Car demand slides, majors mull price hikes

NEW DELHI Wed Sep 7, 2011 2:44pm IST

A worker walks at Maruti Suzuki stockyard on the outskirts of Ahmedabad August 1, 2011. REUTERS/Amit Dave/Files

A worker walks at Maruti Suzuki stockyard on the outskirts of Ahmedabad August 1, 2011.

Credit: Reuters/Amit Dave/Files

NEW DELHI (Reuters) - Demand for cars in India is likely to slow more than predicted as high interest rates and rising costs bite, while automakers mull price hikes that could further stifle purchases in the world's second-fastest growing auto market after China.

Car sales in Asia's third largest economy, which grew at a breakneck 30 percent in the last fiscal year, are seen growing by just 10 to 12 percent this year to end-March, an industry body said, down from an earlier forecast of 16 to 18 percent.

That makes grim reading for an industry struggling to cope with rising raw material prices, as more automakers join the ranks of firms reviewing their prices.

Japan's Toyota Motor Corp will raise prices on most models by 1.5 percent to 2 percent with effect from Oct. 1, an executive said on Wednesday, while General Motors Co's India unit will review its prices this month, its head said.

"Though there is a slowdown in the market, raw material prices are not coming down. Rubber and steel prices have stabilised to some extent but other material prices are still very high," Karl Slym, managing director of GM India, told reporters on the sidelines of an industry conference.

Rising input costs have created a fresh headache for automakers, with many firms watching input costs closely as they mull potential price rises, fearful of pinching sales volumes even further at a crucial time.

"There are cost pressures happening from all sides," said Prakash Telang, managing director of Tata Motors, which saw car sales fall 34 percent in August compared with a year earlier.

"We'll have to see and wait and watch what's happening in the market place," Telang said, adding that production had been cut for certain models.

Honda Motorcycle & Scooter India, a unit of Japan's Honda Motor Co, will review its motorcycle prices in October, its marketing head said on Wednesday.

SALES HIT SPEED BUMP

Passenger vehicle sales, which include cars, vans and sport utility vehicles, fell 5.7 percent in August, the second drop in two and a half years, the Society of Indian Automobile Manufacturers said on Wednesday.

The auto market, which saw a 15.8-percent decline in July, is driven by a burgeoning and aspirational middle class that relies on bank loans for purchases.

But the Reserve Bank of India (RBI) has raised interest rates 11 times since March last year in an effort to battle stubbornly high inflation, a move that has hurt credit-based purchases.

"While we hope that the industry achieves the overall growth forecast...we may have to revise growth projection for passenger vehicles and commercial vehicles further," Pawan Goenka, president of SIAM, said on Wednesday.

Demand has also been dented by high fuel prices, with many first-time buyers plumbing for motorcycles or scooters.

Car sales in neighbouring China, which grew 33 percent last year, are also slowing after the government stripped away most of its incentive policies. Chinese auto sales are forecast to grow at roughly 10 percent annually until 2015.

Still, China sells as many cars in an average month than India sells in a year. Despite comparable populations, China's car sales reached 13.8 million in 2010, while Indian sales totaled 1.9 million in the last fiscal year.

FESTIVE CHEER, RISING COSTS

Sales in coming months are expected to be buoyed by India's festive season, which starts in early September and peaks in November after the festival of Diwali, when it is considered auspicious to buy big-ticket items and when most people get their annual bonuses.

Many automakers also offer discounts at this time of year, leading to a pickup in sales, which could return to double-digit growth by January, Goenka said.

"We all hope the festival season will mark a recovery for the passenger car segment," he said.

Car sales in August were dragged lower by Maruti Suzuki, which sells nearly half of all passenger cars in India and saw its sales drop by 19 percent in August, marking its third decline since December 2008.

Output at Maruti, majority-owned by Japan's Suzuki Motor Corp, was also partly hurt by ongoing labour unrest that has now led to a production loss of about 4,000 cars.

Tata Motors, India's largest maker of trucks and buses and the manufacturer of the Nano, touted as the world's cheapest car and meant to target families of four on motorcycles, saw Nano sales plunge 85 percent in August from a year earlier.

Foreign automakers, however, continued to post rising sales, driven by exports. Many are also relatively new entrants to India and enjoy lower bases of comparison.

The Indian unit of Toyota posted an 84 percent-rise in August sales, driven mainly by its Innova and Etios models.

Nissan Motor Corp saw sales rise 11 percent.

Several global automakers in India such as Toyota, Ford Motor Co, Volkswagen, Nissan and GM are lining up new models and boosting investment in the country, with a focus on exports.

(Writing by Henry Foy in MUMBAI; Editing by Jui Chakravorty)

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