Since the beginning of 2021, major automobile companies have resorted to hiking the prices of their vehicles. Most automakers raised prices by nearly 3-4% across all categories during the first week of January. There was another round of price increases in April. The automotive industry is reportedly planning to introduce a further round of price hikes for their offerings in the coming months.
Unfortunately, Indian consumers continue to be at the receiving end of inflating vehicle prices and high fuel costs. In this article, we analyse the various factors that have led to the sharp increase in automobile prices.
Factors That Led to Price Hikes
- Raw material costs continue to surge because of the relentless increase in iron ore, steel, and precious metal rates. Domestic steel prices had increased sequentially by about 19% in Q3 FY21 and by another 19% quarter-on-quarter (QoQ) in Q4 FY21. The price of plastic has gone up by 60-80% over the past year. Aluminium, copper, lead, and rubber prices have also increased rapidly. It has become difficult for auto companies to sustain the prices of their commodities for a long period as it would impact their operating margins.
- The entire automobile industry is facing a sluggish recovery in terms of demand and sales. The ongoing Covid-19 pandemic and localised lockdowns are major factors that are hurting the sector.
- Bharat Stage (BS) VI emission norms came into effect on April 1, 2020. It is the most advanced emission standard for automobiles and is equivalent to Euro-VI norms that are currently in place across Europe. Unfortunately, BS VI-compliant vehicles are more expensive as the materials required to keep emissions down (such as rhodium) are scarce. Diesel vehicles and economic-segment two-wheelers saw a sharp increase in prices, which kept buyers away from the market.
- Fuel prices have surged over the past year. Petrol prices have crossed the Rs 100 per litre market in most cities and are continuously rising. This has caused a direct impact on total vehicle ownership costs.
- The limited availability of semiconductors has created a supply-demand crisis globally. Original equipment manufacturers (OEMs) across the world had made wrong predictions with respect to the necessity of essential chips for their vehicles.
Price Hikes vs General Inflation
Let us now compare the extent of automobile price hikes with the general inflation in our country. India’s retail price inflation rate eased to 5.59% year-on-year (YoY) in July 2021, from 6.26% in the previous month.
The ex-showroom price of the Maruti Suzuki Swift (base model) stood at Rs 5,19,000 in August 2020. Currently, its price stands at ~5,81,000. This is an increase of 11.95%! We have chosen Swift as it is the best-selling car in India.
Similarly, we can see that the price hike across most prominent passenger vehicles, two-wheelers, and even commercial vehicles exceeds the general inflation rate of India. This is more or less the same case in the global markets as well.
Major Price Revisions in 2021
India’s largest carmaker, Maruti Suzuki India Ltd, was one of the first companies to initiate a price hike in 2021. They announced an upward revision of up to Rs 34,000 in January. MSIL announced a further hike for select models in April and another revision across its entire range in June.
Hero MotoCorp announced a price hike of up to Rs 3,000 across its entire range of two-wheelers in June. The hike was effective from July 1. Tata Motors increased its passenger vehicle prices and Mahindra & Mahindra hiked the prices of all its cars by up to Rs 49,000 in May. Kia announced a price hike in the range of Rs 20,000 and Rs 35,000 for its popular models. Hyundai, Renault, Nissan, and Mercedes-Benz also announced price hikes multiple times this year.
Many auto industry executives believe that the earlier price hikes may not be sufficient to counter or offset high production costs. At the same time, frequent increases in prices could severely impact the sluggish recovery in consumer sentiments. The average Indian consumer is extremely price-sensitive, and higher ownership costs can make customers delay purchases of new vehicles. It seems that the auto sector is bound for an extended period of slowdown.
The announcement of the Vehicle Scrappage Policy has brought some cheer to the auto industry. It will help boost overall sales and reduce imports of essential metals. Now, the concerned officials must give utmost importance to the efficient implementation of the policy.
What are your thoughts on the frequent hikes in vehicle prices? Let us know in the comments section of the marketfeed app.