MC Explainer: Why Piyush Goyal told auto firms to prioritise volumes over margins

Why have entry-level cars become the scapegoat?

Per  data provided by SIAM, the sales of small cars declined 15.5 percent to 66,000 units between April-September 2024  from 78,170 units in the same period last year, comprising just 3 percent of the  20,81,143  PVs sold during the first six months of this fiscal year.

But for premium sedans and SUVs, a 15-20 percent hike in prices had negligible impact on sales. However, in the compact car segment, where Hyundai and Maruti are market leaders, a 20-30  increase in the price tag has put the products beyond the reach of those migrating from  two  to four-wheelers, leading to purchases being postponed indefinitely.

SIAM President Shailesh Chandra says that while some people are migrating from hatchbacks to entry-level SUVs (Tata Nexon, Hyundai Venue, Maruti Brezza), many are switching to affordable, pre-owned cars (priced between Rs 2.5-5.5 lakh).

What was the quantum of price revision?

Per an industry executive, input costs surged  25-30 percent post pandemic, which drove up the price of vehicles.  For instance, a Maruti Suzuki Alto (800 cc), which cost between Rs 2.5-3 lakh (ex-showroom) before Covid, is now available at Rs 4-4.5 lakh (1,000 cc version). This has made cars prohibitively expensive for first-time buyers.

What drove up car prices post Covid?
The surge in input costs was due to higher costs of compliance, heightened emissions standards, and rising raw material costs. Furthermore, the semiconductor shortage drove up chip costs. A spike in the prices of commodities like steel and aluminium also added to the auto sector's woes.

Is the industry sitting on high margins?

Despite a hit on volumes, the auto industry has double-digit profits. For instance, Hyundai Motor India recorded a PAT (profit after tax) of Rs 1,375 crore (Rs 1,628 crore in the same period last year) and an operating margin of 12.8 percent during Q2 FY25. The South Korean carmaker attributed the decline in PAT to weak market sentiments and geo-political factors

PV market leader Maruti Suzuki posted a 17.4 percent year-on-year (YoY) decline in net profit in the August-September quarter, at Rs 3,069.2 crore. The company claimed that the decrease in quarterly sales and elevated discounting levels dented the company’s operating profit. Its EBITDA margin was 11.9 percent during the quarter.

Mahindra and Mahindra (M&M), which bucked the trend, stated that its consolidated net profit for Q2 FY25 surged 35 percent YoY to Rs 3,171 crore, aided by robust earnings growth across its automotive and services segments, and expanding SUV sales. Its EBITDA margin for the quarter expanded by 30 basis points (bps) to 14.2 percent, beating the expected 13.9 percent.

While commodity prices have softened over the last few quarters (and profits expanded), none of the carmakers have dropped prices, prompting the minister to suggest that OEMs should trim their margins and go for higher volumes.

What will more competitive pricing mean for margins and sales?
The reduction in the profit margins of four-wheelers will make their products a bit more affordable, resulting in higher sales. Once sales move northwards, GST collections will also go up.

Can the government help make cars more affordable?

Industry players reckon that the least the government can do is reduce taxes and remove the  cess.

At present, the taxation on cars varies by vehicle type. For instance, small petrol (<1,200cc, <4 m) as well as diesel (<1,500cc, <4 m) cars attract 28 percent GST (in addition to 1 percent cess). On the other hand, while mid-size cars are taxed at 43 percent (28 percent GST + 15 percent cess) , 48 percent taxation (28 percent GST + 20 percent cess) is applicable on luxury cars . SUVs are taxed at 50 percent  (28 percent GST+22 percent cess), and electric vehicles are taxed at 5 percent.