Wednesday, October 4, 2023

Cometh New Year, automobile manufacturers in India make cars expensive. Why?


Automobile manufacturers in India have been practising year-end price hike move since 2005, affecting stakeholders in the ecosystem; including consumers, banks, NBFCs, insurance companies etc.

Despite being one of the largest automobile industries in the world, the Indian automobile market is one of the most unregulated sectors as well. The vehicle price that steers the profitability for the automobile manufacturers in India is totally unregulated and the automakers or Original Equipment Manufacturers (OEM) take the full advantage of this freedom.

Come December every year and the automobile manufacturers in India start announcing price hikes that become effective from the following New Year, especially in the passenger vehicle and two-wheeler segments.

Like many other trends, Maruti Suzuki has successfully set this one as well and others followed, since 2005.

Majority of the automobile manufacturers in India claim every year that the price hike is due to the increasing input cost and operational cost.

While the automobile manufacturers in India blame the increase in raw material cost for the price hike of the vehicles, there are no regulations to probe the method of the price hike. Also, despite the price hikes, the product qualities remain more or less the same.

In recent times, we have seen several passenger vehicles that are widely popular and sold by the highest in demand car brands have scored shaming poor points in crash tests.

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OEMs take advantage of ‘fear psychosis’

Yes. Most of the automobile manufacturers in India take advantage of the fear psychosis of the consumers. Every December when they start floating the announcement that pricing of the vehicles will go up from following January; customers often book the vehicles fearing that a delay would cost them more money. Apart from that, the companies lure buyers with year-end discounts as well.

So far, the automobile manufacturers in India exploit the customers’ psychology or weakness to sell their vehicles.

Previously, when the new BS-VI emission norm was adopted across India in April 2020, the automakers increased the pricing and before that, they lured the buyers to sell their BS-IV vehicles. Similarly, earlier when the country shifted completely to BS-IV emission norm in 2017, the automakers started announcing hefty discounts to sell their vehicles. So far, one thing is clear. The automobile manufacturers in India try to exploit the customers as per their own profitability.

The government has been unable to curb the menace of year-end price hikes and other market manipulations by automobile manufacturers in India.

The principle of automobile manufacturers in India or anywhere in the world should be fulfilling the country’s mobility and transportation needs. But the automakers in the country are not doing that but trying to gain profit by exploiting the poor policy framework for years. As the government is more or less reluctant on this issue, the automakers continue their malpractice unabated.

Use case – Greater loss, lean gain

Take an example to understand the situation better. If a customer buys an XYZ model at Rs 10 lakh (ex-showroom), availing a discount of Rs 15,000 in December 2020, his or her loss on selling that car will be higher than the gain from the discount. If the customer sells the same car in 2025, in the pre-owned car retail network of the same automaker that sells the XYZ model, he or she will get at least Rs 50,000 less than the 2021 model of XYZ. This is because, the model the customer is buying will be older by a year, even if the day count will be less than 30 days.

However, the automobile manufacturer wants the buyer to buy the 2020 XYZ model as it wants to clear the inventory. For this, the OEM will offer a mere discount to lure the buyer. But, if you calculate the value while selling it after 5 years, you will find the deal as a greater loss, lean gain.

Automobile manufacturers in India ploy to liquidate their old stock by announcing the December price hike every year, cajoling the buyers to purchase vehicles in December itself.

No wonder, the customers are falling into such price traps frequently. Such kind of price hike announcement and smaller discounts lead the automakers to witness higher demand and increased retail sales in the last month of a dying calendar year.

What happens when OEMs hike price?

The price hikes by OEMs impact the retail and drive sales in a month when the sales are poor, as the customers rush to the showrooms to book their vehicles in a bid to avoid shelling out more money in the post-hike period. The price hike also maintains a favourable balance of restricted wholesales dispatches from the automobile manufacturing plants to dealers. Announcing the price hike in the last month of the year helps the automobile manufacturers in India to dispatch fewer vehicles to the dealers.

This way, the automakers feel less pressure of retailing those vehicles. Also, producing less number of vehicles and avoiding backlog and stocking a bigger inventory help the automakers to witness around 20% profit growth.

Where it all started?

Maruti Suzuki has been a pioneer for many things for automobile manufacturers in India. The automaker started the trend of price hike announcement every December effective from following January, back in 2005.

Almost all the OEMs started following the trend later, including the Indian automakers like Tata Motors, Mahindra & Mahindra. Luxury carmakers like Audi, BMW also have taken the same route. Not only that, new entrants in the Indian auto market, Kia and MG Motors too have joined the party.

So far, 10 automobile manufacturers in India have announced a price hike for their respective vehicles in December 2020. The price hike from these auto companies will be effective from January 2021. These OEMs are – Maruti Suzuki, Hyundai, Kia, Renault, Mahindra & Mahindra, MG Motors, Honda, Ford India, Nissan and Datsun.

Higher production cost – Reality or exaggeration?

As the automobile manufacturers in India claim that the increased production cost due to the surge in raw materials’ cost results in announcing a price hike. Is it a reality or exaggeration from the OEMs, magnifying the cost increase multiple times that it actually is? Whenever we see the automakers making a price hike announcement, they never give the details of the increased cost. This certainly produces doubts about the authenticity of the claim.

According to industry experts and analysts, the raw material costs have not shot up as much as the automobile manufacturers in India claim except some sectors like iron ore, which resulted in some challenges in procuring steel, one of the main ingredients for vehicles. But, costs of other input materials like aluminium, crude for plastic, rubber and special fibres are still at moderate levels. So far, there has not been any significant and massive demand that could necessitate a price hike by the OEMs.

Financial impact on banks, NBFCs, insurance companies

The price hike not only leads to a sales surge for the OEMs at the expense of customer’s gain but also impacts the banks and NBFC’s balance sheets. As the banks and NBFCs finance these vehicles, they are at a higher risk as their assets come with less value. Often the residual value becomes lower than the money these financial institutions invest. The case becomes even severe for the cabs and taxis as their value reduces at a greater pace.

Insurance companies also lose their business in these cases. For example, a car sold in 2020 will have a lower Insured Declared Value (IDV) than the same model sold in January 2021, just because the former model is one year old as per the calendar. The insurance company loses on the business earned on insuring the car alongside the premium paid by customers.

In all, the entire financial ecosystem elated to car sales loses a significant amount of value as the OEMs manipulate the system to sell more cars in December at a lower value. This leads to a varied negative impact on various stakeholders of the ecosystem.

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The government has several times provided incentives to the automobile manufacturers in India in a bid to rationalise prices by streamlining taxes. However, the government should come up with a firm policy framework to curb the menace of year-end price hikes and other market manipulations by the OEMs.

The government should align the automobile manufacturing cycle in line with the financial year to reduce the complications and remove anomalies in the ecosystem. For example, in Europe, the automobile OEMs often manufacture and stamp the next year mark on their vehicles that are retailed in the new year. However, in India, the Central Motor Vehicles Rules does not permit a different year stamping on vehicles.

According to industry experts, the Vehicle Identification Number (VIN) that currently comes with the calendar year, should be changed to April-March financial year.

Also Read: Why automakers in India bracing for parts shortage in 2021?

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