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After an august run two years ago followed by muted performance in the succeeding years car manufacturers are bracing up for a bitter period in the coming quarters challenged by reduced pricing power and scanty demand.
In all 4-5 increases in vehicle prices were carried out in the last calendar year by manufacturers on account of hike in input price, excise duty hike and negative currency fluctuations. In real terms, total hikes ranged between Rs 6,000 on small cars to nearly Rs 100,000 on luxury cars made in India.
However, with no revival in demand in sight for the next several months and the country's apex automobile body Society of India Automobile Manufacturers predicting a bleak outlook for the sector, manufacturers say they will be forced to digest most of the cost increase this coming year.
Karl Slym, managing director, Tata Motors, said, "Given a competitive segment there is price sensitivity included in that so many of the small to mid segments are competitive segment and price becomes a major player. However everybody has the same suppliers and commodities in general the pressure is felt by each one."
Costs which are unlinked from day-to-day manufacturing such taxes or government enforced costs will, however, be passed on to buyers. For instance, all car manufacturers will increase prices from April 1 to recover the additional costs related to On Board Diagnostics (OBD).
The current OBD will be replaced by OBD II in compliance with a government notification making it mandatory for vehicle makers to upgrade the system. An increase of 0.5-2 per cent could be made on cars and SUVs from next month. OBDs provide vehicle engine performance data, including the emission, fuel usage and other parameters vital for better maintenance of the vehicle.
P Balendran, vice president (corporate affairs), General Motors India, said, "Pressure will always be there so long as market remains sluggish. OEMs increase price only as last option and when bottomlines are hit."
In addition to the general inflation and costly finances, rising fuel prices are a major cause of concern for auto makers. Price sensitive segments such as the small car, mid-sized sedan segments, compact and mid-sized utility vehicles are the trigger areas, say manufacturers.
"Demand on the ground is considerably weaker than expected, and the OEMs are mitigating the risk through new product launches and measures to reduce costs. All OEMs expect volumes to pick up only in 2H FY14E (post October) and FY15, on the back of a recovery of GDP and lower interest rates and fuel prices in India", a Barclays report stated.
Discounts and consumer benefit schemes are failing to entice buyers into showrooms leading to build up of dealer inventory in turn resulting into massive production cuts of cars and SUVs by manufacturers.
Sales in passenger car segment declined by nearly five per cent during April-February this year to 1.71 million from 1.79 million sold in the same period last year. In February domestic car sales plunged to 12-year monthly low of 26 per cent at 158,513 units.
Sandeep Singh, deputy managing director and chief operating officer, Toyota Kirloskar Motors said, "I believe that the coming financial year is going to be much more challenging in terms of low customer demand because of declining GDP, low market sentiments, declining buying capacity and increasing price of automobiles in our country".
