SAMURAIS WALK OUT ON INDIA, INC.

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If you are still trying to figure out what's wrong with the world's second-largest consumer electronics maker, Sony - which has decided to review manufacturing in India at a time when other MNCs are talking expansion - here's the bigger picture.

Japanese consumer electronics giants have been bidding sayonara to production in India in the recent past, with big names like Daikin, Hitachi, Matsushita and now Sony, either trimming or stopping manufacturing operations in India in lieu of imports or local sourcing.

First, it was airconditioner-maker Daikin which stopped manufacturing. This was followed by Hitachi, which consolidated its manufacturing operations by shutting down one plant out of two and shifted part-production to an OEM supplier.

Over a period, Matsushita Electric (Panasonic) has also gradually cut down production in India, with the most recent being its decision to discontinue production of audio products.

Further, a Japanese company was recently negotiating with a local colour television giant to sell its production unit, but talks have failed.

If the Samurais are marching out, experts term this as strategic consolidation by these companies, keeping in mind that in the long-term imports will be cheaper, especially after the proposed free trade agreement (FTA) with Thailand becomes operational.

A Sony India insider explains that with huge installed capacities in Thailand, imports to India have a cost advantage and look more viable in the next two years.

Says an official of the Consumer Electronics and TV Manufactures' Association (Cetma): "The cost differential for inputs in CTVs between Thailand and India is already 7% as Thailand offers duty exemptions on picture tubes and other inputs.

The problem in the import route could be to do with logistics - shipments via sea will take over a week. If inventory is high, it will result in huge warehousing costs." But due to low volumes, managing this problem may not be a difficult task.

As against Thailand, Japanese electronics companies have invested a pittance in India, which reflects in the low existing production capacity. For instance, Sony has invested just Rs 80 crore in total, till date in its Dharuhera factory in Haryana.

The low investment statistics follow the marginal presence of Japanese brands in the Indian durables market. This has been due to the resilience of the Indian brands to the MNC influx, along with turbo-charged competition from the Koreans.

That left the Japanese firms with two options - cut production costs (which is becoming more difficult due to low scale of manufacturing) or look for a cheaper sourcing hub. Talks of an FTA with Thailand has, therefore, come as a blessing.

Incidentally, Thailand has emerged as one of the biggest production bases for Japanese companies in the world, along with China.

The impact of the impending Indo-Thai FTA can be gauged from an internal assessment by LG Electronics India showing that by '06, over half its local production will have to be sourced from excise-free zones (EFZs) for it to become cost-competitive against imports from Thailand.

Already, companies have started shifting production units to states like Jammu & Kashmir, Himachal Pradesh, Uttaranchal and in locations like Kutch in Gujarat, which are offering duty exemptions for long periods.

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