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The Car Pricing Puzzle

Are auto firms justified in raising prices of cars despite a record fall in commodity prices?

At least five auto companies in India, including market leader Maruti Suzuki, have raised prices of cars in the first fortnight of 2016, in what has become an almost annual ritual. Carmakers routinely threaten to raise prices in December and, more often than not, follow up on the threat every New Year in the hope that consumers, lured by heavy discounts, would flock to the showrooms and help clear the inventories.

Yet, the price hikes by Toyota, Honda, Tata Motors and Skoda, besides Maruti, come in the backdrop of a record decline in prices of commodities such as steel, iron, alumimium and rubber. The fall in prices of steel and iron is of particular relevance as they account for over 80 per cent of the cost of building a car. "In January, the price increase is more to create an opportunity to clear stocks," says Wilfried Aulbur, Managing Partner at consultancy firm Roland Berger India. "The increase is often more for new launches that are accepted well. Older cars carry hefty discounts so the actual impact on the consumer is not much."

Another factor that impacts the pricing of cars is rupee depreciation. In the past one year, the Indian currency has depreciated around 10 per cent against the US dollar and a shade under 12 per cent against the yen, making imports expensive. However, in most cars today, imported parts comprise less than 20 per cent of the components used. "The recent price hike, which is the lowest in a decade, was an impact of macro-economic factors, such as a weak rupee and increase in input costs, including electricity, wages, direct and indirect cost, etc.," says a Tata Motors spokesperson, adding: "While some product prices may have increased up to `20,000, in others there was little difference. Prices of small commercial vehicles and pick-ups were not hiked."

Unlike in January 2015, when prices went up due to the withdrawal of concessional excise duties by the Centre, there may have been a case for reducing the prices this year. "The Indian consumer wants a good bargain and discounts are no longer seasonal. A buyer will not visit a showroom if he does not get a discount," says a Maruti dealer. "Maruti Suzuki's operating margin is at a healthy 17 per cent-plus. It is higher than the 15.1 per cent the company had posted in 2014/15. This price increase will only add to their bottom line."

Not every car company in India, however, is as profitable. Tata Motors, for instance, has a much lower operating margin (6.68 per cent) and, in fact, incurred a loss in the July-September 2015 quarter. General Motors and Ford India are also not making profits as far as the domestic maket is concerned, according to industry sources. GM posted a net loss of `1,033.39 crore last fiscal. "In some cases, manufacturers actually incur a loss due to stiff competition or to gain market share," says Jagdish Khattar, Founder, Carnation Auto, and the former managing director of Maruti Udyog, adding: "For some, a price increase is more of a necessity than others."