Impact of petrol price hike and plunging dollar on Indian Auto Industry

The petrol prices have been jacked up by Rs 7.50 per litre, owing to the falling in rupee against the US dollar. Unfortunately, we were not the first ones to rush and tank-up our cars, so were stuck in the queue for quite some time – giving ourselves ample time to think about its implications on the Indian auto industry. This didn’t end there and now there are few more things to consider as US dollar now costs well over Rs 56 and there are speculations that it soon cost Rs 57 or may even Rs 58. 

As a country we import more than we export – so in simple words that means we will have to pay more for everything that needs to be imported. Similarly, rising petrol costs not only mean additional pinch to petrol cars owners, but to everyone including two-wheeler owners and people who travel by rickshaw. In a country of over a billion people, you can be certain that even this number is bound to be very high and thus it is another burden on the common man who is already reeling under inflation.

But probably the impact on the auto industry is much worse than what will be visible on other sectors.  Frankly, from what we see, the Indian auto industry is almost on the verge of a crisis. The entire last fiscal has not been encouraging - barring last quarter of 2011-12, which just about managed to negate the impact of the previous three quarters. So, the current double blow might cost a lot more than just a temporary drop in numbers. Of course, there will be steps taken to correct the situation by both, OEMs and the government and we can also expect some positive outcomes from the current situation.

These are the expected outcomes of the price hike and rupee fall on the Auto Industry.

Hike in petrol prices:

Let us start with the issue that is closer to our heart as it affects our day-to-day life. We are not looking only at the consumers’ perspective here though, because that bit is relatively simple – maintaining a petrol vehicle is going to be a costlier affair now. We will talk more about the long-term implications of the current scenario. 

Impact of disproportionate demand: We have come to day when even petrolheads like us agree that the petrol cars not so dear to us and this hike is further going to strengthen those sentiments. Simply put, the demand for the diesel cars is going to go up further, which is not exactly a nice thing.

- Yes, we will get discounts on petrol cars – but it also means that manufacturers lose their operating margins. So, if it is a listed company like Tata, Mahindra or Maruti, then it also affects their share prices and our money eventually.

- If the demand for petrol cars goes down – then the investment for manufacturing petrol engines will remain under-utilised.

- We were spared from additional taxes on diesel cars in the current budget, but as the demand goes on increasing, the additional taxes may still get implemented in the next budget.

- The loss of margin due to poor sales of petrol cars will have to be recovered from some other avenues. It means that the premium on diesel cars might go up further. The most recent example is that of the Maruti Suzuki Ertiga. Although, the petrol engine used in the car is newly developed, while the diesel is the same from the SX4 sedan – the company is charging a premium of Rs 1.5 lakh for the diesel variants, which is or else not justified. 

Additional Investments: If the demand for the diesel cars continue to go up – which, it will, the OEMs will have to invest futher to increase production capacity. This is one of the few positive impacts; every country wants more and more investment for economic development. We already know about Maruti’s deal with Fiat to source 1,00,000 diesel mills per year, while most others have already started investing to build larger diesel oriented plants.

Segment growth: Currently, there are no diesel cars in the entry level small car segment and this might affect their numbers. People might opt for a one-time higher investment and buy a diesel hatchback instead of an entry-level small car. This trend is already setting in – the Maruti Suzuki Alto sales came down drastically last month and the car is no longer the highest selling model in the country. The Swift has overtaken the Alto as the highest selling car mainly due to the availability of diesel engines. In fact all diesel hatchbacks including the GM Beat, Ford Figo, Tata Indica and other are doing well.

There is also a possibility that people will prefer two-wheelers with better economy over buying entry-level petrol cars.

Fall in rupee value:

If the fall really is short-term then it should not cause too many issues, as purchases can be delayed or marginal losses can be absorbed by the companies. But, in the current situation corrections are not expected any time soon and hence there are bound to be a few repercussions. 

In short-term (one – two years), the rise in dollar prices will give more negative results, but might actually be a bit more beneficial in the long-run. 

Hike in prices: Although there is a decent amount of localisation in the mass market cars sold in India, there are still few components that are imported. And since USD is the most common currency for exchange these parts are going to cost a bit more, increasing the overall production cost of the vehicles. Considering that the total hike in dollar rates is around 10 per cent and about 10 per cent of the components are imported; then we can expect around 1 per cent hike in car prices.

A price hike is never welcome in any market condition, but in today’s situation when everything else is also on a upward move; the results are even worse. Buyers may put their plans on hold, which means the sales will again go down. The impact will be higher for companies like Honda, Toyota and Mitsubishi who rely a lot more on imported parts.

Localisation of components: Many manufacturers will try and localise as many components to reduce the losses due to currency fluctuation. This once again means more investment for the country, more employment and also additional business for component manufacturers.

Exports: As companies pay more for import, they will also get more Indian currency for the vehicles exported. It should encourage automakers to export from India and few companies like Hyundai, Nissan and Maruti are already making the most of the current situation. Indian vendors will also find it a bit more affordable to supply components for fewer dollars, making Indian products more lucrative in the global market.