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Old 23rd November 2012, 15:44   #16
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Default re: Understanding the cost of manufacturing a car

The bucks being added up in the price of a car may be due to some reasons mentioned here. I may be wrong, please correct if so.
  • You buy a car in an air-conditioned showroom with all the facilities. These showrooms are rented/owned and by the company which does incur huge costs. How many commercial vehicles have you been seeing in showrooms? If there are 5 showrooms of tata selling cars, there is 1 for commercial vehicles.
  • How many owners go and buy the commercial vehicles themselves? Hence, there might not be as many facilites available in the showroom. The space can be reduced, hence lower rents.
  • You take multiple testdrives of a car before zeroing on one. We even testdrive the vehicle which has the least probability on our list! How many times is one going to test drive a truck before buying it?
  • Most of the commercial vehicles don't have some funky design or great lines. But a car in the market, with reasonable price tag but looks age old will crash the sales chart. Does anyone remembers VERSA? Design team needs money, don't they?
  • The sale of passenger cars to commercial vehicles WOULD be 10:1(I stand to be corrected here). With higher number of sales, you need more and more space for servicing and maintaining these vehicles.
  • Stockyards! Where are they going to stock up the vehicles ordered from the factory till they are registered or you go and take the delivery?
  • 24 hour assistance. Most of the manufacturers are providing a 24 hour roadside assistance to their customers. Does this happen in commercial vehicles? I did read about some company offering 48 hours guarantee of getting the truck on road again, but that can be kept as an exception.
  • Last but not the least, Brand Image. Does not Rapid, that is almost the same as vento has a difference in price. May that be nominal, but it does count.

These are purely my views and I need to be corrected if any of these points are wrong. Please feel free to do so.
I am not associated with any manufacturer nor do I support the high prices, it is just my way of reasoning the prices.

EDIT:
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Originally Posted by gemi_kk View Post
Hmmm.... An interesting thread indeed.
Read your post now. Exactly what I wanted to say. Some points which I missed, you summed them up!

Last edited by carzone : 23rd November 2012 at 15:51.
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Old 23rd November 2012, 16:28   #17
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Default re: Understanding the cost of manufacturing a car

Force traveller is nothing but an outdated mercedez benz T1 model van (merc stopped its production in 1995). This model was licensed for production in India in the late 80s. Just like many other cars - amby,800- which never say die in India, this continued in production too. Save for occasional facelift the vehicle is the same.
So, traveller has already recovered the cost of tools and dies, and there is not r&d cost involved.

Now compare that to vento. Typically a VW model age is 7 years. All the r&d that went into vento/polo has to be recovered during this period. Additionally, Every new platform/model required re-tooling of factories which is a huge upfront cost.

Not to mention that even by van standards, traveller is ancient (although sufficient for Indian market), but other vehicles that you have mentioned are modern sedans with good safety, comfort, convenience built with very up to date technologies.
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Old 23rd November 2012, 17:01   #18
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by gemi_kk View Post
...where as for cars, Luxury tax comes into picture.
That's an interesting point. I always thought Luxury tax was restricted to Hotels and the kind. Can you please elaborate? Thanks!
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Old 23rd November 2012, 17:40   #19
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Default Re: Understanding the cost of manufacturing a car

A very Good and Interesting thread to discuss the value of a car

The margin of a dealer and the manufacture is one of the key point of the higher cost of the car. Still manufacture sells a ABS/tubeless Tyre as a premium.
Once in financial channel I heard to say that Automobile company makes more profit In Indian market than any other market.

The higher building/rent cost also push the car price up. To setup a showroom/service center you need to sell out more money here.
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Old 23rd November 2012, 17:59   #20
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Default Re: Understanding the cost of manufacturing a car

In most cars being sold in India,

Seatbelts-Imported
ABS-Imported
Airbags-Imported
ECU-Imported
Sensors-Imported
some other electronic components are also imported.


Now each item is levied duty seperately for each unit.
VAT, GST taxes on each and every item supplied by a vendor
Manufacturers incorporate all these duties and then add profit on top
central, state, taxes added on top of the price+profit
then comes dealer commission, the more garish the showroom the more the commission

Since commercial vehicles do not have many of these sensors, seatbelts on rear seats, airbags, ABS etc. They do not have to face these cascading costs.
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Old 23rd November 2012, 18:15   #21
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Default Re: Understanding the cost of manufacturing a car

As far as my knowledge goes, I have the following understanding:
1. The R&D and more-so the sales force along with advertising campaigns etc push up the cost of the sedan.
2. Dealership fact. Commercial vehicle dealerships are not as suave as a sedan dealership.
3. Safety features, and the amount of R&D done on those.
4. Marketing activities such as participating in Indian as well as Overseas auto shows push up costs a huge lot.
5. Premium finish for interiors as well as exteriors and premium paint jobs.
I guess these are the basic points which push up costs of premium cars & of course, how can we forget the Premium Profit they earn from selling sedans. Commercial vehicles dont give them such profits.
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Old 23rd November 2012, 18:37   #22
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by power ranger View Post
This vehicle has an ex-showroom price of 10.87 lakhs. Compare to something like the Vento.
Quite interesting to know this. Low cost could be due to:
  • Manufacturing method, which is mainly fabrication for an LCV compared to moulding/press work (making tool is a very expensive thing)
  • Use of discarded/old technologies bought at relatively cheap price
  • low tech assembly line
  • low tolerance level used in the design/manufacturing of LCV
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Old 23rd November 2012, 19:21   #23
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by Warwithwheels View Post
That's an interesting point. I always thought Luxury tax was restricted to Hotels and the kind. Can you please elaborate? Thanks!
The Taxing structure for cars is different when compared to commercial vehicles.

Commercial vehicles are considered for public transport and they attract less amount of tax.

I20 Magna costs 380K-440K for the manufacturer, however when it comes to exshowroom, it becomes 510K. add some life tax and insurance which make it to 6L+ when it comes on road.

In the case of Karizma, the factory cost is 66000 however when it comes on road, the price becomes 89K. (my bike's invoice) Our taxing system beauty.

Another thing which needs to be noted is, when ever any showroom makes an order for cars, they take loan from HDFC (dont know why) when they sell the car, the corresponding loan would be closed and then the car would be invoiced on customer's name. I think this will ensure them to push all the cars, esp the older ones. Fiat is an exception which sends cars on order.
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Old 23rd November 2012, 20:42   #24
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Default Re: Understanding the cost of manufacturing a car

Quote:
Originally Posted by gemi_kk View Post
...Another thing which needs to be noted is, when ever any showroom makes an order for cars, they take loan from HDFC (dont know why) when they sell the car, the corresponding loan would be closed and then the car would be invoiced on customer's name.
Guess you meant 'banks' in general

Dealerships borrow heavily to meet their working capital needs (Read: Inventory). Obviously, they repay once the car is sold and cash comes in. Atleast I don't see anything weird in that.

And this practice would extend to all dealerships as well (CV, Two wheeler etc.,)


Quote:
I think this will ensure them to push all the cars, esp the older ones. Fiat is an exception which sends cars on order.
Can you please explain the nexus between the two statements?
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Old 23rd November 2012, 22:04   #25
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Default Re: Understanding the cost of manufacturing a car

Thought provoking topic. I always wanted to ask this.

I am in no way supporting the manufacturers, but it seems here that my points are favoring them. When the Beat diesel was launched, why was it priced higher than the petrol even Chevrolet was saving on a cylinder? I guess money spent on R&D and incorporating new technology too needed to be recovered from the price of cars whereas not much R&D on new technology is happening to the commercial vehicles (especially, the vehicle being discussed). And those which use new technology costs a premium. Eg - Volvo over other.

Why is the jeans from Levis costing more than a Live-in? It is just for the sake of brand name. Even still, these days, the same branded jeans that costed you INR 1000 a couple of years back costs you a minimum of INR 2000 now. Have the material and labor cost doubled in two years? Definitely not increased in proportion to the increase in price of the product. Another example I have always been wondering about is the Baleno. Though the Baleno had huge discounts towards the end of production and that it is now years down the line, I just cant imagine even a hatch that can match the value provided by the Baleno in terms of power and features, at the same price. We had bought the top end Baleno for 6.5 lacs. It is not only that materials and labor have become costly, it is also that manufactures has become more greedy. And there are people who can / want to pay a premium for getting a small premium-ness over the ordinary. I have always felt that the people who are rich are becoming more rich whereas the poor are remaining the same. Ain't the difference between the poor and the rich is getting too disproportionate.

If I am wrong, please enlighten me. And, sorry if my post felt more of a rant.
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Old 24th November 2012, 00:15   #26
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Default Re: Understanding the cost of manufacturing a car

Quote:
Originally Posted by Warwithwheels View Post
Guess you meant 'banks' in general

Dealerships borrow heavily to meet their working capital needs (Read: Inventory). Obviously, they repay once the car is sold and cash comes in. Atleast I don't see anything weird in that.

And this practice would extend to all dealerships as well (CV, Two wheeler etc.,)

Can you please explain the nexus between the two statements?
When any manufacturer starts a showroom he will pay some 2-3 crores to the company as a deposit, against which the company sends him the stock. Once the dealer is done with this stock, he places an order for more cars and makes the payment for the new ones. The initial deposit will be with the company as a colletral/security or any other term you may think of.

Down the line, depending on the relation ship with the company, the company sends more cars than what were ordered. This in turn reduces the deposit amount. right? this is how the concept of showrooms work.

In this example, the dealer has put up the deposit amount, for which they are getting cars. The concept of car loans didn't come into picture.
One of my friend wanted to start a MS showroom for which the real estate requirement cost was coming around 80L and a deposit of 1Cr. when i talked to him, i got this info.
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Old 24th November 2012, 08:43   #27
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Default

Quote:
Originally Posted by gemi_kk View Post
...Down the line, depending on the relation ship with the company, the company sends more cars than what were ordered. This in turn reduces the deposit amount. right? this is how the concept of showrooms work.
Gemi, I wonder even if my friendly neighborhood Kirana Shop operates that way. But am sure that Car dealerships work in a completely different fashion.
2 or 3 crores is just pittance. It would not even suffice for a week's operation of a TATA or Maruti dealership.

Here's a screenshot to give you a fair idea about the kinda money that goes into a passenger car dealership setup.

Understanding the cost of manufacturing a car-tata.png

Source: http://www.tatamotors.com/contactus/dealership.pdf

Quote:
Originally Posted by gemi_kk View Post
When any manufacturer starts a showroom he will pay some 2-3 crores to the company as a deposit, against which the company sends him the stock.
BTW... Which manufacturer pays a company to start a showroom? I may be interested in such a deal?

Last edited by GTO : 24th November 2012 at 15:35. Reason: Merging both your posts.
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Old 24th November 2012, 10:44   #28
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Default Re: Understanding the cost of manufacturing a car

I agree the prices of cars in India are highly inflated. Particularly when it comes to big names it is more so. Remember when E series was launched it was close to 14 lakhs and Zen use to cost 2.5 lakhs. Today E series is 30+ when Zen is still 4 lakhs. When they find customers ready to pay they charge. And why should they not? If our nouveau rich are ready to pay 100% premium for a little better than ordinary car for it's brand and snob value it is their money. We need not complain.

Actually, preferred mode for commuting in our crowded cities is Public transport. But looking at pathetic state of Public transport facility we have to buy cars and two wheelers. I am told that some of the manufacturers spend good amount of money for lobbying to NOT to make Public transport convenient. I have also heard that in the same manner tyres manufacturers pay to the road contractors to not to make roads good so that their tyres sell.

Under these circumstances we have no option but to but personalised transport at whatever price it is offered. Our taxes are high for cars but that's ok. In other saarc nations taxes are still higher. Maruti Alto costs 12 lakhs (equivalent in Indian currency) in Sri lanka.

As far as I know Force motors, they are masters in cost cutting. In reality they also cut down on quality with it. I have traveled in original Mercedes traveler equivalent (same engine and same design), here in India in the vehicle imported by Force motors for R & D and later donated to one of the NGOs and difference is glaring and obvious. It out performs traveler 1:20 in the pick up, build quality, engine noise, rattle, etc. I am therefore not surprised that they can offer things so cheap. Look at the vehicle after 2 years and you understand why it is cheap.
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Old 24th November 2012, 15:43   #29
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Default Re: Understanding the cost of manufacturing a car

The "cost + margin" pricing model in the auto industry is long, long gone. When strategists are finalising the ex-factory price of a car, it is rarely influenced by cost. Rather, the question is : How much is the customer willing to pay?

At an 8 lakh price, our projections are 3,000 units a month
At a 7 lakh price, our projections are 3,500 units a month

Which do we choose?

It's a fine balance between revenue & volumes. Remember what BMW said : The difference in the manufacturing cost of the 3 & 5 Series is 10 - 15%. Now, go look at their selling prices.

The old Fiesta 1.6 moves for 5.xx lakhs in India, where the new Fiesta goes for 8 lakhs. The actual difference in manufacturing cost will be a fraction of that.

The Jazz actually costs more to make than the City in India. One reason is the Jazz' beefed up rear section (for safety). Second of course is the car's low volumes.

Last edited by GTO : 24th November 2012 at 15:44.
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Old 24th November 2012, 18:50   #30
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Default Re: Understanding the cost of manufacturing a car

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Originally Posted by CANPUSH View Post
I am told that some of the manufacturers spend good amount of money for lobbying to NOT to make Public transport convenient. I have also heard that in the same manner tyres manufacturers pay to the road contractors to not to make roads good so that their tyres sell.
That's a interesting stuff to know. Even manufacturers will be paying road contractor more so that they can sell parts like suspension,rim and etc. Till now I was knowing this nexus b/w BSNL and Private player.

Does buying car in rural area give better chance of bargaining and better pricing ? They need to sell out less to setup a 3-S.

Premium pay is just a eye wash for the customer. Many of us in T-Bhp has been witnessed the same. They charge premium, labor cost is getting increased but end of the day the service quality is falling.

We all are justifying the over stretched GOVT tax for the higher car price. Some one can also give info for various country's tax. Then we can compare better.
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