Necessary commodities such as food and fuel have become significantly more expensive in the last five years. But, car prices have remained steady or seen a moderate rise.

The Wholesale Price Index (WPI) for all commodities (Base: 2004-05 = 100) rose 42.44 per cent between April 2012 (163.1) and April 2007 (114.5).

In the same period, the WPI for motor (passenger) vehicles rose 13.94 per cent, while for the whole automotive sector it was up 19.86 per cent.

Fear larger than reality

There are many reasons for this. Firstly, there has been a sharp rise in volumes helping carmakers absorb the higher input costs.

Between 2006-07 and 2011-2012, passenger vehicle sales went up 90 per cent (1.37 million to 2.61 million). Thus, the increased scale of production has helped by getting in economies of scale.

“The fear that car prices are up is larger than the reality, especially because they are highly dependent on fuel costs and interest rates. OEMs are trying to deflate costs while being aggressive on the pricing front,” said Mr Abdul Majeed, auto practice leader at PwC India.

Added an industry executive, “The model portfolio of companies has significantly widened in the last few years, especially towards the premium segments. This has put less pressure on the lower margin mass segment models, helping them maintain the lower prices.”

pricing strategy

The larger volumes have helped push up aggregate profits, even if the per-unit margins have declined.

A highly price-sensitive Indian customer and increased competition from new players has also made incumbents adopt a more aggressive pricing strategy.

“A tight watch on costs has led to higher automation in the factory. So, the production efficiency has gone up, while wastages have reduced,” another industry source said.

Another factor helping carmakers contain input costs is the increased localisation, which today is as high as over 95 per cent for players such as Maruti Suzuki, Tata Motors and Hyundai.

The domestic sourcing of components and raw materials, such as steel, has made companies less vulnerable to rupee depreciation.

The negative forex impact on the bottom line has also been offset through an increased focus on exports to markets such as Europe, South America, Africa and South-East Asia.

Exports are usually a higher margin business.