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Car manufacturers considering price hike

Car manufacturers are considering a price hike; following an increase in raw materials prices

Apnaloan.com Research Bureau

26 Mar 2008

Increasing raw material prices are forcing car makers to contemplate a price hike as soon as June or July.

Most of the car manufacturers had already slashed prices (on small cars) in the beginning of March following the Budget announcement of a cut in excise duty from 16 per cent to 12 per cent.

Since December, the industry has seen a sharp rise in key input costs of steel, alloys, crude oil, copper, aluminium, among others.

For example, prices of alloy steel have gone up by 8-12 per cent (nearly Rs. 7,000 a tonne), while aluminium has become costlier by 18 per cent to $2,842 a tonne (Rs. 113,680). Copper too has gone up to a record high of $8,890 a tonne (Rs. 355,600), an increase of 31 per cent.

According to experts, a 10 per cent increase in the steel price may result in around 2 per cent rise in the overall cost of a small car.

As reported by Business Standard, Shinzo Nakanishi, MD and CEO, Maruti Suzuki India Ltd. (MSIL), said, "Input costs are definitely hurting us...we have yet not decided to hike car prices as we had just cut them a few weeks ago. But we are not saying we will not do it either."

Adding to this, an executive from General Motors said, "We are reviewing the situation and a decision will be reached soon."

Whereas K K Swamy, the joint managing director of Toyota Motors, said, "Toyota especially has the comfort of raising prices as it did not cut prices earlier as the excise duty cut did not affect the company".

To make matters worse, the situation will only aggravate in coming months as metal players expect a surge of around 15-65 per cent in prices of steel, iron, coking coal, copper to name a few.

Even though it is difficult to calculate the exact hike in vehicle prices, analysts say the hike can be around 5-8 per cent. More than 60 different models of cars and utility vehicles are manufactured in India by 15 companies.

Also as reported by Business Standard, according to research analyst, no auto maker will introduce the price hike suddenly. The hike may eventually be spread over a period of time with an intermediate increase of 2 per cent. A lot also depends on margin sustainability. If the demand goes up, the company has the comfort of increasing prices, although marginally.

Some auto experts say car companies can improve their margins simply by reducing discounts they are giving to customers and there is no need to raise prices.