Executive can also be explained as the global

Executive Summary

 

The selected topic for this
report is: The international business
links between Sri Lanka and USA.  The
discussion will be thoroughly based on the USA – Sri Lanka business relations
and how the Sri Lankan business community is extending a link to the country
and the impact of this relationship.

This report explains about the international
trade relationship between Sri Lanka and USA within the automotive industry.
Therefore, certain areas those affect the industry when importing automobiles
to Sri Lanka are described in this report in detail. The key areas are:

·        
The
legal political environment

·        
The
financial climate

·        
The
managerial and labor environment

·        
The
regulatory environment

·        
Key
players within the industry

·        
Key
Consumers

·        
Key
international Competitors

 

Finally, recommendations and
suggestions are given with regards to how these investment ties can be further
strengthened and used in order to gain benefits for both countries.

 

Introduction

International business refers to
transactions that are devised and carried out across national borders to
satisfy the objectives of individuals, companies, and organizations. (Czinkota
& Ronkainen, 2002) This process involves the activities of private and
public enterprises’ movements with countries around the globe in terms of
goods, services, resources, knowledge or skills. (Dlabay & Scott, 2008) It
can also be said in simply that it is the activities carried out between or
across national borders of countries. Or it can also be explained as the global
business international trade and foreign trade taking place between countries.

International trade did not take
place as much as it has been developed as now throughout the world, during the
past era of business. Before, people produced goods and services by themselves
to satisfy their needs and wants. But as time changed people’s needs and wants
began to change and it became impossible for people to simply make their own
goods due to lack of resources.

Hence, international business was
founded. Through International Business, people got the opportunity to satisfy
their needs as well as exceed expectations and look for even more options than
they originally needed. Many counties took this as an opportunity to produce
goods they are available of and to do trade among countries.

 

Background
– International Business between the USA and Sri Lanka

Importance of the US as a trading Partner

The US continues to be the single
largest export destination for Sri Lankan products with over 20% of its
exports. 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 in
2016 was US $ 540 million, while total trade turnover between Sri Lanka and the
US remained at all-time high of US $ 3.35 billion. The balance of trade is in
Sri Lanka’s favour amounting to US $ 2.2 billion.

In 2016, Sri Lanka GDP was an
estimated $82.2 billion (current market exchange rates); real GDP was up by an
estimated 5.0%; and the population was 21 million. (Source: IMF)

Exports

Sri Lanka was the United States’
102nd largest goods export market in 2016. U.S. goods exports to Sri Lanka in
2016 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 ($27
million), electrical machinery ($24 million), and plastics ($23 million). U.S.
total exports of agricultural products to Sri Lanka totaled $118 million in
2016. 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)

Imports

Sri Lanka was the United States’
62nd largest supplier of goods imports in 2016. U.S. goods imports from Sri Lanka
totaled $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), precious
metal and stone (other stones not strung) ($89 million), and coffee, tea &
spice (tea) ($65 million). U.S. total imports of agricultural products from Sri
Lanka 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 Balance

The U.S. goods trade deficit with
Sri Lanka was $2.4 billion in 2016, a 4.3% decrease ($110 million) over 2015.

Investment

U.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 in
Sri Lanka.

Sri Lanka’s FDI in the United
States (stock) was $57 million in 2015 (latest data available), up 35.7% from
2014. The distribution of Sri Lanka’s FDI in the United States is not
available.

 

 

Source: Embassy of
Sri Lanka, Washington DC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Automobile Industry

“The automotive industry includes industries
associated with the production, wholesaling, retailing, and maintenance of
motor vehicles. This industry is not formally defined in the North American
Industry Classification System (NAICS), but the Bureau of Labor Statistics is
referring to a group of detailed industries as the “automotive
industry” for purposes of analysis”. (Source: Bureau of Labour
Stattistics)

Global Trends

According to
analysts, the world market for cars and other light vehicles will expand from
the current rate of 80 million units a year to well over 100 million by 2020, showing
a massive growth potential of emerging economies. According to current
estimations, the global automotive industry is worth US $ 800 billion. The
global automotive industry is currently witnessing a widespread adoption of
advanced technologies to increase fuel efficiency, reduce emission levels and
to enhance the driving dynamics of the vehicle while at the same time
increasing in sustainability of the vehicles (Source: Sathosa Motors PLC,
Annual Report)

Emerging
markets’ share of global sales will rise from 50% in 2012 to 60% by 2020, while
their share of global profits is also set to rise by 10%. When it comes to new
cars, purchase intent is strongest in Asia, where 65% of respondents say they
will buy new cars in the next two years, compared with 7% who plan to buy used
cars ( Source : The Booming Automotive Industry in Emerging Markets, Carmudi,
2014)

Local Trends

The year of 2015
was a promising one for Sri Lanka’s motor vehicle industry because with the relaxation
of import duties and tariff a doorway for a notably higher number of vehicle
imports to enter the country was opened as opposed to other years. Sri Lanka’s
vehicle imports have increased more than 60% to Rs. 288bn during 2015 compared
to 2014 according to research done by the EIU. In terms of vehicles, imports of
passenger vehicles have increased by 88% while imports of goods transport type
vehicles 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 year
earlier.

Source: Carmudi Sri
Lanka

But with the changes in duty rates in 2016, the vehicle market of Sri
Lanka was in a very aggressive situation. By January 2016, vehicle
registrations 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 maximum
70% Loan-to-Value (LTV) ratio for loans and advances in respect of motor
vehicle financing, the depreciation of the Rupee during latter half of 2015,
and increases in motor vehicle import tariffs introduced in Budget 2016
announced in November (Source: EIU Data Brief on Vehicle Imports of Sri Lanka).
  “The Automobile trade in Sri Lanka is facing
extreme difficulties due to the recent regulations introduced by the
government” said the former chairman of the Ceylon Motor Traders
Association (CMTA) Gihan Pilapitiya. The overall showroom traffic had dropped
more than 40% and even most of these customers who walk in, go away without
purchasing due to high pricing. In some cases certain vehicle showrooms have no
customer visits at all in a day” he said.

By 2017, the
number of vehicle registrations has dropped by nearly 45,000 (Source: Hiru
News). The commissioner General of Registration of Motor Vehicles, Jagath
Chnadrasiri said that the vehicle registrations for the year came to a close on
the (29th December, 2017) and in total 448,625 vehicles has been
registered in the year of 2017 out of which 70% was motor cycles.
Optimistically, there has been an increase in the exchange of registered
vehicles.

The key change in the Budget of 2018 is that the motor vehicle duty
is no longer calculated on values, but on the cubic capacity (cc) of the
engine, be it petrol, diesel or hybrid, and the kilo watt (KW) output of the
electric motor for an electric vehicle (EV) (Source: Daily News). With the
proposed duty changes the Government of Sri Lanka seems to wish to achieve the
following goals within the automotive industry.

·        
Create transparency and a level playing field
for the various segments of the industry

·        
Maximise revenue and minimize leakages

·        
Limit outflow of foreign exchange on the import
of motor vehicles

·        
Set direction to the industry

·        
Encourage
fuel efficiency via encouraging import of hybrids

(Source: Daily
News)

 

 

 

 

 

 

 

 

 

 

 

Legal and Political
Environment

The legal and political
environment of the automotive industry is very subjective and dynamic.

With the most recent budget proposal there were a few significant
changes to this industry locally such as follows (Source: Auto Lanka)

·        
By the year 2040, all vehicles in Sri Lanka will
be powered by renewable energy.

·        
By the year 2025, all Government vehicles will
be either Electric or Hybrid.

·        
Import tax for electric vehicles will be reduced
by 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 importing
three-wheelers

·        
Youth who already own three-wheelers will be
provided with an opportunity to sell them to countries such as Bangladesh.

·        
Importing vehicles without airbags will be
prohibited in the future.

 

As can be evident, the budget
2018 has rationalized the import taxes on vehicles powered by fossil fuel with
the new formula for import taxes being calculated based on engine capacity, to
minimize revenue leakages. This system seems more equitable to all segments of
the industry, especially the customer since this method is more transparent and
easy to administer.

Merenchige, a representative of
the views of reconditioned vehicle dealers in the country, noted that the only
issue is the imposition of duty on hybrid vehicles with engine sizes between
1,300cc and 1,500cc (Source: Sunday Observer, 2017)

Reeza Rauf, Chairman, Ceylon
Motor Traders’ Association (CMTA) representing brand new vehicle dealers said, “While there is no change in cars below 1000
cc, the introduction of the smaller gap between the engine capacity and unit
rate tax will push up the prices for petrol cars”. (Source: Sunday
Observer, 2017)

Additionally some of the other
political factors that affect the automotive industry are

·        
Inconsistent policies and decision making procedures
of the new government.

·        
Unpredictable fiscal policies

·        
Provision of necessary infrastructure facilities
and maintain favourable monetary policies.

·        
Provisions for enhancing the tourism sector

While the effort taken to take
the local automobile industry to the next level is commendable, it is important
that the authorities take into consideration the optimal rates of taxes which
would not decrease the demand for motor vehicles while at the same time meet
public policy needs in terms of vehicle congestion on roads and pressure on
Balance of Payments.

The Financial Climate

Globally, the US auto industry
had a record-breaking 2015, selling 17.5 million new cars and trucks. This
shows that nearly every carmaker is barely making profits (Source: Business
Insider). The US automotive industry is having trouble with competition and
capital spending with the efforts to compete with Japanese automakers and meet
government control and safety and especially with the trump regime, the economy
and situation within the country is very tense and difficult (Source: The
National Academic Press).

Approximately, America’s exports to Sri
Lanka amounted to $540 million or 2.8% of its overall imports annually.

The domestic automotive industry
is established and very cyclic; the peaks and falls in vehicle demand
essentially equivalent to the economic activity within the country.

The demand for vehicles is one of
the key factors that determine the profitability of this market. Additionally,
the different array of vehicles such as cars, trucks, SUV’s etc., influences
the profit margins.

Vehicle financing is a major
business in Sri Lanka as the majority of new and used vehicle registrations are
supported by leases or loans. As a result, most insurance companies report
motor insurance and leasing as a lucrative segment of their business lines. But
a higher debt to equity ratio has resulted in motor vehicle buyers bearing a
larger percentage of the cost of a vehicle, which has disappointed prospective
customers. In the month of August 2015, 68% of new cars, 64% of used cars, 57
percent of two-wheelers and nearly 92% of three-wheelers were financed (Source:
LMD.lk)

There are many things to consider
and very little grants and concessions by the government when importing
automobiles to the country and even then, these grants and concessions are
applicable only for exports.

The managerial and labour Environment

The modern industry of auto
mobility is all about technology. From gadgets in the car to apps used to find
last minute rides to production lines that fork out automobiles.

The higher and more advanced the
technology becomes, there’s more automation within the industry and this in
turn means that auto makers and organizations will require fewer workers (with
relatively low labor costs). But, this does not necessarily mean there is a
decrease in manual labour per se as the workforce needs are increasingly
tech-focused—a trend will accelerate with the rise of driverless cars and
trucks.

According to research carried out
done by ‘Economic Modeling’ in 2017 (data taken from period on January 2016 to
January 2017), the most common skills and job titles asked for in job postings
from 11 major auto makers showed the following results.

Source: Economic
Modeling

 

 

 

 

 

 

 

 

According to labour, shop and
office act No. 8 of 1978 is in force relating to the employees of automotive
companies which is common to other companies as well.

 

The Regulatory Environment

Regulations are a major factor
that affects the profitability and performance of the vehicle brands. Vehicles
selling in the international market are subject to laws related to product
quality and safety. The pollution laws have grown stricter. The vehicles being
exported overseas have to pass strict emission controls. Next are the laws
related to product safety that has an important impact on the sales of the
vehicles. Recently, Toyota had to recall its vehicles because of its faulty
airbags. There have been similar cases in the past putting passenger safety
under question. Due to such accidents, governments have made laws related to
passenger safety stricter. Apart from it, there are environmental laws, tax
laws and several other laws that the vehicle companies have to deal with while
operating in the international market.

 

Key Players within the industry

a)     
Key
International Competitors

The Global car market share of
the world’s largest automobile OEMs in 2016 are shown below. This statistic
gives a ranking of the world’s leading car manufacturers in 2016, based on
revenue.

Source: Statista,
2017

b)     

Key local Competitors

The key competitors locally within the automotive industry
are as follows

·        
Toyota Lanka (Private) Limited

·        
David Peiris Motor Company Limited

·        
SML Frontier Automotive (Pvt) Ltd

·        
United Motors Lanka PLC

·        
DIMO Lanka

Key Consumers

The key
consumers within this industry are as follows

-General Public                

-Importers

-Exporters

-Government

Critical thoughts and Recommendations

The automobile industry in Sri Lanka is considered highly
volatile and regulated. Since it is an oligopolistic market as well, there is
cut-throat competition. Because this industry holds a very important role
within the country, there are many government interventions. Additionally, there
are many barriers to enter such a complex market due to reasons such as high
costs in investments, high risks, extremely high competition and strict and
tough regulations by the government etc.

 

Investors must be mindful when investing in such an industry
as the recovery of investments will take a long period of time and gaining
profits will be difficult in the initial stages. Hence, if investing, investors
need 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 growing
middle class with higher disposable incomes will drive consumption up. In most
cases, spending on a vehicle is seen as a smart investment and one of the first
priorities for the upwardly mobile. However, the rise in duties and lack of
purchasing power due to uncertain economic conditions has caused disappointment
among some customers since owning a vehicle is a measure of social status
(Source: LMD.lk).

 

“The
motor vehicle industry is fiercely contested and players are exploring
innovative methods to grab emerging opportunities while carving out unique
niches for themselves. The growth avenues that most serious vehicle importers
should follow must be improved through after-sales service and by offering
better-quality facilities such as enhanced customer care and technical
expertise”(Shungo Yoshioka, Managing Director, Toyota Lanka (Private) Limited)
.