Automakers put brakes on prices

Written by Yogima Seth | New Delhi | Updated: Dec 26 2009, 06:05am hrs
Car buyers have reason to cheer this New Year. Reversing the trend of several years, leading manufacturers are not expected to increase prices from January thanks to relatively stable commodity prices and long-term vendor contracts. There is no rationale for a price hike. Current commodity rates are well within the limits of absorption, and the company may not increase car prices this time, Hyundai Motor India senior vice-president Arvind Saxena told FE.

According to Maruti Suzuki India chief general manager (marketing) Shashank Srivastava, automobile pricing is largely determined by forex fluctuations and commodity prices. A decision regarding an increase in car prices has not yet been taken as Maruti is still evaluating the impact of commodity prices and forex fluctuations, he said. The company generally renews contracts with vendors in April and October and that is when commodity prices will come into play.

Auto manufacturers have usually hiked car prices in the range of Rs 5,000 to Rs 25,000 in January. But industry analysts feel that the decision not to hike prices next month is a strategic move, ascounter-intuitively--no further reduction in excise duty in Budget 2010-11 is expected. Since 2006, car companies have always resorted to price increases in the range of 1.5-2% in January to compensate for any reduction in excise duty in the Budget that is always passed on to consumers, explained a Mumbai-based analyst.

But this time around, there could in fact be an increase in excise duty. If that happens, car companies will have to pass the duty hike on to the consumer. Thats why automakers are trying to avoid the double-whammy of a price hike early in the New Year, the combined effect of which would hit consumer sentiment.

Currently, small cars attract an excise duty of 8% after the Centre announced a Cenvat reduction of 4% in December last year as part of a stimulus package to revive automobile sales.

More importantly, theres no real surge in raw material costs. Steel prices are at 60% of their peak levels of June-July 2008. Steel constitutes around 60% of the inputs that go into the making of cars. Even other materials like plastics and aluminium may have risen from their lows, but are still far below their mid-2008 peaks.

Car companies also typically spend heavily on advertising in December indicating a price increase from January in order to clear inventories. But this time companies had record sales between September and November and therefore not much inventory has piled up either at the manufacturers level or dealers level.