Just passing by

Last week, Lucky Motors informed potential car buyers that the company is reducing the prices of its vehicles or “passing on” the benefit of the rupee appreciation to its customers. It is common practice for automotive assemblers to “pass on” the impact of rupee’s movement against the dollar—and use these specific words to describe their pricing decision. A typical depreciation of the rupee causes prices to go up—what is now considered a run of the mill cause and effect storyline. Frequent price hikes are often shoved under the umbrella of “passing on” the external macroeconomic vicissitudes completely out of the control of the company raising said prices, thereby shielding it from any public scrutiny.

While Lucky Motors financial accounts are not available for us to analyse, it is evident from the published accounts of other assemblers that—if they are “lucky”—they might not follow into Lucky’s steps. Automakers were set to raise prices over the past few months as rupee took its massive and frequent tumbles but that depreciation was never passed on to the consumers (see graph).

Companies like Honda might not be able to afford a price reduction as the company is already trailing at negative margins. In Jun-24, Honda Atlas Cars incurred a grossmargin of -4 percent, only to turn the quarter around into positive earnings due to robust other income. Both Indus Motors and Suzuki had impressive gross margins during that quarter, but until very recently, Suzuki was in losses for every quarter in the last fiscal year, turning some profits during FY22 but in consecutive losses in FY20 and FY21. Indus Motors’ strong financial muscle and continued performance has always shone through but during FY23, despite an impressive last quarter performance, the company’s annual costs per unit sold rose higher than its revenue per unit sold (these are estimated) which seem to indicate the “passing on” of the costs may not have been adequate or timely, after all. That’s a chink in the armour.

If “passing on” of the costs is indeed followed religiously, Indus Motors may not reduce its prices. Suzuki and Honda certainly can’t afford to. But what’s left is absurdly low demand for vehicles on the back of criminally high cost of borrowing, surging petrol prices, and unending inflation. The latter may keep cash buyers at bay and savers staying put on their current saving instruments. Cars will have to be discounted enough to make investing in them worthier than other instruments (stocks, real estate, bonds, banks etc.)

The real tragedy here is that we almost never have a discussion on industrial growth (or lack thereof) beyond debating over the short-term effects of fuel prices and/or the fragility of the rupee against the dollar.There are no urgent discussions on long-term industrial growth or policies to promote such growth. Like passing on the costs to consumers, companies just pass on the buck of everything that is happening around them to the next big economic bump, watching it unfold in front of them like passersbys who have no say or stake in the matter.