Indian Auto Makers Search for Strategies to Steer Through Slowing Economy

MUMBAI – There are troubling signs in India’s auto industry that may portend a rough patch ahead, as the world’s economy continues to contract.

For example, BMW AG has scrapped plans to bring the Mini to India by 2009. Peter Kronschnabl, president BMW India Ltd., recently quoted an internal feasibility study that says, “It will not be viable to bring the Mini that soon.”

A small car such as the Mini, costing Rs2 million ($50,000), would be regarded as very expensive in the context of the slowing economy, Kronschnabl says. “But BMW is hopeful. In another one-and-a-half years, we (will) reassess the market again.”

Meanwhile, Tata Motors Ltd. is increasing its internal power-generation capacity to 44 megawatts to hedge against an unpredictable outside supply. The demand for electricity in India steadily has been increasing due to fresh investments planned by auto makers and other industries.

Domestic auto makers raised their retail prices in fourth-quarter 2007 to offset the cost of energy, rising interest rates and the escalating price of oil. The Indian government in February cut the excise duty on small cars from 16% to 12%, and car makers reduced prices up to 3% to pass along the savings to buyers.

Ford cut price of flagship Ikon to attract buyers.

Unfortunately, rising steel prices now are pushing auto makers to increase retail prices, while anti-inflationary steps by the government are forcing banks to increase auto-loan interest rates and charges. HDFC Bank loan rates have jumped more than 15%.

“Steel prices have risen so steeply, they cannot be absorbed any more,” says Surinder Kapur, chairman and managing director of Sona Koyo Steering Systems Ltd.

Maruti Suzuki India Ltd. is advising its dealers to be prepared for a significant increase in vehicle prices next month. Honda Siel Cars India Ltd. and Mahindra & Mahindra Ltd. likely will follow.

However, Ford India Ltd. has announced a cut of Rs36 ($900) in the price of its flagship Ikon, a strategic move to attract buyers as other car prices rise.

Auto makers are adopting different strategies to woo the buyers in the face of such challenges. Ford is offering 24-hour roadside assistance. Maruti Suzuki and BMW India are setting up showrooms for current cars and concepts. And Fiat India PVT Ltd. has seven product launches lined up in the next two years.

Tata recently bought Nissan Motor Co. Ltd.’s South African plant to produce the Nano for Europe, while Mahindra is going straight to London to start selling its Scorpio SUV. “Attractive price is our surprise offering,” Mahindra’s Executive Vice President Rajesh Jejurikar says.