The New Year may not be too kind on the pockets of new vehicle buyers as major automakers of the country have announced a price hike due to rising commodity costs.
Country’s largest automaker Maruti Suzuki was among the first to announce the hike. It said that it will increase prices of its vehicles from January to offset the adverse impact of rising input costs. “Over the past year, the cost of the company’s vehicles has been impacted adversely due to increase in various input costs. Hence, it has become imperative for the company to pass on some impact of the above additional cost to customers through a price increase in January 2021. This price increase shall vary for different models,” Maruti Suzuki India said in a regulatory filing.
Other carmakers too have jumped on the bandwagon. The list includes Kia Motors, which was one of the best performing auto companies in 2020. Kia announced that the price hike could be anything between the range of ₹20,000 and ₹35,000 for its popular models, such as the Sonet and the Seltos. Mahindra & Mahindra (M&M) and Ford have also indicated that from January many of its brands will see an uptick in prices.
Automakers have stated the increase in prices of raw materials like metals, polymers, plastic, etc. as the reason behind this hike. “The company will increase the price of its range of passenger and commercial vehicles, across models. This has been necessitated due to the increase in commodity prices and various other input costs,” M&M said in a statement.
Two-wheelers, too, are not far behind. Hero Motocorp said that in order to partially offset the impact of the commodity costs, the company will be increasing the prices of its products by upto ₹1500, with effect from January 1, 2021. “The increase will vary across models, and the exact quantum will be communicated to our dealers in due course. There has been a steady rise in commodity costs across the spectrum, including steel, aluminium, plastics, and precious metals,” it said in a statement.
Demand is slowly creeping up to be normal and during such challenging times, if this price hike wasn’t there, it would have been better. January could be a challenging time, but slowly and steadily it will be normal.Vinkesh Gulati, president, Federation of Automobile Dealers Associations (FADA)
Will raising car prices help auto companies?
Indian automakers have been struggling for long, reeling first under the economic slowdown, which in turn got exacerbated by the Covid-19-induced national lockdown. The lockdown had sent a shockwave through the auto industry, throttling consumer demand, and subsequently, affecting automobile sales. The rise in commodity prices this time is, similarly, expected to hit the customer as well. In April 2020, for example, automakers had seen a similar sharp spike in prices due to the industry’s transition to stricter BS-VI emission norms.
Experts caution that a further escalation in prices could offset the already sluggish demand growth. While the extent of the price increase is not clear at this point, experts say that it could be between low- to mid-single digits depending on the model and the company.
According to a recent report by research and rating agency ICRA, commodity prices, which have stayed accommodative in the first half of FY21, are expected to increase in the second half and will adversely impact margins in the auto component industry. “Prices of steel, aluminium, copper, lead, and rubber have inched up higher in the past month and will add to commodity price pressure for ancillaries,” the report said.
Another report by the American credit ratings agency, Fitch Ratings, similarly argues that the decision by automakers to pass on higher commodity prices onto the customers could dim the chances of a demand recovery post-December 2020, particularly more so because by early next year all the pent-up demand from festival months would have faded away, and the adverse economic climate wrought by the pandemic would again come back to bite the automakers.
The report notes that these factors could potentially raise the cost of owning vehicles in India further, after the price hikes of up to 15% from April 1, 2020, following the implementation of BS6, a more stringent emission framework. “We believe the impact will be more pronounced on commercial vehicles, which experienced higher price increases in percentage terms in April.” Fitch Ratings report read.
Vinkesh Gulati, president, Federation of Automobile Dealers Associations (FADA), the apex national body of automobile retailers, expects that customers will take around a month to adapt to the new price and things will slowly normalise after that. “But obviously 15 days to a month will be a problem for regular selling models. In the general sense, it should be around 3%-6%, except for some products, it can go to 10% also. Some customers may think of delaying their purchase and they may think of using traditional margin money,” he told Fortune India.
Fitch Ratings argues that the decision by automakers to pass on higher commodity prices onto the customers could dim the chances of a demand recovery post-December 2020, particularly more so because by early next year all the pent-up demand from festival months would have faded away, and the adverse economic climate wrought by the pandemic would again come back to bite the automakers.
According to the data from Society of Indian Automobile Manufacturers (SIAM), a national body representing automakers, the passenger vehicle sector saw a decline of 22% during the April-November period, while the two-wheeler segment fell by 25% during the same period this year.
Gulati feels that at a time when the market was already struggling, this isn’t great news. “Demand is slowly creeping up to be normal and during such challenging times, if this price hike wasn’t there, it would have been better. January could be a challenging time, but slowly and steadily it will be normal,” he says.
In fact, the report from Fitch Ratings further buttresses Gulati’s point. The report had pointed out that profitability for automakers in the three months to September 2020 rose from the first quarter mainly because the sector benefitted from better fixed cost absorption arising from higher volumes, along with cost efficiency measures amid the pandemic, and prudent pricing practices. “These factors helped to counterbalance the uptick in commodity prices as automakers chose not to raise prices in an uncertain environment,” it said.
After the lockdown, pent-up demand and the gradual opening up of the market helped the monthly wholesale volume of passenger vehicles (PV). But, as per the Fitch Ratings report, there are already signs of this demand diminishing. “Festive demand helped sustain the growth after September, but the pace slowed to 5% year-on-year in November 2020, from 14% in October 2020. This is even after including the timing benefit from Diwali falling in November in 2020 instead of October in 2019. This indicates that pent-up demand is tapering off,” the report said.
Gulati maintains that things will take some time to come back to normal as the overall economy improves. “What we noticed during the lockdown is that the customer has to be happy to buy a car or a bike. We saw that even the customers who could afford it, had already spoken to dealers and were all set to buy the vehicle, were delaying their purchases. Buying a vehicle is also related to happiness and overall positivity of the economy,” he explains.
“This time we have also got the benefit of revenge buying as people have saved a lot on travel, shopping, and moving around, so now a lot of them are willing to buy cars. But whatever be the case, things are only going to improve from here,” he says.