Rising input cost vs demand shock:  Carmakers, buyers caught in crossfire

NEW DELHI:  Besides record surge in fuel prices, frequent hikes in prices of automobiles have become a big headache for consumers preferring personal mobility over public transport during the pandemic. “There are very few options available in the Rs 5-6 lakh price segment that comes with adequate features. This was not the case earlier,” said Mayank Kumar, 32, who wanted to purchase a Maruti Suzuki Swift but had to settle for Maruti Suzuki Celerio.

Not just Maruti Swift, prices of almost all popular models have seen significant rise in the last one and half year. While OEMs (original equipment manufacturers) were offering healthy discount last year to lift market from the lockdown blues, rapid increase in prices of raw material, especially in the second half of last fiscal, forced them to pass the rising cost of production on to consumers.

Rajesh Goel, Senior Vice President and Director-Marketing & Sales, Honda Cars India, told TNIE that the prices for raw materials like steel, aluminium and precious metals have increased sharply and many of them are at an all-time high, impacting input costs significantly. 

He added, “Our endeavour is to keep the cost of acquisition lower. So, we are currently deliberating on how much of the additional cost we can absorb and how much will be inevitable to be passed on to our customers.” 

Honda would announce fresh prices of its entire range from August 2021. 

Ashish Modani, Vice President & Sector Head - Corporate Ratings, ICRA, explained that input prices across key commodities like steel, copper and aluminium have witnessed over 40-50% hike from last year lows. Also, prices of precious metal like palladium have almost doubled over the last 12-18 months, which has necessitated price hike by OEMs. “Given the challenging demand environment the pricing flexibility is limited with OEMs and they are trying to improve operational efficiencies to partially mitigate the impact of commodity price hike,” he added.

Modani warned that if commodity prices don’t moderate, further hikes cannot be ruled out. “Market participants are expecting some moderation in commodity prices in the coming quarters, though the extent of the same remains to be seen,” he said. 

Steel, rubber, plastics and aluminum are four commonly utilised commodities in four-wheelers. Also, the auto industry relies on oil and petroleum products, not just for gasoline, but for the synthesis of plastics and other synthetic materials. Plastic prices have increased 40-100% in the last one year.

A Chennai-based carmaker said that last year’s price hike was to realise large investment made by OEMs to transit from BS4 to BS6 emission norms. For this year’s hike, he attributed chip shortages and logistics costs besides commodity prices. “Freight shipping costs have been going through the roof over the last few months. Shipment cost between India and Europe/USA has almost doubled which increases component prices and export costs. Additionally, due to global shortage, suppliers are asking exorbitant prices for semi-conductors,” said the executive of a four-wheeler company. So far this year India’s largest carmaker Maruti Suzuki had implemented three price hikes. Other automakers too are going for successive price hikes.