Eroding Margins Mean Catch 22 For Automakers

BMI View : While some carmakers have begun to increase the prices of their cars to respond to higher import costs, we believe other firms will follow suit in a bid to protect their bottom line as the rise in average industry wholesale prices has lagged the general CPI increase since January 2011. However, this will only serve to further hurt weak consumer sentiment at a time when the industry is already suffering from anaemic demand. In our opinion, cost controls and a focus on exports will help to mitigate the woes of the sector.

We warned back in June that the weak Indian rupee will raise import costs for Indian automakers and suppliers alike ( see 'Passenger Vehicle Market Woes Threaten Supply Chain', June 19 and 'Exports Will Be Crucial For Maruti To Combat Weak Rupee', July 31), resulting in the erosion of the already thin margins of carmakers due to intense competition in the domestic market.

Indeed, General Motors Company (GM) together with the Germany luxury carmakers Mercedes-Benz, and BMW, recently announced price increases in the range of 1-5% for some of their car models. Besides the weak local currency making imports more expensive, premium brands have already had to grapple with the rise in luxury import taxes in the current fiscal year budget, which has put a strain on their bottom line since March ( see 'Budget Will Be No Saviour To Autos Sector', March 4).

More Upward Revisions In Vehicle Prices To Come
India - CPI and Auto Wholesales Price Index (2011=100)

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This article is tagged to:
Sector: Autos
Geography: India

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