Executive Summary The selected topic for thisreport is: The international businesslinks between Sri Lanka and USA. Thediscussion will be thoroughly based on the USA – Sri Lanka business relationsand how the Sri Lankan business community is extending a link to the countryand the impact of this relationship.This report explains about the internationaltrade relationship between Sri Lanka and USA within the automotive industry.Therefore, certain areas those affect the industry when importing automobilesto Sri Lanka are described in this report in detail.
The key areas are:· Thelegal political environment· Thefinancial climate· Themanagerial and labor environment· Theregulatory environment · Keyplayers within the industry· KeyConsumers· Keyinternational Competitors Finally, recommendations andsuggestions are given with regards to how these investment ties can be furtherstrengthened and used in order to gain benefits for both countries. IntroductionInternational business refers totransactions that are devised and carried out across national borders tosatisfy the objectives of individuals, companies, and organizations. (Czinkota& Ronkainen, 2002) This process involves the activities of private andpublic enterprises’ movements with countries around the globe in terms ofgoods, services, resources, knowledge or skills. (Dlabay & Scott, 2008) Itcan also be said in simply that it is the activities carried out between oracross national borders of countries. Or it can also be explained as the globalbusiness international trade and foreign trade taking place between countries.International trade did not takeplace as much as it has been developed as now throughout the world, during thepast era of business. Before, people produced goods and services by themselvesto satisfy their needs and wants.
But as time changed people’s needs and wantsbegan to change and it became impossible for people to simply make their owngoods due to lack of resources. Hence, international business wasfounded. Through International Business, people got the opportunity to satisfytheir needs as well as exceed expectations and look for even more options thanthey originally needed. Many counties took this as an opportunity to producegoods they are available of and to do trade among countries. Background– International Business between the USA and Sri LankaImportance of the US as a trading PartnerThe US continues to be the singlelargest export destination for Sri Lankan products with over 20% of itsexports. Sri Lanka’s exports to the US demonstrated an impressive growth of 31%in 2016 compared to 2011 (Source: Embassy of Sri Lanka, Washington D.C). Total Imports to Sri Lanka in2016 was US $ 540 million, while total trade turnover between Sri Lanka and theUS remained at all-time high of US $ 3.
35 billion. The balance of trade is inSri Lanka’s favour amounting to US $ 2.2 billion.In 2016, Sri Lanka GDP was anestimated $82.
2 billion (current market exchange rates); real GDP was up by anestimated 5.0%; and the population was 21 million. (Source: IMF)ExportsSri Lanka was the United States’102nd largest goods export market in 2016. U.S. goods exports to Sri Lanka in2016 were $369 million, up 1.9% ($7 million) from 2015 and up 55.
9% from 2006.The top export categories (2-digit HS) in 2016 were: machinery ($46 million),food waste, animal feed ($44 million), optical and medical instruments ($27million), electrical machinery ($24 million), and plastics ($23 million). U.S.total exports of agricultural products to Sri Lanka totaled $118 million in2016. Leading domestic export categories include: soybean meal ($59 million),dairy products ($12 million), wheat ($12 million), fresh fruit ($5 million),and planting seeds ($4 million).
(Source: Embassy of Sri Lanka, Washington DC) ImportsSri Lanka was the United States’62nd largest supplier of goods imports in 2016. U.S. goods imports from Sri Lankatotaled $2.8 billion in 2016, down 3.6% ($103 million) from 2015, but up 29.9%from 2006.
The top import categories (2-digit HS) in 2016 were: knit apparel($1.1 billion), woven apparel ($869 million), rubber ($247 million), preciousmetal and stone (other stones not strung) ($89 million), and coffee, tea &spice (tea) ($65 million). U.S. total imports of agricultural products from SriLanka totaled $170 million in 2016. Leading categories include: tea, incl herb($38 million), tropical oils ($32 million), spices ($29 million), tree nuts($19 million), and essential oils ($13 million). (Source: Embassy of Sri Lanka,Washington DC) Trade BalanceThe U.
S. goods trade deficit withSri Lanka was $2.4 billion in 2016, a 4.3% decrease ($110 million) over 2015.InvestmentU.S. foreign direct investment(FDI) in Sri Lanka (stock) was $111 million in 2015 (latest data available),unchanged from 2014.
There is no information on the distribution of U.S. FDI inSri Lanka.Sri Lanka’s FDI in the UnitedStates (stock) was $57 million in 2015 (latest data available), up 35.7% from2014. The distribution of Sri Lanka’s FDI in the United States is notavailable. Source: Embassy of Sri Lanka, Washington DC The Automobile Industry “The automotive industry includes industriesassociated with the production, wholesaling, retailing, and maintenance ofmotor vehicles.
This industry is not formally defined in the North AmericanIndustry Classification System (NAICS), but the Bureau of Labor Statistics isreferring to a group of detailed industries as the “automotiveindustry” for purposes of analysis”. (Source: Bureau of LabourStattistics)Global TrendsAccording toanalysts, the world market for cars and other light vehicles will expand fromthe current rate of 80 million units a year to well over 100 million by 2020, showinga massive growth potential of emerging economies. According to currentestimations, the global automotive industry is worth US $ 800 billion.
Theglobal automotive industry is currently witnessing a widespread adoption ofadvanced technologies to increase fuel efficiency, reduce emission levels andto enhance the driving dynamics of the vehicle while at the same timeincreasing in sustainability of the vehicles (Source: Sathosa Motors PLC,Annual Report)Emergingmarkets’ share of global sales will rise from 50% in 2012 to 60% by 2020, whiletheir share of global profits is also set to rise by 10%. When it comes to newcars, purchase intent is strongest in Asia, where 65% of respondents say theywill buy new cars in the next two years, compared with 7% who plan to buy usedcars ( Source : The Booming Automotive Industry in Emerging Markets, Carmudi,2014) Local TrendsThe year of 2015was a promising one for Sri Lanka’s motor vehicle industry because with the relaxationof import duties and tariff a doorway for a notably higher number of vehicleimports to enter the country was opened as opposed to other years. Sri Lanka’svehicle imports have increased more than 60% to Rs. 288bn during 2015 comparedto 2014 according to research done by the EIU. In terms of vehicles, imports ofpassenger vehicles have increased by 88% while imports of goods transport typevehicles have increased by 79%. Imports of auto trishaws have increased by 66%and imports motor cycles have increased by 11% in 2015 compared to a yearearlier.
Source: Carmudi Sri Lanka But with the changes in duty rates in 2016, the vehicle market of SriLanka was in a very aggressive situation. By January 2016, vehicleregistrations recorded a sharp drop of 34% year-on-year and 41% month-on-month.This slowdown was impacted by the imposition by the Central Bank of a maximum70% Loan-to-Value (LTV) ratio for loans and advances in respect of motorvehicle financing, the depreciation of the Rupee during latter half of 2015,and increases in motor vehicle import tariffs introduced in Budget 2016announced in November (Source: EIU Data Brief on Vehicle Imports of Sri Lanka). “The Automobile trade in Sri Lanka is facingextreme difficulties due to the recent regulations introduced by thegovernment” said the former chairman of the Ceylon Motor TradersAssociation (CMTA) Gihan Pilapitiya. The overall showroom traffic had droppedmore than 40% and even most of these customers who walk in, go away withoutpurchasing due to high pricing. In some cases certain vehicle showrooms have nocustomer visits at all in a day” he said. By 2017, thenumber of vehicle registrations has dropped by nearly 45,000 (Source: HiruNews).
The commissioner General of Registration of Motor Vehicles, JagathChnadrasiri said that the vehicle registrations for the year came to a close onthe (29th December, 2017) and in total 448,625 vehicles has beenregistered in the year of 2017 out of which 70% was motor cycles.Optimistically, there has been an increase in the exchange of registeredvehicles. The key change in the Budget of 2018 is that the motor vehicle dutyis no longer calculated on values, but on the cubic capacity (cc) of theengine, be it petrol, diesel or hybrid, and the kilo watt (KW) output of theelectric motor for an electric vehicle (EV) (Source: Daily News). With theproposed duty changes the Government of Sri Lanka seems to wish to achieve thefollowing goals within the automotive industry.· Create transparency and a level playing fieldfor the various segments of the industry· Maximise revenue and minimize leakages· Limit outflow of foreign exchange on the importof motor vehicles· Set direction to the industry· Encouragefuel efficiency via encouraging import of hybrids(Source: DailyNews) Legal and PoliticalEnvironmentThe legal and politicalenvironment of the automotive industry is very subjective and dynamic. With the most recent budget proposal there were a few significantchanges to this industry locally such as follows (Source: Auto Lanka) · By the year 2040, all vehicles in Sri Lanka willbe powered by renewable energy.· By the year 2025, all Government vehicles willbe either Electric or Hybrid.
· Import tax for electric vehicles will be reducedby Rs 1 million· Rs 2.5 million import tax on luxury vehicles· Luxury tax on all super luxury vehicles· Rs 50,000 tax increase on importingthree-wheelers· Youth who already own three-wheelers will beprovided with an opportunity to sell them to countries such as Bangladesh.· Importing vehicles without airbags will beprohibited in the future. As can be evident, the budget2018 has rationalized the import taxes on vehicles powered by fossil fuel withthe new formula for import taxes being calculated based on engine capacity, tominimize revenue leakages. This system seems more equitable to all segments ofthe industry, especially the customer since this method is more transparent andeasy to administer. Merenchige, a representative ofthe views of reconditioned vehicle dealers in the country, noted that the onlyissue is the imposition of duty on hybrid vehicles with engine sizes between1,300cc and 1,500cc (Source: Sunday Observer, 2017) Reeza Rauf, Chairman, CeylonMotor Traders’ Association (CMTA) representing brand new vehicle dealers said, “While there is no change in cars below 1000cc, the introduction of the smaller gap between the engine capacity and unitrate tax will push up the prices for petrol cars”. (Source: SundayObserver, 2017) Additionally some of the otherpolitical factors that affect the automotive industry are · Inconsistent policies and decision making proceduresof the new government.
· Unpredictable fiscal policies· Provision of necessary infrastructure facilitiesand maintain favourable monetary policies.· Provisions for enhancing the tourism sectorWhile the effort taken to takethe local automobile industry to the next level is commendable, it is importantthat the authorities take into consideration the optimal rates of taxes whichwould not decrease the demand for motor vehicles while at the same time meetpublic policy needs in terms of vehicle congestion on roads and pressure onBalance of Payments. The Financial ClimateGlobally, the US auto industryhad a record-breaking 2015, selling 17.5 million new cars and trucks. Thisshows that nearly every carmaker is barely making profits (Source: BusinessInsider). The US automotive industry is having trouble with competition andcapital spending with the efforts to compete with Japanese automakers and meetgovernment control and safety and especially with the trump regime, the economyand situation within the country is very tense and difficult (Source: TheNational Academic Press). Approximately, America’s exports to SriLanka amounted to $540 million or 2.8% of its overall imports annually.
The domestic automotive industryis established and very cyclic; the peaks and falls in vehicle demandessentially equivalent to the economic activity within the country. The demand for vehicles is one ofthe key factors that determine the profitability of this market. Additionally,the different array of vehicles such as cars, trucks, SUV’s etc., influencesthe profit margins.
Vehicle financing is a majorbusiness in Sri Lanka as the majority of new and used vehicle registrations aresupported by leases or loans. As a result, most insurance companies reportmotor insurance and leasing as a lucrative segment of their business lines. Buta higher debt to equity ratio has resulted in motor vehicle buyers bearing alarger percentage of the cost of a vehicle, which has disappointed prospectivecustomers. In the month of August 2015, 68% of new cars, 64% of used cars, 57percent of two-wheelers and nearly 92% of three-wheelers were financed (Source:LMD.lk) There are many things to considerand very little grants and concessions by the government when importingautomobiles to the country and even then, these grants and concessions areapplicable only for exports. The managerial and labour EnvironmentThe modern industry of automobility is all about technology.
From gadgets in the car to apps used to findlast minute rides to production lines that fork out automobiles. The higher and more advanced thetechnology becomes, there’s more automation within the industry and this inturn means that auto makers and organizations will require fewer workers (withrelatively low labor costs). But, this does not necessarily mean there is adecrease in manual labour per se as the workforce needs are increasinglytech-focused—a trend will accelerate with the rise of driverless cars andtrucks.According to research carried outdone by ‘Economic Modeling’ in 2017 (data taken from period on January 2016 toJanuary 2017), the most common skills and job titles asked for in job postingsfrom 11 major auto makers showed the following results. Source: Economic Modeling According to labour, shop andoffice act No. 8 of 1978 is in force relating to the employees of automotivecompanies which is common to other companies as well. The Regulatory EnvironmentRegulations are a major factorthat affects the profitability and performance of the vehicle brands. Vehiclesselling in the international market are subject to laws related to productquality and safety.
The pollution laws have grown stricter. The vehicles beingexported overseas have to pass strict emission controls. Next are the lawsrelated to product safety that has an important impact on the sales of thevehicles. Recently, Toyota had to recall its vehicles because of its faultyairbags. There have been similar cases in the past putting passenger safetyunder question.
Due to such accidents, governments have made laws related topassenger safety stricter. Apart from it, there are environmental laws, taxlaws and several other laws that the vehicle companies have to deal with whileoperating in the international market. Key Players within the industrya) KeyInternational CompetitorsThe Global car market share ofthe world’s largest automobile OEMs in 2016 are shown below.
This statisticgives a ranking of the world’s leading car manufacturers in 2016, based onrevenue. Source: Statista, 2017 b) Key local CompetitorsThe key competitors locally within the automotive industryare as follows· Toyota Lanka (Private) Limited· David Peiris Motor Company Limited · SML Frontier Automotive (Pvt) Ltd· United Motors Lanka PLC· DIMO Lanka Key ConsumersThe keyconsumers within this industry are as follows-General Public -Importers -Exporters-Government Critical thoughts and RecommendationsThe automobile industry in Sri Lanka is considered highlyvolatile and regulated. Since it is an oligopolistic market as well, there iscut-throat competition. Because this industry holds a very important rolewithin the country, there are many government interventions. Additionally, thereare many barriers to enter such a complex market due to reasons such as highcosts in investments, high risks, extremely high competition and strict andtough regulations by the government etc. Investors must be mindful when investing in such an industryas the recovery of investments will take a long period of time and gainingprofits will be difficult in the initial stages. Hence, if investing, investorsneed to have a proper, clear pointed out plan with a long-term view in mind.
Despite the drop in sales volumes,there’s optimism in the industry especially given the hope that a growingmiddle class with higher disposable incomes will drive consumption up. In mostcases, spending on a vehicle is seen as a smart investment and one of the firstpriorities for the upwardly mobile. However, the rise in duties and lack ofpurchasing power due to uncertain economic conditions has caused disappointmentamong some customers since owning a vehicle is a measure of social status(Source: LMD.lk).
“Themotor vehicle industry is fiercely contested and players are exploringinnovative methods to grab emerging opportunities while carving out uniqueniches for themselves. The growth avenues that most serious vehicle importersshould follow must be improved through after-sales service and by offeringbetter-quality facilities such as enhanced customer care and technicalexpertise”(Shungo Yoshioka, Managing Director, Toyota Lanka (Private) Limited).