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March 11, 2010

INDIA: Raw materials, emission control costs, could hit automakers

A rise in raw material prices, coupled with costs associated with new emission regulations, could force Indian automakers to increase prices further, which may hit volumes according to a local media report.

A rise in raw material prices, coupled with costs associated with new emission regulations, could force Indian automakers to increase prices further, which may hit volumes according to a local media report.

The recent federal budget raised factory-gate duties on large cars and sport utility vehicles by 2% which was immediately passed on by vehicle makers, the Hindustan Times reported.

While there is still some uncertainty over the actual date of implementation of new emission rules, automakers are working to the 1 April deadline when all vehicles sold in 13 major cities will have to comply with Euro IV emission standards, adding to costs and setting the stage for another round of price hikes.

“The industry will not be able to absorb all these costs,” Rajiv Dube, head of passenger cars at Tata Motors, told the paper. “Raw material prices are also increasing….we will have to pass on the costs of Euro IV compliance to customers,” he added.

Analysts have estimate the price hikes, including excise duty hikes, to be in the range of 5 to 6%, according to the report.

“We can expect an increase of 2 to 4% arising from this (Euro IV compliance)….and along with the rise on account of excise duties means a total increase of 5 to 6 percent,” said Prabhudas Lilladher analysts Surjit Arora.

Society of Indian Automobile Manufactuers director-general Dilip Chenoy told the Hindustan Times he expected a sharp fall in sales of vehicles in April compared to March due to the change in emission rules.

Commercial vehicles, which carry freight and are a barometer of economic activity in the country, will be hit harder compared to cars and other passenger vehicles, analysts said.

“Most cars, especially those recently launched, are already compliant with the norms and others are working on it and they are prepared, but commercial vehicle makers are yet to factor in those costs of upgradation and they also have to contend with the rise in diesel prices,” PINC Research auto analyst Vineet Hetamasaria said.

Automakers could also face further pressure from auto parts makers passing on their costs to them.

“Auto parts makers have asked for price hikes because of rise in [costs] of raw materials. Original equipment manufacturers are increasing prices as they are feeling cost pressure from supply side,” Angel Broking analyst Vaishali Jajoo said.

However, auto makers are still banking on the ample liquidity in the market to see them through.

“The concern is availability of liquidity. Industry should be able to manage demand as long as financing is available,” Tata’s Dube told the Hindustan Times.

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