The Hindu Business Line : Margins on small cars may go down

Bangalore, June 6 Car makers as well as dealers will increasingly see their margins eroded by nearly half as more small cars are launched in the country including Tata Motors’ Nano.

Sources in Maruti Suzuki told Business Line that margins for certain cars do get affected but the passenger car manufacturer has been able to tide over the issue through higher volumes. Maruti Suzuki sells half the number of cars sold in the country.

“The margins are coming down for small car manufacturers from a modest 7–10 per cent to a frugal 4–5 per cent,” Mr Ankur Gupta, an associate consultant with Zinnov Management Consulting said. Renault-Nissan, Bajaj Auto, Volkswagen, Honda and Toyota are some of the car makers who are planning to launch small cars in India within two years and are expected to compete on pricing to offer low-cost variants.

For dealers, the margins currently are as low as 3 per cent and it could come down further as competition increases in the small car market. “If the price of small cars keeps getting lower, it will surely hurt our margins,” Mr M.P. Shyam, a car dealer based out of Bangalore, said.

Zinnov’s Gupta said that car makers will start segmenting the small car market by introducing small car models which are feature-rich but are priced higher and those which have ‘bare-minimum’ features and are low-priced. Maruti Suzuki is also planning to introduce small cars whose running cost are much lower like the Maruti 800 LPG version which is priced about Rs 15,000 higher but the price of LPG fuel is lesser by at least 30 per cent compared with petrol prices. Maruti has already launched petrol-cum LPG fuelled Wagon-R model called Wagon-R Duo. The Duo sales are about 40 per cent of the total sales of the model.

Mr Gupta said Indian OEMs (original equipment manufacturers) will have to increase the efficiency of their processes and introduce innovative designs and improvise if they have to sustain their operations. “More cost-cutting will require high R&D from OEMs,” he said.

Mr Shyam said as the margins get hit, dealers will have to offer more service to engage the customers throughout the year. But Mr Gupta points out that higher the sale of small cars, more will be the visit to the service centres. Hyundai’s senior vice-president for sales and marketing, Mr Arvind Saxena, said the company has no plans to either reduce costs or margins and that their volumes are raising steadily.

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