Financial Times

Regnis threatened by FTA fridge tax breaks
Regnis, the Singer subsidiary that makes refrigerators, says it can expand production to meet rapidly rising demand but is constrained by the threat of cheap Indian imports that will come in duty free under the free trade deal.

The company is hoping the new government would make good its promise to protect local industry. "We want some protection for this industry to survive," said V.G.K. Vidyaratne, Regnis Factory Director. "Under the existing arrangement, the importer benefits while the manufacturer is penalised."

Regnis has to pay the highest levels of import tariff on raw materials - 33 percent for steel sheets and compressors - but must compete with imported Indian fridges that are taxed at only 19 percent, inclusive of the 10 percent surcharge.

Imports of finished refrigerators from other countries are taxed at 30 percent as were LG fridges shipped from India before the Free Trade Agreement. "That's why we protested against the lowering of import tariff under the FTA to 19 percent and its further reduction to zero duty in 2008. We asked the government not to lower it further," said Vidyaratne.

"If the import duty on finished goods is zero, how can local manufacturers compete?" Regnis had suggested the government classify refrigerators under the negative list in the FTA with India where no duty concessions are given, like other products like washing machines.

It had in fact been assured it would be so but the decision had been changed at the last moment. "Certainly we will expand if protection is assured or the duty on imported inputs is lowered," said Vidyaratne.

The company is thinking of hiring more staff as demand for fridges increase but feels constrained by the uncertainty over the import duty. Furthermore, being a manufacturer in a small country with a small consumer base has its own disadvantages. Regnis has to pay much more than its Indian competitors for key components such as compressors.

"We buy smaller volumes compared to Indian manufacturers who buy in larger volumes and get better prices. There's a huge price gap - about 15-20 percent," said Vidyaratne.

Regnis believes it is stable as long as it can compete in terms of costs given Singer's strong marketing arm and good distribution network and recognised brand. The company also keeps developing new models and introducing new features suitable for local conditions.

"We provide additional features ideally suited for local conditions," said Vidyaratne. For instance, some inner components are made of copper which, though being more costly than steel, are less susceptible to corrosion.

Regnis has also introduced specific features like a humidity controller from Japan that ensures uniform humidity levels, helpful in keeping stored fruits and vegetables fresh for longer periods, and a door alarm that alerts users if they keep the door open for too long.

Despite the competition from Indian imports, Regnis sales have grown sharply over the last two years, with a 40 percent growth between 2002 and 2003. Volumes have grown by 30 percent this year up to May. The company plans to make close to 40,000 units this year.

The market is expanding as living standards rise and more homes get electricity. However, Vidyaratne said sales could be growing because the overall market is expanding as the company's own market share has not expanded as strongly.

The total market is around 110,000 refrigerators a year and the market share of all refrigerators sold by Singer of various brands, including those it imports, is about 55 percent. Of this Regnis has about a 40 percent share, giving it an overall market share of around 25-30 percent.

The company was started in 1987 with an initial share capital of Rs 27 million. It is 49 percent owned by Singer and the rest by local shareholders. "Price-wise we are competitive and our quality is up to international standards," said Vidyaratne.

Regnis employs 250 people and has 40 sub-contractors who in turn employ a large number of people. The steel sheets, plastic pellets, compressors and thermostats are imported from Korea, India, Thailand and Taiwan. The local value addition consists of making the cabinet and painting it, high-pressure insulation and fixing the imported components.

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