Rising costs throw auto-companies out of gear

Rising costs throw auto-companies out of gear

Mansi Kapur | TNN

Mumbai: Automobile companies may not be in for a smooth ride in the next few months—especially when it comes to profitability. While demand might take a turn for the better in the coming year with a long line-up of new models, increasing production costs and competition are expected to keep operating margins under pressure.

   Production costs, which have been on the rise in the past few quarters,
are expected to go up further in the coming months. Prices of key inputs
like steel and rubber are expected to rise in the coming months. A recent
report from Fitch Ratings on the auto sector said, "Margins of automobile
companies could come under increased pressure during 2008 on account of
higher steel prices expected during the year—with the tight domestic market
limiting OEMs' ability to pass through increased costs.'' Although there
have been two rounds of steel price hikes since January, prices are expected
to rise further in the coming months. The same holds true for rubber prices.

   And though demand for automobiles has grown at a rate of 12% during the
last 10 months of this fiscal, it is still sluggish compared to the 20%-25%
growth it witnessed in the last few years. As a result, manufacturers are
finding it near impossible to pass on the input cost increase to the
customers. "Even though some auto companies have announced price increases in the last few weeks, they have not been able to implement it very
successfully as there are huge discounts being offered at the moment to
retain customers,'' a city-based car dealer said. Most auto companies like
Tata Motors, Mahindra & Mahindra, Bajaj Auto and TVS Motors reported a drop in their margins in the third quarter as compared to the previous years.
Officials from these companies said that margins would continue to remain
under pressure in the near term.

Source- Google Groups