New Delhi:
India witnessed the most frequent car price hikes this year attributed to alleged input cost increases. Yet, most of the automakers feel the cost impact was not fully passed on and very soon they might resort to another round of price increase. Most of the companies are readying for the fourth price hike of the year.
“We have not been able to pass on the complete cost pressure to the customers. There is a lag in the price increase. The way things are happening, we should expect more price increases in future,” Rajeev Chaba, President and Managing Director, MG Motor India, said at the ETAuto Connected Vehicle Virtual Summit 2021. According to sources the price hike may be applicable from the first week of January and that has been the tradition.
The current supply chain crisis will force the industry to move to a new bucket of strategies which will include creating an inventory model for some components and Just-in-Time for a few others.
“This will certainly have an impact on the cash flow and production cost of the business. But, we all know that there is a reality and sensitivity to the market as to how much can be passed on by price hike,” Veejay Nakra, CEO, automotive, Mahindra & Mahindra, said.
Vinod Aggarwal, MD & CEO, Volvo Eicher Commercial Vehicle, said the company used to think that if there was inflation it would have to be passed on as price hike. But that equation has gone totally. Now, there is no linkage between the cost increase and price increase. “Of course there is a need for price increase but how much we can make is not in our hands,” he added.
Justifying the impending price hike Nakara pointed out that there had been significant investment by the industry when it moved to BS-VI and now it is investing to meet BS-VI.2 or new CAFE norms. According to him the industry is carrying a lot of costs and the level of the industry is lower than what it was in 2019 for passenger vehicles, and for commercial vehicles and two-wheelers in 2015-16.
India adopted the CAFE norms for the first time on April 1, 2017. In Phase 1 (2017-2022), CAFE norms require average corporate CO2 emissions to be less than 130 gm/km by 2022. The Phase II of CAFE norms will be implemented from April 2022– this aims to reduce CO2 emission to 113 gm/km and could be further tightened to 108 or 104 gm/km.
“Manufacturers are increasing prices frequently and still they have not been able to pass on the cost pressure completely,” he added.
Carmakers fear that the overall inflation and the increase in fuel prices would make the passing on of the complete cost implication impossible.
Besides the technology cost, the automakers hold commodity prices responsible for the cost surge. Shashank Srivastava, Senior Executive Director, Sales & Marketing at Maruti Suzuki India, said, “We did not pass on the cost increase to the consumers as we did not want to compromise the sales recovery post recovery, and also we were hopeful that the material costs will soften. The softening has not happened and the commodity prices have been stubbornly high.”
Maruti Suzuki has announced three price hikes so far in 2021, in January, June, and September.
“They did not cover the increased costs and we hope there will be some softening of commodity prices. But certainly profitability will be under pressure. So we are monitoring the situation closely and will decide appropriately. We are walking the fine line between the topline and the bottomline,” Shashank said.
Maruti Suzuki India’s consolidated profit dipped 65.7% to INR 486.9 crore in Q2 FY22 from INR 1419.6 crore in the corresponding quarter the previous year.
There has been a steep increase in commodity prices like steel, copper, precious metals, aluminium etc. For example, steel prices increased from INR 38 a kg in March 2020 to about INR 70 a couple of months ago and copper from USD 5200 /tonne to USD 10300/tone. Rhodium went up more than 3 times in this period. Material costs are about 75%-80% of the OEM vehicle costs and this obviously has impacted profitability.
According to Tarun Garg, Hyundai Motor India Director (Sales, Marketing, Service), the auto industry is experiencing strong headwinds owing to rising material as well as other input costs.
“Also there is a global supply and procurement constraint for e- components. Hyundai Motor India is committed to offering the best price-value equation to its customers by absorbing the inflation impacts to the best of its capability. However, a price hike may become unavoidable if the challenges on this front continue. As of now we are closely watching the situation and will make a decision on price at the opportune time,” he said.
Price hike may become unavoidable if the challenges on this front continueTarun Garg, Hyundai Motor India Director (Sales, Marketing, Service)
“The interesting part is that there are some traders who deal in chips and we are dealing with them and we are paying multiples of premium and we are trying to find all possible ways to deal with the situation.” Rajeev Chaba concluded.
(The event is supported by Varroc Excellence, Tata Communications, Siemens and Hexagon.)
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