The ANALyst

Leverage, optimise, synergise

Making Protectionism Work


With a consumer base of 300 million and growing, it is not a stretch to say that the Emerging Economy will be a major economic super power in the coming decades. 300 million affluent consumers with disposable income is a larger market than The Superpower. This is incentive enough for most major manufacturers and service providers to try to establish a presence here and reap the benefits of a massive and largely untapped market.

Hold that thought!

Growth in the EE only started accelerating in the 90s when economic reforms took place, thanks largely to the same person who is at the helm today (then in charge of the country’s purse). While the changes have been dramatic and far reaching, some of the draconian laws still remain. One protectionist law from the socialist era, however, is now doing the country more good than it has ever done before.

There is a law that in essence states, that car manufactures from overseas have to pay a tax of 150% on the base price of the vehicle. This tax is obviously passed on to the consumer, and as a result, the cost of foreign cars here would be more than double that elsewhere. Sounds protectionist? Definitely. Uncompetitive? Perhaps. Silly? Actually, no! Not, if you read the second part of the law – which states that the tax is waived if the cars are assembled and manufactured in the EE.

You see, the EE has already lost the “manufacturing-centre-of-the-world” to the Big Bully to the North East. So while, it can’t become a manufacturing centre for the world, it can ensure some jobs through manufacturing for the domestic market. And who with even half a brain is going to ignore 300mn consumers?

As a result of this law, most major car manufacturers from the Old World, the New World and that country that chases the Sun have setup manufacturing plants in the EE for the domestic market and are now competing with the local brands on an equal footing.

While this has obviously benefitted the everyday car manufacturers, the real jackpot has been hit by the luxury car makers. Luxury car makers set a mammoth price tag (relative to other countries) thanks to the tax law. But thanks to the EE’s large affluent class they were always able to sell a decent number of vehicles. Now, while they are assembling the cars at the EE at a much lower cost and not paying the tax, guess how much the prices of luxury cars have dropped? Zilch!!!

That’s right, the prices are still where they were. But thanks to the upwardly mobile population and a desire for the nouveau riche too flaunt their gains, the luxury car makers are prospering more and more.

We usually frown at protectionist policies, but here’s one law that finally seems to be working.

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January 29, 2010 - Posted by | Emerging Economy

1 Comment »

  1. and the good this makes to the other industries such as auto component manufacturers.

    Comment by afan | January 30, 2010 | Reply


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