The Hindu Business Line : Automakers draw up strategies to beat high interest regime

Mumbai July 30 The Indian automobile industry is gearing up for a bumpier ride in the coming months. With a hardening of interest regime round the corner and a debilitating squeeze on availability of finance, vehicle makers may find it extremely difficult to stick to their targeted growth in sales volumes.

As it is, automobile majors have been struggling to grapple with inflationary pressures and galloping prices of raw materials, which are expected to further gnaw at their margins in the current fiscal.

Companies in this business have drawn up their own strategies to beat this downtrend, but the common thread running through them includes aggressive cost reduction measures and cautious price increases.

To fill in the gap in availability of finances, companies such as Tata Motors and Mahindra & Mahindra plan to sharpen their focus on their finance arms. Launching of new models to light up the gloomy finance market for vehicles is another option being pursued by the companies, including Tatas.

Says Mr Aravind Saxena, Vice-President (Marketing & Sales) of Hyundai Motors: “The automobile industry will be affected by the credit crisis. Last year, as much as 85 per cent of vehicles purchased were through financing. Now it has come down to 67 per cent. When inflationary pressures ease, the credit situation would improve.”

The average interest rates on auto loans now range from 12.5 to 13 per cent, which is expected to go up by 50 to 100 basis points, said a banker.

Shrinking finances

More than the hardening of interest rates, vehicle makers are concerned over the shrinking availability of finances, with many finance companies withdrawing from their earlier commitments. Tata Motors and Mahindra, which have their own financing arms, plan to step up their lending to fuel retail sales.

“Availability of finance is a concern for us. We plan to strengthen the business of Tata Motors Finance in the coming months,” Mr Ravi Kant, Managing Director of Tata Motors said.

Similarly, Mahindra plans to leverage on the strengths of its finance arm, Mahindra Finance, which is working out new market practices to deal with the tightening credit situation. “Reduction in transaction cost and increased participation of manufactures and dealers would help control the finance cost. For achieving this, new market practices have to be adopted so that volumes are protected,” Mr Ramesh Iyer, Managing Director, Mahindra Finance, says.

There would be some scope of salvaging the situation if manufacturers, dealers and financiers could come together, he pointed out.

Cautious price increases will be another route the vehicle makers take to shore up the slackening trend. Tata Motors, for example, increased the prices of its commercial vehicles twice in the last three months by 3.5 per cent each time.

“We would normally take a 7 per cent price increase in three years, but (this time) we did it in three months. This means the market can absorb price increases,” Mr Ravi Kant pointed out. Spiralling input costs will continue to strain operating margins, especially as raw materials constitute a major slice of the expenditure of vehicle makers.

Take for example Tata Motors. The company ran up a bill of Rs 5,025.15 crore towards consumption of raw materials and components out of its total expenditure of Rs 6,586.75 crore in the quarter ended June 30, 2008 — in the corresponding quarter of last fiscal, its raw materials consumption was Rs 3,994.52 crore.

This trend, which is likely to continue in the coming months, has prompted auto companies to step up their cost reduction efforts.

Tata Motors will clearly be leading other companies in launching new models — it plans to launch 12 to 15 new models in its commercial vehicle segment in this fiscal.

“The focus will clearly be on more fuel-efficient vehicles as far as new launches are concerned to counter the tight financing market for vehicles,” an industry analyst said.

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