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Old 25th April 2018, 18:36   #1
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Default Overpriced cars : Myth or reality?

Hi Fellow BHP-ians

I have been following team-bhp's posts for years, over these period I would say I have become more educated, wiser, sharper and knowledgable to the world of cars. Of late I have noticed a lot on the "Pricing" factor for cars. My recent read was the all-new "Y-aris" and it goes all the way with City, Innova, WR-V and many other recent premium launches over last few years.

What concerns me is the basic definition of price of a car ?
I mean here is what are the factors that actually define the right price for a product and what makes us feel the product is over-priced.

Comparing a product with-in its segment provides a relative pricing, but is that what hold good for different manufacturers who use different techniques, materials, quality and other parameters which influence the final pricing.

I feel there is a direct relation between Price and quality. e.g. there are multiple Udupi/Sagar hotels serving similar curries and are similarly priced with a variance of 5-8%. But the moment you go to a New Udupi/Sagar with a bit of proper ambience the price varies by 30-40%. I agree the ambience and service plays a role to dictate the price, even factors like rental value, labour cost and transport adds to that.

Similarly in the automobile world lot of these factor influence pricing e.g. Innova which was 7Lakhs in 2005 is costing appx.18Lakhs now, Considering the inevitable "INFLATION" factor 7Lakhs in 2005 is actually translated to ₹ 1,632,540.78 [2017]
Number of Years: 12
Average Yearly Inflation Rate : 7.35 %
Culmulative rate of inflation : 133.22 %

But if we compare the features available in 2005 vs 2018 we see an incremental leap.

So the question here is "Is it a state of mind which actually makes us feel cars are overpriced or We pay for what we actually get? "


Note - I am not bringing purchasing power parity of individuals -
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Old 25th April 2018, 19:37   #2
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What if it was pricey to begin with..? As the market matures (read saturates) the product must necessarily offer better bang for the buck.
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Old 25th April 2018, 19:58   #3
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Default re: Overpriced cars : Myth or reality?

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Originally Posted by peus017 View Post
What concerns me is the basic definition of price of a car ?
IMO - Is the maximum price a customer would be willing to pay for the product.

An overpriced product is when a majority of prospective customers feel that the premium demanded by the manufacturer is beyond reason or logic.

You just can't put a hard and fast rule around it, nor explain it with inflation and such factors - because the maximum price a customer would be willing to pay is decided by many social factors too - Like brand, social perception, exclusivity etc. Some products are even overpriced on purpose because the customers desire it to be so!
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Old 25th April 2018, 20:22   #4
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Default re: Overpriced cars : Myth or reality?

Hard reality almost all the cars that are out there in the Indian market are over priced, right from the base price to taxation to inflation to what not used as an excuse to justify! The price that a consumer has to pay is HUGE Vs what these products offer. Primary reason being, cars aka automobile are considered as Luxury goods by the system. This is very similar to the 2% of population paying income tax and supporting the rest. Disparities and huge ones at that!

From a business angle one can't really blame the manufacturers alone, unless the underlying disparities are fixed in our economy and society in general.

My gripe towards manufacturers is basically the way in which they manipulate categories and make typical entry level sedan like Honda City, Verna and now the Yaris a premium class?! what logic are these sub categories with a model range??? Just to fool the consumer to pay money. To me the Yaris is just like Sunny, better kitted.

I just bought an Ignis and I think I paid atleast 1.5 to 2 lakhs for what it is actually worth. I paid a premium for what I wanted as features if you ask me, though I got some juicy discounts overall.

Last edited by Jaggu : 25th April 2018 at 20:23.
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Old 25th April 2018, 20:54   #5
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Default re: Overpriced cars : Myth or reality?

I guess the car manufacturers can price their cars as high as they want, as long as the Customer is willing to pay for it. Even if Toyota were to increase the price of Innova by 1-2 Lakh, even then the Innova would sell in high numbers. Such is the brand value of that car in the Indian car market.

Still I think prices of most cars have been increasing at an alarming rate over the last 5-6 years or so. We bought our Punto MJD Emotion in 2012 for 6.5 Lakh (on-road), then in 2016 one of our close relatives bought a Celerio ZXi AMT for 6 Lakh lakh (on-road). Except for AMT & steering mounted controls, our Punto was a better equipped car & Punto is of course from a higher segment.

As of today, premium hatchbacks with diesel engines are priced around 10 lakh (e.g i20, Baleno). Let us go a few more years back in time, in 2001 a ZEN VXi used to cost around 4.5 lakh. We have a 2010 i10 magna in our extended family, that car cost us around 4.5 lakh. So, in that time period the prices of cars were stable, it is only during the last few years the prices of cars have started to rise quite unreasonably.

I believe the luxury cars have been more adversely affected by this phenomenon of overpriced cars. I am waiting for a "JIO" moment to come in the Indian car industry, which would force the rest of the manufacturers to price their cars competitively.

Last edited by GTO : 27th April 2018 at 12:26. Reason: typos
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Old 25th April 2018, 21:23   #6
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Default re: Overpriced cars : Myth or reality?

In my view to a large extent-Overpricing is perception.

Companies decide a 'price'. If there are enough buyers at that price to meet the companies targets, then as far as the company is concerned, it is rightly priced. The customers who buy it also think it is a fair price and there is a reason for the premium they are paying over a similar competitor product. Sometimes this backfires and the company is forced to correct. The S Cross is a good example. Another one is the Ford Fiesta which could never recover from the 'over pricing'

The rest of the world can cry hoarse about 'overpricing' but the company is not going to care. Tons of examples in our market.

And this is not just for cars, any consumer goods, schools, restaurants all fall into the bucket. If a particular pricing has enough takers, the rest does not matter.

Also, all of them are in it together. Take the example of Yaris, the pricing has made the Honda City (which is mostly perceived as overpriced) look good. This now gives Honda the freedom to do a few tweaks and raise the bar and again this sets the stage for a Yaris refresh or special edition at a higher price.

In summary, overpricing (like beauty ) lies in the eyes of the beholder. So whether it is a myth or reality depends on who is looking at what. Personally for me, I find most of the cars in the market currently grossly overpriced for what it offers and compared to the prices even 3-4 years ago.

Last edited by Rajeevraj : 25th April 2018 at 21:24.
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Old 25th April 2018, 21:42   #7
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Default re: Overpriced cars : Myth or reality?

Quote:
Originally Posted by Rajeevraj View Post
In summary, overpricing (like beauty ) lies in the eyes of the beholder. So whether it is a myth or reality depends on who is looking at what.
Well said! One of the best examples of this statement in automobile market is Hyundai Creta. Creta is overpriced as per segment standard still it sells like hot cake.
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Old 25th April 2018, 22:03   #8
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Default re: Overpriced cars : Myth or reality?

In 1990 I bought my first car a bucket-seat floor-shift Premier Padmini for Rs 200,000 or so. The INR has depreciated ~6.5 times since then. This makes that Padmini priced at ~Rs 13 lakhs in today's money - a top end Yaris - picked that as it is a hotly debated topic. What does that get us in terms of a car today and how far ahead of the Padmini would a car priced at Rs 13 lakhs be on all points of comparison? Fact is we get a lot more bang for the buck today in automobiles than ever in this country's history and it is only getting better. Let's take another example. In 1996 I bought my first luxury car or what was amongst the top end cars built in India in those days - the Daewoo Cielo for I think about Rs 6 lakhs with all the bells and whistles. In today's currency that is ~Rs 23 lakhs. At Rs 23 lakhs one gets a lot more than a Cielo today - Octavia?.

So are our cars over priced is a function of where you start the measurement from.

Compared to Dubai or China yes cars in India are over priced. Compared too our own yesterday they are not. Compared to what car enthusiasts will want they will forever be over priced.

What is over priced will vary by buyer and for the same buyer with time.
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Old 25th April 2018, 22:04   #9
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Default re: Overpriced cars : Myth or reality?

Almost all cars that are assembled in India are fairly priced. Only CBUs and SKDs are overpriced, because of taxation.

Among mainstream cars, you mostly get what you pay for. Some cars might seem overpriced because we only tend to weigh in and compare "visible" parameters like features (auto headlamps, sunroof etc) & engine (power, fuel economy etc). We mostly tend to ignore "invisible" parameters like safety (no crash test data) and automotive engineering (handling, ride, braking etc). Then there are other parameters like build quality, part reliability, quality of seats etc where there will always be differences between brands and models.

There might be few exceptions though -

- Certain mainstream models might have higher import content (again taxation)
- Certain companies might have higher financial strength (no loans on their balance sheet, for example) than others. Such companies can afford to price a particular car lower than others & still maintain decent profitability/margins.

No manufacturer would intentionally overprice a car because lower price generally means higher sales. After all, car manufacturing and selling is a volumes game.

Last edited by SmartCat : 25th April 2018 at 22:28.
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Old 25th April 2018, 23:06   #10
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Default re: Overpriced cars : Myth or reality?

Quote:
Originally Posted by smartcat View Post
Almost all cars that are assembled in India are fairly priced.
+1 to that.

Quote:
Originally Posted by smartcat View Post
There might be few exceptions though
+1 again. This is why Manufacturers create 'Brands' and try to differentiate on different factors such as Service, Features, etc. This is why some manufacturers have higher profit margins (trying to go ahead of the curve).

Quote:
Originally Posted by smartcat View Post
No manufacturer would intentionally overprice a car because lower price generally means higher sales. After all, car manufacturing and selling is a volumes game.
True that. Even if someone puts a higher price on their product, they eventually have to offer huge discounts later (Audi, VW for example). So the market forces them to adjust based on what they are offering w.r.t competition.

Also, if you look at it in detail, all vehicles (including Motorcycles) are very heavily taxed in India. Based on their cost of manufacturing, the taxes are usually near by 100%. + or - 10% depending upon the State and category of the vehicle. So when you pay on-road price of about 10 lacs (including extra items such as insurance) for a car, its manufacturing cost is like to be less than 5 lacs. Dealers usually operate at near about than 5% in margin on product sales.

So it is not the price that the Manufacturer decides that is high, it is the taxes that the governments (or numerous government departments) take from us (directly or indirectly).

We tend to compare Car prices in India with those in countries such as US where taxes on cars are lower. Try to compare the same with a country such as Singapore or China and you would feel the opposite
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Old 26th April 2018, 02:05   #11
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Default re: Overpriced cars : Myth or reality?

Quote:
So when you pay on-road price of about 10 lacs (including extra items such as insurance) for a car, its manufacturing cost is like to be less than 5 lacs. Dealers usually operate at near about than 5% in margin on product sales.

So it is not the price that the Manufacturer decides that is high, it is the taxes that the governments (or numerous government departments) take from us.
An optimist like me would not shy away from mentioning a figure of 4 Lakh instead of 5. I would like to mention another reason for increased costs. Manufacturing sector is highly unorganised in India, every third or fourth workshop/ factory in Faridabad claims to supply parts to Maruti. Imagine the number of vendors/sub vendors/sub-sub vendors, transportation costs, GST, individual factory profits, transporter's profit etc etc.
Tata tried to do Jio by eliminating some of the above mentioned points for Nano production,but failed in terms of sales.
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Old 26th April 2018, 08:03   #12
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Default re: Overpriced cars : Myth or reality?

Irrespective of inflation or deflation or leveraging by mass production, if we go strictly by the prices of cars today then yes certain cars are indeed overpriced.

However, the calculations for being overpriced are slightly complex. It depends on engine specifications (also keeping to national norms to decrease tax burden for big engines), raw material input (aka quality of plastics, fabrics, steel, tyres, alloys), convenience expenses (i.e center console type, gadgets etc), safety (number of airbags, ABS, EBD, hill-hold etc).

Suffice to say that :

1) Suzuki maintains the optimal balance of engine specifications, initial acquisition price, running costs and gadgets of perceived value - hence is a run-away hit and is "considered" value for money. However their raw-material input isn't industry beating or even median so that's where the shortage lies.

2) Hyundai maintains the industry-best balance of gadgets of perceived value, raw-material input and running costs.. however since their engines are wide and varied, most slot in a position where government penalties are attracted and thus running costs aka fuel efficiency, insurance and part charges also go up slightly. This is their shortage and thus they can always only remain in 2nd position.

3) Honda - off late they've been skimping on raw material input but giving gadgets of perceived value and space. Their engines are usually frugal and hence they give their buyers the much vaunted lesser running costs though service charges are altogether another thing. However Honda runs on brand value as does Toyota and thus they do charge, lets say 5% purely for that single aspect. That strategy however will ensure that both stay in their respective sales positions for years to come.

4) VW/Skoda - highest quality of raw material input, i.e rhino hinges in doors, better paint techniques, better plastics, better welding techniques etc. However their running costs are industry highest and the perception of running costs of which reliability is a major component, is that of being even higher. They do fall short in convenience aspects i.e space, seating etc. This will lead them to also be exactly where they are.

5) TATA - great quality of RM input, good space, good comfort and convenience inputs.. however TATA does suffer from after-sales and lack of brand recognition/snob appeal (the very factor that makes Honda and Toyota charge for their brand value) thus TATA doesn't sell even if they mark-down by 5%. Of course they are among the top 5. A design refresh and renaming of the entity is badly required.

ALL the above brands have certain cars that compete with each other in certain segments and the price difference is on average 10% or at the most 20% on higher segments.. however given the amount of permutations and combinations + luck required to necessitate a trouble free ownership, it is impossible to calculate which car is value for money and which isn't.. all need-based at the end of the day. Price strictly being a hurdle, a Hyundai and Maruti will deliver a car at the 4-7L price barrier which will be unbeatable.
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Old 26th April 2018, 08:53   #13
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Let me add a new twist.

1. Tax sops? Automakers have got land at throw away prices and Tax holidays for years together.

2. Labour cost compared to the rest of the world? Low. Don't even talk about the crushing healthcare costs they have abroad.

3. Investment on R&D specific for India? Meh.

4. Investment on meeting emission standards? No problem. Let's blame the fuel quality and lack of public awareness.

5. Costs associated with environmental protection and management? Well I don't know. But check how much GM was fined in India for the Tavera engine pollution fraud.

6. Warranty costs? Lol. Sell third year warranty for a price while rest of the world gets 7 years standard in many cases.

And cars cost more in India? 😀

I can't imagine how much more cars would cost if tax sops are gone and a couple of other factors (mentioned above) start becoming relevant for India.
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Old 26th April 2018, 09:11   #14
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Default re: Overpriced cars : Myth or reality?

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Originally Posted by peus017 View Post
What concerns me is the basic definition of price of a car ?
I'd agree with the sentiment that pricing often boils down to perception. Each one of us has a typical willingness to pay.

If you look at most threads on premium cars, be it CKD or CBU: the first thought that comes to mind is, this car is $ XYZ in the US, and $ to INR is ABC%, and hence, this car is over-priced in India.

The other aspect is, we tend to compare prices to what we consider to be a benchmark. The pricing of the Yaris, being in the same segment as the City/Ciaz, is immediately compared against the City, the perceived segment definer. The built-up cost doesn't really matter.

And then there are the segment creators, who have a double-edged sword. If they get it right: the Innova, Fortuner and EcoSport. There wasn't anyone giving what these cars provided so there wasn't real competition but the package was strong enough that Innova/Fortuner's seemingly high pricing doesn't deter buyers.

I believe, price ends up being driven by two factors: 1) brand equity, and 2) benchmarking against the segment leader

Else, a Toyota/Maruti Tiago would have sold for maybe a 25% premium whereas a Hyundai Fortuner would have 1/10th the sales at that price.
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Old 26th April 2018, 10:14   #15
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Default re: Overpriced cars : Myth or reality?

"Premiumization" - as the name goes, the current trending hashtag of high flying marketing guys of today's industries. We can always keep pushing the sales teams to deliver more volumes, but we know that the obscenely high volume targets given to them would not be met, and we anyway want money/profits to show. Hence - premiumize the offerings by adding "perceived" value adds. Like the "pehle se behtar", (100 nimbuon ki shakti wala") soap.

Contrary to what we may like to believe, marketing does bring in customers, who are willing to pay more if sufficiently convinced (fooled successfully) that a particular product/brand is giving them a lot more than the price on which it is offered.

Right price for a car (or any product) is the maximum price such "target" customers are willing to pay, in a way that it satisfies their inflated egos/social standing/snob value/whatever we can call it.
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