GST rejig spooks plans of German luxury car makers

Luxury carmakers were one group who gave the Goods and Services Tax (GST) a thumbs up when it was rolled out on July 1. That’s because under the GST regime the total tax incidence on these vehicles came down to 43% from 50%. The benefits were to be passed on to customers by slashing prices but the positivity was short-lived. Last week the GST Council recommended increasing the maximum ceiling of cess on motor vehicles to 25% instead of the current 15%, raise the total tax to 53%. Understandably, luxury carmakers are scrambling to deal with the flip-flop in policy.

Fortune India spoke to Rahil Ansari, head, Audi India, Roland Folger, managing director and chief executive officer, Mercedes-Benz, and Vikram Pawah, president, BMW Group India about the implications of such a hike. They also touched upon topics such as vehicles using alternate fuel and sales patterns in India. Edited excerpts:

How is the hike in GST-related taxes going to impact the pricing of cars?
FOLGER: At the moment we don’t know because nothing has been fixed, so we are hesitant to make any price-related comments.  What I can tell you is that if we do get up to the full 25% cess as projected, then it would certainly make our cars more expensive. I do believe that this one step forwards and two steps backwards as it doesn’t help business move at a steady pace, and will affect long-term planning. You can imagine the complex discussions we are now having with our colleagues in Germany about the Indian marketplace.
PAWAH: We strongly believe that long-term stability in tax reforms and regulations are of paramount importance to foster growth of any industry in the country. While we welcome the implementation of GST, immediate changes and fluctuations on motor vehicles cess will adversely affect the stability and growth of the automotive industry in India.
ANSARI: One month after implementing GST, rethinking a cess on luxury cars is not the right step and will give consumers and the business a negative sentiment. Our cars could end up being priced 4% higher than before GST, with the A3 and Q3 being priced at almost Rs 1.8 lakh more and the Q7 costing about Rs 7 lakh more. Then there’s the matter of us having to revisit our business plans, which were built on earlier announcements and this affects the dealers, sales force, and everyone in the supply chain.

In the near future how low on price will you go for an entry level car?
FOLGER: Our strategy is to drive value to our customers across the portfolio and not merely making products accessible. We do not see new products below the New Generation cars.
PAWAH: All our customers are different and we remain committed to meet their needs. Immediate change in repositioning our portfolio is not foreseen but the positive or negative effects of tax reforms go a long way in affecting consumer sentiment.
ANSARI: We have been the first in creating an entry-level luxury car segment in India–with the Q3 and A3–especially younger customers.

How far are you from the point where we can see a satellite plant which feeds supply or full-scale localised engine transmission production?
PAWAH: The strategy is to increase localisation and production as sales increases. In the last 10 years we have climbed to 50% localisation which included engines and gearboxes that are being assembled and made by local partner, Force Motors.
FOLGER: Mercedes-Benz India is part of our global production network and plays an important role in the CKD (completely knocked down)/MVP production networks in Brazil, Indonesia, Malaysia, Thailand, and Vietnam. At these locations, Mercedes-Benz produces vehicles in various extension levels for domestic markets. However, in India, we make in India for India and we are adequately prepared to meet any future rise in demand here.
ANSARI: Far enough to not discuss this at the moment.

Your thoughts on vehicles using alternative fuel with regards to India.
PAWAH: India is unique in that it was mostly a diesel market earlier. Then it became petrol and diesel. With the government’s focus on electric mobility, that is going to be a reality as well but India won’t be homogenous, it will be a mixed bag.  The challenges for electric and alternate fuel are the infrastructure and changing of driving culture, which is the big one. Remember how much time it took to go from desktops to laptops? It’s going to be similar to that.
FOLGER: We must consider two key factors to the transition to hybrid and electric in India. One, is achieving the massive infrastructural scale to facilitate 24-hour charging of millions of vehicles, that too in a short time. Second, powering the electric vehicles will emerge as a significant challenge as major power generation in India comes from fossil fuels, and renewables like solar, wind, and hydro-electricity have negligible presence in the current mix. The best possible short-term solution would therefore be transitioning to BS-VI diesel, and as a second step with a full hybrid or PIHV (plug-in hybrid vehicles) which can reduce emissions, even challenging today’s electric vehicles with their present energy source mix.
ANSARI: If the infrastructure is conducive Audi can roll out electric and alternative fuel vehicles in the Indian market. The lower GST rate for electric vehicles (12%) is a clear indication from the government and we welcome the state vision for 100% electric vehicles by 2030. Important questions are on how realistically a road-map could be put in place to move to electrification, the infrastructure, competitively priced electricity to make e-mobility viable, and a focus towards sustainable electricity production.

In terms of demographics and regions, where is growth coming?
PAWAH: Demographically, our range is wide but we do see first-time buyers for premium cars increasing and they reflect the buying audience of the nation which is younger owners typically under the age of 45. Regionally, it’s still the major metro cities that generate volumes, although the next tier of Indian towns holds promise and is not to be ignored.
FOLGER: Delhi and Mumbai along with other key metros contribute a lion’s share to volumes, though there are pockets of growths in tier II and III cities which can mature in the foreseeable future and contribute big numbers. Even though we have been witnessing a steady decline in the overall customer age, the current average customer age is around 37 years in India, which is one of the lowest across the globe for us.
ANSARI: There is a new segment of customers moving from premium sedans to compact and executive luxury sedans and SUVs or crossovers. They are aged between 28 years and 35 years. They are also in tier II and III towns. That’s the segment we have been able to tap and we expect strong growth and market share it. We also see double digit growth from the smaller cities, but major metros still contribute the most with more than 70% of sales coming from there.