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Automakers’ New Year gift: Price rise!

Automakers’ New Year gift: Price rise!


The Indian auto industry or a good number of automakers at least, have announced that they are increasing the prices of vehicles they sell, effective January 2013. A wag may well describe this as a New Year gift, but the truth is auto buyers will have to shell out more money to buy the vehicle of their choice. While companies like Maruti Suzuki, Mercedes Benz, Nissan, Mahindra & Mahindra, and others have announced the price rise effective January 1, 2013, across the last two months of 2012, the move is reminiscent of a similar exercise last year, with higher prices from January 1, 2012. The reasons behind the 2012 price hike were rising input costs, and higher interest rates. The fluctuation of currency did not make it to the list then. Now it has. If the fluctuation in currency had a strong effect on the operating margins of automakers in 2012, it is Maruti Suzuki, which was among the early birds to announce a price hike across the board. The statement issued by the company mentions that the increase would be to the tune of Rs 20,000, effective January 1, 2013.


The price rise announcement by Mahindra is expected to be in the region of 1 to 2.5%. Mercedes Benz, despite announcing the price hike, has not divulged the quantum of increase. Expected to be across the range of automobiles it sells in India, locally made and CBU imports, according to Eberhard Kern, Managing Director & CEO, Mercedes-Benz India, the price rise was dictated by a significant level of cost escalations, much of which was absorbed by the company until now. Mr Kern added, “Beyond a point we cannot continue to sustain. We have made substantial investment in our India operations and are responsible for the growth of our employees and dealer partners. We aim for a sustainable profitable growth maintaining our premium appeal and hence, we are going to substantially increase the prices of all Mercedes-Benz cars from January 2013.”


The price rise by most automakers is influenced by the turbulent year that was 2012. Interest rates continued to be high. Automakers like Maruti Suzuki had to face intense labour issues, which affected its profitability. To keep the interest from vanning most automakers chose to launch new models, or at least face lifts. This had a considerable effect on costs, not just at the automakers, but also at the vendor level.

If the sales picked up momentum during the festive season, the end of 2012 brought about the additional pressure of clearing the stocks for the year. Hence the mid-night sales, or December 2012 offers. This, in addition to the high discounts already offered to keep the momentum from going down. With the situation in the export markets of Europe showing some signs of revival lately, leading to a slight increase in exports, automakers like Maruti Suzuki, which sells a variety of models ranging from the small M800 to the Kizashi CBU import, in the second quarter of the current financial (FY12-13) year posted a 5.41% fall in net profit at Rs 227.45 crore. If this reflects the labour problem at the company’s Manesar plant as mentioned above, and low sales and currency fluctuation, the company, due to adverse foreign exchange movement had an overall impact of Rs350 crore during the July-September period in 2012.

For the month of November 2012, Maruti Suzuki reported 12.45% increase in its total sales at 1,03,200 units. The domestic sales of the company grew by 9.67% to 90,882 units compared to 82,870 units in the year-ago month.


Having announced a 1 to 3% increase in prices, General Motors, working towards launching new cars during the year ahead, some of which are expected drive out from its plants in China, has reasoned that it was forced to increase the prices to offset the losses emerging from rising input costs and rupee fluctuations. Looking at the industry initiatives, the increase in price by almost all the automakers is dictated by the economic slowdown at one end, and rising input costs at the other. According to an auto analyst, rupee fluctuation in the recent times has exerted much pressure on the operating margins of auto makers. Combine this with slowing sales, and the picture is clearly not very rosy. He draws attention towards what he terms as a dull time.

The dull period, he claims, will continue until March 2013, when the budget would be announced. Post the announcement of budget, which is expected to be a populist budget with measures to instil enthusiasm back into the manufacturing sector, the auto industry in India will see strong growth returning. Considering the current situation, it is not surprising to have Audi India’s head, Michael Perschke mention that the overall market scenario is challenging.

He is also known to have remarked that the rise in input cost, depreciating rupee as well as continuous increase in fuel prices have made his company re-evaluate the pricing strategy of their products in India, and increase them. So, it is not just Mercedes Benz, but Audi too, which has increased the prices of its models, effective January 2013. Interestingly, the year 2013 looks set to be a mixed bag for the Indian auto industry. Growth is expected to return to this industry sooner than later; perhaps in the later part of this financial year. As of now the challenge is to keep costs down, and sustain. There is a sense of overall slowdown in economy. If the slowdown has bottomed out, there’s no way of knowing. Much would also depend on the budget due in another two months, and the elections that are due next year. The year 2013 is set to be an interesting year for the Indian auto industry nevertheless. And the interesting part begins with the price hike!

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