The Hindu Business Line : Putting up a high price?

Are automobile prices in India really fair to customers? Or should they have, like telecom, been on a downward spiral many moons ago? Would that have caused a similar explosion in sales, but we get ahead of ourselves . . .

At every conference, seminar, round-table or gathering of people concerned with automobiles (barring, of course, the poor uninvited customers), there are moans of the high taxation on the Indian automobile industry. Imran Hassan of Skoda in India went so far as labelling the Indian Government as his "invisible partner" in a fairly sarcastic manner at the CNBC Auto Evoultion show, held at Pune in December. My colleague Murad Ali Baig's favourite lament is also about high taxation, at press meet after press meet. Pre-budget time is for the Society for Indian Automobile Manufacturers to start lobbying in the polluted airs of Delhi for more concessions.

The truth, as the saying goes, is always in the numbers. Not in rhetoric.

Development

The automobile industry in India is largely made up of companies which import, assemble or replicate products made by them elsewhere. Barring few honourables like Tata, Mahindra, Bajaj, TVS and Ford, the rest seem to view India only as a market for incremental sales on existing product lines and platforms. As was made amply clear by the fine Japanese gentlemen of Toyota a few weeks ago, reducing sales elsewhere in the world made it essential for them to shore up numbers in countries like India.

Fair enough, but then, why do we need to pick up the tab for development costs and benefits accruing elsewhere, usually already accounted for, allowed for and benefited from? The larger benefit of being an "incremental" market is, simply, that we should benefit from the lack of involvement in the spec-design-development phase. Does the automobile industry pass that benefit on to Indian customers, as do the pharma and technology industries?

No they don't. And this is why.

Benchmarking

If we want to take the example of one of the more popular cars in the Indian marketplace, for almost seven/eight years now, the street price of a basic air-conditioned Maruti Zen has hovered around the Rs 3.5-lakh mark. "Street price", incidentally, implies sticker cost plus premium or less discount, as applicable. The cost of inputs and taxation, in the period ad interim, has only gone up. There was a mild drop in excise rates from 40 per cent to 32 per cent, quickly offset by other levies.

The Zen does provide the benchmark for the automobile industry in more ways than just price. So was it over-priced in 1996 or is it selling at a loss now? Either way, one thing is for sure — the Zen does not and did not make a loss for its manufacturers. Maybe it does not make as much of a profit as it did in the past, but then, what is a fair profit in an industry?

True costs

Automobile manufacturers do not reveal their numbers towards the "cost" of the product and service called a "motor vehicle". Ideally, as in the IT industry, a buyer can often get a good idea of the various sub-assemblies, components and other elements going into manufacturing and selling, say, a PC. Add to that a factor for "other costs", and you pretty much get a range within which all PCs should lie.

"Brand equity", as expressed by marquees such as Daimler Chrysler and Toyota, is increasingly dropping as a reason to notch prices up abroad. Travelling Indians know that the Toyota Corolla is a great taxi in Bangkok and the Mercedes-Benz is reliable as well as excellent for carting heavy plumber implements. The Skoda Octavia has no brand equity, but manages to sell basis a low-entry price.

On incidence of taxation, sure, prima facie a cascading excise duty structure, supplemented by customs import duties and other state as well as regional levies, does seem excessive. But look at the other end of the mark-up stick. Transfer pricing norms are still not stable enough in India for proper investigations to be done, pertaining to manufacturers' mark-ups along the way. Therefore, the average "foreign" made-in-India car has gone through a series of mark-ups even before landing on Indian shores!

The MD of one such company once confided that an engine imported from the parent company went through a series of five mark-ups along the way as it moved without value addition except on paper from foundry supplier to main parent company to export arm to trading arm and thence to intermediate "close cooperation" ancillary in India. Why could he not source it direct from the foundry supplier in the first case? Because it would spoil the bottom-line of the intermediate companies!

Hubris

So it is clear that the basic premise on which automobiles are priced in India has everything to do with perceptions on what the market and customer will bear, and has nothing to do with real costs and fair margins for the vendor. The customer in India has been at the end of the food chain for the past few centuries, and it continues.

Look into the books of any automobile manufacturer abroad, and see the vast sums of money spent on essentially social costs connected with keeping motor vehicles on road. Be it by way of research, after-sales and service or involvement in social projects, the figure on a per-vehicle basis easily crosses 35-40 per cent of the cost of a vehicle. What is it in India? Close to nil.

Change

So do we expect a drastic drop in automobile prices soon?

The answer is yes. This will be seen as the Golden Quadrilateral Highway and other surface transport projects improve mobility; and outside the big cities and urban pockets, as these people will likely pick up older vehicles and make them last longer than city dwellers spoilt by the concept of rapid replacement. But that is not all, as the following anecdotes denote.

As a correspondent for another publication, I receive almost 100-150 e-mails a week on consumer-related motoring issues. I reply to each one of them. One e-mail came from a youngster, for his gram-panchayat in a Maharashtra village. He wanted to know from a two-wheeler manufacturer if special rates — at least 30 per cent below market price — would be given if it was guaranteed a 100 vehicle order per annum. Also, would it assist the gram-panchayat to set up an after-sales and service centre on a no-profit no-loss basis for their village and surrounding area?

This was, he said, for "better choice" over an existing offer.

Gathered around a table groaning with fine food and liquor on the evening before the launch of the Tata Indigo, with the cream of the country's motoring media, we were laying our predictions on what the Tata Indigo would cost. Most present were in the plus Rs 5-lakh range, some going as high as 6, which gave a good indication of what people would be prepared to pay for a three-box sedan car in India. The launch, next day, announced a showroom price to the customer of Rs 4.35 lakh, and even at that price, the manufacturers are making a comfortable profit. The add-on price for an Indigo over an Indica would not be more than Rs 30,000-40,000, but the margin was three time that, after allowing for incremental taxes. And the Indica is not making a loss for TELCO, either.

The absolute groan of disbelief amongst almost all sections of society, and the subsequent lack of interest, at the Rs 10-12 lakh price quoted by Toyota for its Corolla/Altis. A fleet operator in Delhi, after a test sales pitch for this otherwise excellent car, told me that he could purchase a 3-4 year-old Merc for less than the price of a new Toyota Corolla and bill at twice the rate, so where was the logic? Quite right, said I, as I drove back home in a "borrowed" four-year old Merc, picked up by him for about Rs 8 lakh.

Will automobile prices crash in India?

They already have. Many of the high-priced CBU (Completely Built Up) cars being imported at fancy sticker prices are quietly finding their way into garages all over the country at duty-free prices, courtesy the variety of routes available for such cars. From diplomatic purchases, to exporters entitled to them, and a vast variety in between.

As for the middle and the lower ends, just wait and watch the churn over the next few months.

The author can be reached at veeresh@chowk.com

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