technical expertise, the capital that is not easily mobilized in underdeveloped countries for new industrial ventures and the managerial experience that can so rarely be supplied by them.”
The modus operandi of the multinationals in spreading their net is very interesting. Like the East India Company which came to India as a trading company and then spread its net throughout the country to become politically dominant, these multinationals first start their activities in extractive industries or control raw materials in the host countries and then slowly enter the manufacturing and service sectors.
The process of internationalism begins with the buying of the weak subsidiaries in the host country and modernizing them according to the demand and factor conditions. Technology and mass methods of production, easy access to finance of favorable terms, drawing on a pool of managerial talent, a large and effective sale apparatus and research and development turn a weak subsidiary into a surplus repatriating affiliate.
The American Multinationals realize quite substantial returns to the extent of 34 percent in Asiatic countries and 22 percent in African countries. They acquire enormous powers in the host countries that smoothens the free flow of funds across international boundaries. They purchase the best brains in these countries and resort to unfair practices. With their huge resources, the multinationals are able to invest in research and development and exploit technological developments to manufacture new products and discover new processes.
A3] The Evils of Multinational Corporations:
The specific demerits or evils of the MNCs are grouped under four heads:
- Harmful for Producers and Consumers:
Since the multinationals transcend national frontiers, they have loyalties to none. And since they are in the nature of oligopolies, they have the power and to do everything possible to eliminate any actual/potential competition. Their technique of imposing their will on producers and consumers are many a varied. They manipulate future markets, differentiate their products through deceptive and misleading advertising etc. and through these devices they succeed in achieving their aim of maximizing global profits. All this leads to raising the prices for consumers, lowering the income of the farmers, increasing the profits of MNCs along with making the quality of the products inferior.
- Evil of Transfer Pricing:
The multinationals have often been charged with predatory practices. These include many techniques such as reciprocity agreements among different firms to share markets etc. manipulation of markets, product differentiation etc. Quite many of these ingenious techniques are commonly referred to as ‘transfer pricing’. It refers to the intra-company transactions that are valued at deceptive prices with a view to maximize group-profits. Again, some times the multinationals establish dummy trading companies in low tax countries and in the name of coordinating trading activities of their companies in different countries, manipulate transactions to maximize their global profits. In addition, quite a large part of the returns of the affiliate companies is sucked into the country of the parent company in the guise if such payments as royalties, technical fees, management service fee etc. These payments reduce the profits of the affiliates and thereby impose a heavy price on these countries for whatever services they may be getting. As a result of these multinationals make exorbitant profits.
- Currency Manipulations:
The multinationals with worldwide operations involve financial dealings in several national currencies. They keep on accumulating funds in places that are safe, with strong currencies and high interest rates, in short a profitable place. As far as weak currencies are concerned, the MNCs ask their affiliates to go in for larger debts through rising fresh loans, premature repayment of old loans etc. In brief they build up assets in strong currencies and debts in weak currencies. Since the amounts involved are very large, the multinationals are responsible for creating or at least accentuating the seriousness of currency crises. These activities are undertaken to maximize their profits by being international. These render no advantage to the less developed countries; rather harm them directly by further weakening their currencies and indirectly by adding to the currency crises at the world level.
- Bad Business Ethics:
Another serious evil that affects particularly the less developed countries is concerned with the activities of the multinationals which often fall outside the domain of proper business ethics and the legal system of the host countries. Some of these, as already explained, pertain to their techniques of their transactions called ‘transfer pricing’. There are some countries of Asia, Africa and Europe wherein the US
The criticisms of the multinational companies activities may be collected under the following heads:
- Political
- Sales and Marketing
- Technology
- Economic
- Personnel Management and Industrial Relations
Political:
In this context multinationals have been assessed on occasion of
- Supporting repressive regimes
- Paying bribes to secure political influence
- Not respecting human rights
- Paying protection money to terrorist groups
- Establishing national governments of which they do not approve
The multinationals are in reality owned and controlled by the nationals of just of handful of Triad countries so that MNCs take their orders from company headquarters in another country staffed by mangers who owe their allegiance to a foreign nation. Hence MNCs subsidiaries might act as de facto instruments of the foreign economic policy of another state. The vast resources of large multinational companies enable them actually to challenge the sovereignty of smaller nation states. In particular their ability to transfer economic activity around the world can undermine underdeveloped countries abilities to purse national economic objectives.
In fact, fears that the multinational companies would destroy nation-states in the developing world receded during the 1980s due to a number of factors including:
- Increasingly ferocious international competition among the MNCs which made them keen establishes good relations with host country governments.
- Development of better negotiating skills by host government representatives. Ministers and senior civil servants became adopt a securing the best possible deals when bargaining with the MNC management.
- A wider dispersion of the home countries in which the MNCs were based. Japanese, Korean and other Asian MNCs brought different approaches to host country relations compared to firms from Western Europe and especially the
- The emergence of large home-grown international businesses in a number of less developed countries.
- An increase in the number of small firms operating on the global scale.
- Greater cultural sensitivity on the part of MNC managers resulting from their longer experience of doing business abroad.
Sales and Marketing:
Allegations in this category of criticism are that the MNCs have:
- Undermined ancient cultures and traditions through the use of ubiquitous advertising and marketing methods.
- Engaged in misleading and deceitful advertising in
- Promoted goods that waste valuable resources in poorer nations
- Supplied products that are inappropriate to local needs.
- Not accepted responsibility for unsafe products.
Environmental Management:
Environmentalists have criticized the MNCs for:
- Depleting natural resources too quickly (and not looking for artificial substitutes).
- Polluting the environment
- Not paying compensation for environmental damage.
- Causing harmful effects in local living conditions
- Paying little regard to the risks of accidents causing major environmental destruction.
The MNCs are sometimes accused of using developing countries as dumping grounds for environmentally ‘dirty’ activities and products, although it is known that many MNCs are at the forefront of environmental practice and management.
It has also been pointed out by critics that the multinational corporations tend to be more extensively involved in pollution-intensive industries compared to domestic business and that they frequently apply only the very minimum environmental standards required by the host governments. Moreover, the mobility of an MNC is a great advantage when negotiating favorable environmental regulations and exemptions with host country governments. On the other hand, a number of factors may encourage the MNCs to behave in an environmentally friendly manner:
- Consequent to their high visibility within host nations their vulnerability to host government interference and control, MNCs must strive harder to establish good rapport with local communities. This will not be achieved if an MNC pollutes the local environment.
- MNCs need to protect their global image
- The superior financial and technological resources of the multinationals relative to local firms enable them to be innovative and to exercise leadership in relation to environmental protection. Also their size and management systems enable them to locate environmentally sensitive activities in the suitable areas.
It may be noted that national governments can influence the MNCs environmental policies through a number of devices, notably:
· Legal controls and regulations
· Public subsidies for environmentally positive activities
· Resource depletion and for effluent emission taxes
· The issue of tradable pollution permits whereby the permit holder is allowed to engage in environmentally damaging activities that would otherwise be illegal; permits are sold to the highest bidder.
· Requirements that firms undertaking environmentally sensitive operations deposits significant sum of money with the host country’s central bank which will only repay the deposit if the company invoice protects the local physical environment.
Technology:
In this condition, the multinationals have been accused of:
- Using technologies that are inappropriate to the needs of the local economy. Typically the MNCs do not develop technologies specifically relevant to the needs and conditions of host nations, as it is usually cheaper to an MNC to transfer an existing technique to a foreign country than to devise a new suitable for local conditions.
- Charging license fees that are very expensive.
- Not engaging in research and development in host countries.
- Encouraging ‘brain drain’ from poorer countries.
- Making host countries technologically dependent on the West.
- Not allowing local nationals in the operation of improved technologies.
Arguably the use by MNCs of capital-intensive production methods in less-developed countries undermines local businesses making similar items but with labour-intensive technologies. In the process, unemployment is created. Also the MNCs might destroy the spirit of entrepreneurship within local community, which becomes increasingly dependent on large foreign owned companies for local employment. The counter argument here is that typically MNCs enter foreign countries in order to supply new products not previously available to local consumers and that often an MNC will pay its local employees higher wages than local companies. Note however that the latter practice might cause workers and managers to leave local businesses further eroding the latter’s competitive positions.
Economic:
It is the opinion of the critics that the multinationals have impeded rather than facilitates the overall economic development of many poorer countries, through concentrating economic activity in a handful of urban centers rather than promoting evenly balanced economic development across the nation as a whole. MNC activities in the less developed countries have to ‘dual’ economic structures with foreign-owned capital-intensive high-technology high-productivity industries operating in parallel with labour-intensive low-productivity industries. The foreign-owned sectors might export most of their output and are managed primarily for the benefits of the MNCs concerned and the countries to which their products are sent often at low prices. Thus, technical progress, results not in higher incomes for local residents, but rather in lower prices which favour consumers in developed countries. These lower import prices for advanced countries further stimulate their economic development, enabling them to dominate the world. According to this line of reasoning it would be better for the host countries to develop domestic industries serving local consumers rather than export sectors, in order to provide growth points for manufacturing, local dissemination of technical knowledge, urban education and infrastructural improvement programmes, and so on.
The other economic objections to the activities of the multinationals are as under:
- The multinational companies sometimes choose to import raw materials and input components for their foreign subsidiaries rather than procure them locally. Scarce foreign exchange is used to pay for the imports and the host country’s balance of payment suffers.
- The multinational companies’ repatriation of profits can have adverse affect on the balance of payment of the host country.
- The MNC might come to dominate key technically advanced sectors of an economy, causing the host country government to lose control over the nations’ economic destiny in these critical areas.
- The multinationals contribute to inequality in the distribution of income within a country. (The counter argument here is that although local residents who work for an MNC might be rewarded generously compared to other citizens, it is the responsibility of the state rather than the MNC concerned to ensure that national income is distributed fairly, via domestic taxes and subsidies.)
- Foreign firms periodically raise large amounts of capital on domestic money markets, hence ‘starving’ local companies of funds. The counter argument to this criticism is that investors are not fools, and the fact that they choose to buy shares in foreign rather than local business is but a reflection of market mechanism properly allocating financial resources to their most profitable uses.
Personnel management and Industrial Relations:
The main points of criticisms here are that certain MNCs:
- Refuse to recognize trade unions or engage in collective bargaining.
- Do not apply equal opportunities policies that would be legally required in economically advanced countries.
- Use expatriate staff for all significant management positions, do not promote excellent locally recruited workers and do not pass on managerial competencies to local employees.
- Ignore the occupational health and safety needs of local workers.
- Exploit host country labour.
- Do not involve local employees in managerial decision-making.
Trade unions in some Western countries have criticized the MNCs for:
- Exporting jobs through investment in foreign production.
- Exploiting low-paid foreign workers in countries where there is negligible employment protection.
- Transferring skills to other nations, thus enabling the latter to compete more freely in the home country market.
- Taking advantage of the tax advantages, investment grants and subsidiaries offered by foreign governments.
- Circumventing home country laws on business competition, labour relations etc. through shifting production among countries.
A4] Nature of Organisational Design:
Organisational design represents how organisations structure subunits and coordination and control mechanisms to achieve their strategic goals. Right organisational design is crucial for MNCs to achieve their multinational strategic goals.
The two basic questions in designing an organisation are:
1) How shall we divide the work among the organisations subunits?
2) How shall we coordinate and control the effects of the units we create?
In very small organisations, everyone does the same thing and everything. There is little reason to divide the work. However, as organisations grow, managers divide work first into specialised jobs. Different people perform different tasks. Later, when enough people are doing the same tasks and a supervisor is required, managers divide their organisations into specialised subunits. In smaller organisations, the subunits are usually called departments. In larger organisations, divisions or subsidiaries become the major subunits.
Once an organisation has specialised subunits, managers must develop mechanisms that coordinate and control the efforts of each subunit. For example, a manufacturing company must make sure that the production department produces the goods at the time when the marketing department promised the customers. Similarly, a MNC must ensure that its foreign operations support their subunits very closely. They centralize decision making at company headquarters to make certain that the production and delivery of products and services conform to rigid standards. Other companies give subunits greater flexibility by decentralizing decision making control.
Before we can understand the organisational structures necessary for multinational strategy implementation, we need to have some basic knowledge of organisational structure.
Organisations usually divide the work into departments or divisions based on functions, geography, products or a combination of these choices, each way of organizing has its advantages and disadvantages. Companies adopt one or a combination of these subunits forms based on management’s beliefs concerning the best structure or structures to implement their chosen strategies.
In the functional structure, departments perform separate business functions such as marketing or manufacturing. The functional structure is the simplest of organisations. As such, most of the smaller organisations have functional structures. However, even larger organisations often have functional subunits. Most organisations use charts to display their organisational structure.
The structure arrangements for building a department of subunit around a product or a geographical area are called the product structure and geographical structure respectively.
Product or geographical organisations must still perform the functional tasks of a business. In contrast to the financial structure, however, product or geographical organisations do not concentrate functions in different subunits. Instead, financial tasks are duplicated by each product department or geographical area department. The duplication of these functional tasks usually requires more managers and more people to run the organisations.
The geographic structure allows a company to serve customers needs that vary by region. That is, the geographic structure sets up a mini functional organisation in each region. Rather than one large functional organisation that serves all the customers, the smaller, regional, organisation focuses all functional activities on serving the unique needs of the regional customer. Because the organisation focuses on specific customer groups, managers can more easily and quickly identify customer’s needs and adapt products accordingly.
Few organisations adopt pure organisational forms. Each organisation faces unique tradeoffs based on efficiency, product types and customers’ needs. They design their organisations with mixtures of structures that they believe will best implement their strategies. These mixed form organisations, which can include functional, geographic and product units are called hybrid structures.
A5] Transfer Pricing:
The pricing of goods and services traded internally is one of the most sensitive of all management subjects and executives are reluctant to discuss it. Each government normally presumes that multinationals use transfer pricing to its country’s detriment. For this reason, a number of home and host governments have setup policing mechanisms to review transfer pricing policies of Multinational Corporation.
The most important uses of transfer pricing include:
- Reducing taxes
- Reducing tariffs, and
- Avoiding exchange controls.
Transfer prices may also be used to increase the MNCs share of profits from a joint venture and to disguise an affiliate’s true profitability.
Tax Effects:
To illustrate the tax effects associated with a change in transfer price, suppose that affiliate A produces 100,000 circuit boards for $10 a piece and sells them to affiliate B. Affiliate B in turn sells these boards for $22 a piece to an unrelated customer. As shown in the following exhibit pre tax profit for the consolidated company is $i million regardless of the price at which the goods are transferred from affiliate A to affiliate B.
Nevertheless, because affiliate A’s tax rate is 30% while affiliate B’s tax rate is 50%, consolidated after tax income will differ depending on the transfer price used. Under the low markup policy, in which affiliate A sets a unit transfer price of $15, affiliate pays taxes of $120,000 and affiliate B pays $300,000, for a total tax bill of $420,000 and a consolidated net income of $580,000. Switching to a high markup policy (a transfer price of $18), affiliate A’s taxes rise to $210,000 while affiliate B’s decline to $150,000, for combined tax payments of $360,000 and consolidated net income of $640,000. The result of this transfer price is to lower total taxes paid by $60,000 and raise consolidated income by same amount.
In effect, profits are being shifted from a higher to a lower tax jurisdiction. In the extreme case, an affiliate may be in a less position because of high start up costs, heavy depreciation charges or substantial investments that are expensed. Consequently, it has a zero effective tax rate and profits channeled to that unit can be received tax free. The basic rule of thumb to follow if the objective is to minimize taxes is as follows: If affiliate A is selling goods to affiliate B, and tA and tB are the marginal tax rates of affiliate A and affiliate B respectively, then
If tA > tB, set the transfer price as low as possible.
If tA < tB, set the transfer price as high as possible.
A6] Factors that should be considered by a car manufacturing company that wishes to enter India
1. Industry Conditions:
Barriers to Entry Barriers to entry in this industry are high. These barriers are study the cost of developing high volume production facilities, the ability to gain access to technology of major global operators, the relatively high competition between established domestic companies and foreign companies. The automobile manufacturing sector is characterized by a high cyclical growth patterns, high fixed cost and break-even point levels, and an excessive number of participants. Barriers to entry into automobile manufacturing activity are formidable. Some of the barriers that need to be overcome by a new entrant include: the cost of developing high volume production facilities, in order to benefit from economies of scale; and the ability to gain access to technology of major operators, as the present incumbents include some of the largest multinationals, that have considerable claims to new technology. The relative large size of domestic market, together with high competition, has already seen significant rationalisation of this industry.
2. Taxation:
3. Excise Duty:
Central Excise duty is an indirect tax levied on those automobiles which are manufactured in India
Types of Excise Duties:
· Basic Excise Duty: This is the duty leviable under First Schedule to the Central Excise Tariff Act, 1985 at the rates mentioned in the said Schedule.
· Special Excise Duty: This is the duty leviable under Second Schedule to the Central Excise Tariff Act, 1985 at the rates mentioned in the said Schedule. At present this is leviable on very few items.
· National Calamity Contingent Duty (NCCD): Normally known as NCCD. This duty is levied as per section 136 of the Finance Act, 2001, as a surcharge on specified goods.
· Excise Duties and Cesses Leviable under Miscellaneous Act: On certain specified goods, in addition to the aforesaid duties, prescribed rate of excise duty and cess is also leviable.
· Education Cess on excisable goods is levied in addition to any other duties of excise chargeable on such goods, under the Central Excise Act, 1944 or any other law for the time being in force.
4. MODVAT and CENVAT:
Taxation of inputs, like raw materials, components and other intermediaries has a number of limitations. In production process, raw material passes through various processes stages till a final product emerges. Thus, output of the first manufacturer becomes input for second manufacturer and so on. When the inputs are used in the manufacture of product `A', the cost of the final product increases not only on account of the cost of the inputs, but also on account of the duty paid on such inputs. As the duty on the final product is on ad valorem basis and the final cost of product `A' includes the cost of inputs, inclusive of the duty paid, duty charged on product `A' meant doubly taxing raw materials. In other words, the tax burden goes on increasing as raw material and final product passes from one stage to other because, each subsequent purchaser has to pay tax again and again on the material which has already suffered tax. This is called cascading effect or double taxation.
This very often distorted the production structure and did not allow the correct assessment of the tax incidence. Therefore, the Government tried to remove these defects of the Central Excise System by progressively relieving inputs from excise and countervailing duties. An ideal system to realize this objective would have been to adopt value added taxation (VAT). However, on account of some practical difficulties it was not possible to fully adopt the value added taxation.
Hence, Government evolved a new scheme, `MODVAT' (Modified Value Added Tax). MODVAT Scheme which essentially follows VAT Scheme of taxation. i.e. if a manufacturer A purchases certain components(raw materials) from another manufacturer B for use in its product. B would have paid excise duty on components manufactured by it and would have recovered that excise duty in its sales price from A. Now, A has to pay excise duty on product manufactured by it as well as bear the excise duty paid by the supplier of raw material B. Under the MODVAT scheme, an Original Equipment Manufacturer can take credit of excise duty paid by First Tier and Second Tier suppliers. It amounts to excise duty only on additions in value by each manufacturer at each stage.
MODVAT Scheme ensures the revenue of the same order and at same time the price of the final product could be lower. Apart from reducing the costs through elimination of cascade effect, and bringing in greater rationalization in tax structure and also bringing in certainty in the amount of tax leviable on the final product, this scheme will help the consumer to understand precisely the impact of taxation on the cost of any product.
Subsequently, MODVAT scheme was restructured into CENVAT (Central Value Added Tax) scheme. A new set of rules 57AA to 57AK , under The CENVAT Credit Rules, 2004, were framed and whatever restrictions were there in MODVAT Scheme were put to an end and comparatively, a free hand was given to the assesses.
Under the CENVAT Scheme, a manufacturer of final product or provider of taxable service shall be allowed to take credit of duty of excise as well as of service tax paid on any input received in the factory or any input service received by manufacturer of final product. Inputs include goods used in the manufacture of capital goods which are further used in the factory of the manufacturer.
5. Customs Duty:
Customs Duty (Import duty and Export tax) is a type of indirect tax levied on goods imported into India as well as on goods exported from India India India
Export duties are levied occasionally to mop up excess profitability in international prices of goods in respect of which domestic prices may be low at the given time. But the sweep of import duties is quite wide.
6. Service Tax:
Service tax is a tax levied on services rendered by a person and the responsibility of payment of the tax is cast on the service provider. It is an indirect tax as it can be recovered from the service receiver by the service provider in course of his business transactions. Service Tax was introduced in India India
7. Industry Assistance:
The automobile industry has a defined its target in the Automotive Mission Plan as “To emerge as the destination of choice in the world for design and manufacture of automobiles with output reaching a level of USD 145 billion accounting more than 10% of GDP and providing additional employment to 25 million people by 2016”. In order to achieve this plan interventions are required from both Industry and Indian Government. The Indian Government would play a key enabling role in facilitating infrastructure creation, promote the country’s capabilities, create a favorable and predictable business environment, attract investment and promote research & development. The role of Industry will primarily be in designing and manufacturing products of world-class quality standards, establishing cost competitiveness, improving productivity of both labour and capital, achieving scale and R&D enhancing capability and showcasing India
In order to achieve these goals the following key recommendations have been made in the Automotive Mission Plan to the Indian Government and Industry:
Manufacturing and export of small cars, multi-utility vehicles, two and three wheelers, tractors, components to be promoted Care to be taken of negative like and rules of the country with current negotiation of Free Trade Agreement and Regional Trade agreement with countries like Thailand, Singapore, Malaysia, China, Korea, Egypt, Gulf etc. Attractive Tariff Policy which may follow attractive investment. Specific measures will be taken for expansion of domestic market:
· Incremental investment of USD 35 to 40 billion to Automotive Industry during the next 10 years.
· National Road Safety Board to act as the coordinating body for promoting safety.
· Inspection and Certification system to be strengthened by encouraging public-private partnership.
· National level Automotive Institute for training on automobile at International Training Institutes (ITI) and Automotive Training Institute (ATI) to be set up.
National Automotive Testing and R&D Implementation Project (NATRIP) to act as Centre of Excellence for Technical Design Data:
· Integration of Information Technology in manufacturing to be promoted.
· Research & Development for product, process and technology to be incentivized.
· Road Map for Auto Fuel Policy beyond 2010 would be drawn.
The profitability of motor vehicle manufacturers has been rising over the past five years, mainly due to rising demand and growth of Indian middle class. Major players of the industry, like Maruti Suzuki India
Cost of material has reduced from over 85% in the year 2001-2002 to fewer than 80% in the year2008-2009. Wages and salary as a percentage of revenue has been declining and with the increasing labour productivity this is expected to decline further in the coming years.
8. Capital and Labour Intensity:
The level of Capital Intensity is high where as the level of Labour intensity in medium.
The motor vehicle manufacturing industry requires significant level of capital investment. Value is added through the automated manufacturing and assembly of costly components. Labour input is required in the manufacturing, assembly, and finishing processes. In order to achieve and retain competitiveness, vehicle manufacturing industry depends on its capacity and speed to innovate and upgrade. The most imperative indices for competitiveness in the industry are productivity in both labour and capital.
9. Technology and Systems:
The level of technology change is high. The rate of change in technology is medium
Investment in technology by producers has been on the rise. The automobile industry in India
Multi Point Fuel injection (MPFI)
The fuel injects were used to meet stricter emission norms as it keeps pollutants to bare minimum and drives the maximum performance out of a vehicle by squeezing out the maximum mileage even from the last drop of fuel that goes into the engine.
MPFI system injects fuel into individual cylinders after receiving command from the on board engine management system computer or Engine Control Unit (ECU).
This technology results in superior fuel combustion, better fuel management, engine performance and reduced pollution. To get the maximum out from these types of engine one should use Premium petrol like XTRA Premium, Speed, and Power.
Common Rail Direct Injection (CRDI)–
CRDI engine cars offer 25% more power than the normal direct injection engine with a superior pickup and torque, offering sometimes up to 70% more power than the conventional diesel engines.
They are smooth, less strident, and immensely fuel efficient giving around 24 kilometers to a litre of Diesel. The fact that Diesel is cheaper than petrol in India
The high pressure in the common rail ensures that when injected, the fuel breaks up into small particles and mixes evenly with the air, thereby leaving little un-burnt fuel thus reducing pollution. The common rail principle has been used to reduce the noise which used to be a downside with earlier Diesel engines; the technology has been pioneered by the Fiat group, only to be adopted by other automobile companies around the world.
However, these engines are 25% more costly than the conventional engines. They also require higher degree of maintenance and spares are also expensive.
The Indian automotive industry is in the mindset of a major structural transformation in today’s globalised scenario. “System Supplies” of integrated components and sub-systems has become the order of the day, with individual small components being supplied to the system integrators instead of vehicle manufacturers. In this process most of the Small Scale Industrial units, manufacturing smaller individual components, have become tier 2 and tier 3 suppliers, while the large companies including most Multi National Companies are being transformed into tier 1 company who purchase from tier 2 and tier 3, and sell to the auto manufacturers.
Investment in new technology such as supply-chain management and collaborative forecasting (where members of the supply chain share forecasting data to reduce bottlenecks) will help make industry more competitive.
10. Industry Volatility:
The level of volatility is medium. Over the past few years, the Motor Vehicle Manufacturing industry has become more volatile. This has been the result of fluctuations in metal prices and fuel prices, as well as changes in legislation and assistance packages. India India
