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)

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).

Firms Have Been Largely Absorbing Cost Increases Thus Far

The accompanying chart is an interesting comparison of the combined consumer price index (CPI) and the auto wholesale price index since January 2011. The upward move in the combined CPI index can be taken as a proxy for the increase in costs, which manufacturers have had to bear over this period. While the CPI has surged by roughly 25% since January 2011, average auto wholesale prices have only risen by 10% in the same period. The large percentage jump in the CPI has been due to rising labour and raw material costs for manufacturers, and the much smaller increase in vehicle prices has been due to the reluctance of original equipment manufacturers to hike prices in the face of a poor economic outlook.

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

The widening gap between the two indices is evidence of the erosion in margins which automakers are experiencing. Additionally, we believe the weak rupee will create strong upward pressure on the combined CPI level in the coming months as the high cost of oil imports (something which India is heavily reliant on) and other essentials begins to filter into the general price level of the country. We then expect other firms to also raise their prices, as there is a limit to how many raw material price increases manufacturers can absorb.

However, while automakers mull further price hikes in the coming months, they face the dilemma of protecting their bottom lines in a period of depressed market sentiment. With consumer demand for new vehicles already so weak and our view that a revival will not come anytime soon, higher sticker prices will just deter more buyers from making purchases resulting in lower auto sales for the industry.

Cost Control And Exports Will Mitigate Pain

In our opinion, carmakers need to keep a lid on costs and boost their exports to mitigate the pain of falling margins in the home market ( see 'Diversification And Cost Reduction Critical For Firms', August 21). An example is local carmaker Tata Motors. While the firm's domestic sales in August declined sharply by 33.7% year-on-year (y-o-y), to 44,717 units, its exports rose 11.9% y-o-y, to 4,894 units.

Read the full article

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

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.