Auto sales this year have been nothing less than great. Auto manufacturers have never been so elated with the response of Indian car buyers. But as is with everything else, this hot spell of outstanding car sales may not continue for a very long period. Rising interest rates, the ever increasing output costs, and not to mention the curse of capacity constraints, can play the biggest challenge for car makers in India.
With the start of the festive season in India, we witnessed fantastic sales in August. And despite monsoons, capacity issues and price hikes, auto makers in the country managed strong sales growth in the previous month. Auto analysts predict that going further the sector would grow 12-15 per cent year-on-year (y-o-y) for 2010-11. But, let’s say the demand grows further or even stays at its current, auto makers will have to find a solution for capacity constraints, absorb or pass on increasing raw material costs and tackle rising interest rates.
M&M, Maruti Suzuki India (MSI) and Tata Motors are facing severe supply related issues. MSI is currently operating at its optimum capacity level by tweaking its production capacity, and was able to achieve four per cent increase in volumes over July. In the face of increasing competition, MSI was able to hold on to its position in the A2 category with a 27 per cent y-o-y jump.
Mahindra’s sales, which went up by 28 per cent y-o-y, were mildly if not severely were affected by a shortage of such key components as tyres, castings and diesel fuel injection pumps. New products Maximo and Gio helped push its four-wheel pick-up sales by 45 per cent.
While battling with capacity constraints and all, auto majors have to deal with the ever mounting pressure of increasing raw material costs too. Most of the companies have passed on some of the tension to the car buyers by raising the prices on select models.
Maruti, for example, increased prices in August on all models except Alto by Rs 2,000-7,500. And another blow is going to come again when the steel companies increase prices by Rs 1,000-1,500 a tonne from September. And given the festive mood that is going to engulf Indian car buyers soon, car manufacturers won’t think twice to increase the costs.
Auto analysts believe that a rise in interest rates is likely to influence the sales in the second half of this fiscal year. Major banks have increased their rates in the recent past and considering that 70 per cent of passenger vehicles and the entire commercial vehicle portfolio are funded by credit, leading players in these two segments will be hit the hardest. But then, M&M, Tata Motors and Maruti Suzuki have deep penetration in the auto finance sector and they are likely to come out of the problem safe and sound.
