Forex rates and car price

entropy · 7th June 2007, 02:49

I'm not sure if this is the right place to post this question.

I was curious why forex rate changes don't show up in car prices that have some component of imports. For most of the C+ higher segment this ranges from 25% to 100% (CBUs). In a simplistic model if a car price has X% import component then a Y% appreciation in INR should lead to about X*Y decrease in the price. Following is a table assuming 15% rupee appreciation (as with INR vs. many currencies recently)

Car Price Import fraction Expected decrease
10L 0.3 4.00% - 45K INR
12L 0.4 6.75% - 81K INR
24L 1.0 15.00% - 3.6L INR

So the variations could be pretty large based on localisation content. Who gets to pocket these "gains" ? Why these don't get passed on to the poor buyers. Have there been precedents where a company has passed on such gains to the end buyer. I understand it would be cumbersome to change a car price everyday as forex rate moves

but periodically it could be possibly done.

I have always felt that cars in india are way too expensive for what they are actually worth (thanks mostly to our taxes/duties but in some part I think also due to the manufactures fat margins esp in higher segments). For the later perhaps more volume/competition would bring it in-line but for the former I sincerely hope some sanity prevails in the long run ...

low_bass_makker · 7th June 2007, 03:42

this is some serious margins...but I think the car company would never pass them to the consumer....and they will keep the sale price to which it is before....

rubin2006 · 7th June 2007, 03:53

Intresting thing ,but you have been more technical than possibaly most of the indian buyers can be in there dreams ,if they make us fools by not giving us most BASIC of the options and robbing us poor indians , most importantly of it Air bags And Abs which they re giving in the Foreign markets when they sell cars at half the price they charge there

How can we ask them what money we re gainng on our rupee which appreicated like a rocket ,car companies would not like to discuss this matter even as rupee is 40.6 to 1 dollar had the dollar gone up instead of rupee they would have made hue and cry but now they re sitting silent to even speak of it ,some of these car companies i feel act more disgracefully then our most corrupt Politicians

Imagine the case of Toyota Camrey which Starts from Japan for 10 lacks which was 22000 Usd and now dollar hovering around 40 Rs this value is
20000 Usd so they re chargin us almost 2200 dollars extra ,and on top of it we have to pay 110 % duty which is 2500 more dollars as its a CBU
Because if they
reduce the value of Camrey Ex japan by 2000 dollars it will come cheaper to roughtly 4500 dollars which will be like 1.8 lacks cheaper ,but forget it you will not even hear any body talking about rupee Dollar situation other than Our IT companies cause they re loosing Big time

ako · 7th June 2007, 07:43

The rupee has started gaining drastically only in the last 6 months or so. I would think this is too short a period for car companies to make pricing decisions just based on this. Auto is very capital intensive and most contracts with suppliers would be long-term and locked in.

However, if rupee appreciation persists in the long term, we could see import prices coming down.

Mayavi · 7th June 2007, 09:05

Quote:

Originally Posted by rubin2006

Imagine the case of Toyota Camrey which Starts from Japan for 10 lacks which was 22000 Usd and now dollar hovering around 40 Rs this value is
20000 Usd so they re chargin us almost 2200 dollars extra

It is very less if you ask me as India is a low volume market for Toyota, so it can't benefit from economies of scale. It has to set up a seperate dealer network for just two models, after sales service and create a whole supply chain for the cars the sell.

entropy · 8th June 2007, 02:36

Quote:

Originally Posted by Mayavi

It is very less if you ask me as India is a low volume market for Toyota, so it can't benefit from economies of scale. It has to set up a seperate dealer network for just two models, after sales service and create a whole supply chain for the cars the sell.

Still I don't understand if that justifies the benefits not being passed on to the customers. The increase though seems to occur quite often on account of material cost/transportation etc. Well it's business so I think unless there is more volume/competition the companies would continue to silently reap these gains. Sad but that's the state of affairs seems to be at present.

risga · 8th June 2007, 15:20

Well, you must also consider the following before being too critical of automobile companies.

Most companies utilise a product known as FX forwards, which helps to fix their Fx rate upfront (say, for a period of 6 month or so), rather than vary for each consignment. This is done to preserve their margins, as they cannot be changing the showroom price of their cars very frequently, unlike the neighbourhood vegetable seller. FX rate is just one of the components. If you go to the extreme, there is no end, example metals are traded on the London Metals exchange. Now, steel, aluminium prices change everyday just like shares. So, there would be long term contracts. Say, Maruti will contract steel from SAIL at a rate which will remain constant for next 12 months or so.

Else, imagine prices of thousands of component prices varying everyday. And therefore, car prices varying just like tomato prices (in terms of volatility).

entropy · 8th June 2007, 16:51

I guess my query was a bit premature.

Given these long term contracts so should we expect a revision sometime in say 6 months time frame given current INR forex rates more or less prevail .. Would be interesting to watch.

Zappo · 8th June 2007, 19:07

You guys are talking of hedging practices against fluctuating forex. However whatever it may be the fact remains that this kind of fall in the dollar value (Rs46 to Rs40) has earned the manufacturers huge profits in the last 6 months or so. The ones who import CBUs or even CKD kits have benefitted hugely.

While the indian arms of the global units gain by paying less for getting in the same car (or parts of it) for lesser rupees and then selling it at the same old price the global parent has a double bonanza. They not only earn bigger moolah due to the increase in profits of their indian arms but also gain on the royalty front. Most of the times the royalty is paid back to the parent company as a fixed percentage of the selling price of a car in the local market. So the same payment of the royalty as earlier now fetches the parent company more dollars.

entropy · 28th November 2007, 04:04

Well .. It's been nearly half year since I started this thread. Do I see any manufacturer rationalizing their prices esp. those with lower localization content or CKD/CBU units. None.

I really think buyers are being taken for a ride.

serious_maniac · 28th November 2007, 15:09

Rupee has only been appreciating against dollar or rather a more correct statement is that the dollar has been depreciating against all major currencies. Where are the parts imported from? lets say Malaysia then the question is has rupee appreciated against Ringgit?

I do not think any parts are imported from US.... so cost savings for manufacturers seem unlikely.

tsk1979 · 28th November 2007, 16:33

Actually its very simple.
1. When value of Rupee falls, car prices rise due to rise in import costs. Rupee is worth less so you need to pay same
2. When value of Rupee rises, car prices rise because exports suffer, and to cover up for that suffering you pay more. Your salary is same right, and its worth more, so why not share some buddy

So either way car prices rise.
If Rupee stays stable car prices rise anyways to cover up for steel price rise.
If by some freak accident of nature the car price is reduced, the govt comes to rescue by raising taxes.

BaCkSeAtDrIVeR · 28th November 2007, 17:58

Car prices are not a function of cost, but a function of "what the market can bear". If you read between the lines, most press releases accompanying new launch do say that "this is the price we think the market will bear"; and like the price reduction of chevy's models recently, (and rumbles about i10's price hike) when marketers realise that they product is over/under priced after all, they do tend to refix prices.

entropy · 8th December 2008, 14:38

Bump

I guess as tsk1979 had mentioned, prices always move only one way. Up. Exchange rates etc are secondary. When Re appreciated we didn't get a break but as Re has depreciated now we all are hearing about rise in input cost due to import content blah blah.

I think I now understand the answer to my original query when I started this thread. I leave it to mods to close this thread as they please.

7th June 2007, 02:49	#1
entropy BHPian Join Date: May 2007 Location: Lost Posts: 405 Thanked: 51 Times	Forex rates and car price I'm not sure if this is the right place to post this question. I was curious why forex rate changes don't show up in car prices that have some component of imports. For most of the C+ higher segment this ranges from 25% to 100% (CBUs). In a simplistic model if a car price has X% import component then a Y% appreciation in INR should lead to about X*Y decrease in the price. Following is a table assuming 15% rupee appreciation (as with INR vs. many currencies recently) Car Price Import fraction Expected decrease 10L 0.3 4.00% - 45K INR 12L 0.4 6.75% - 81K INR 24L 1.0 15.00% - 3.6L INR So the variations could be pretty large based on localisation content. Who gets to pocket these "gains" ? Why these don't get passed on to the poor buyers. Have there been precedents where a company has passed on such gains to the end buyer. I understand it would be cumbersome to change a car price everyday as forex rate moves but periodically it could be possibly done. I have always felt that cars in india are way too expensive for what they are actually worth (thanks mostly to our taxes/duties but in some part I think also due to the manufactures fat margins esp in higher segments). For the later perhaps more volume/competition would bring it in-line but for the former I sincerely hope some sanity prevails in the long run ...
	() Thanks

7th June 2007, 03:42	#2
low_bass_makker Senior - BHPian Join Date: Mar 2006 Location: Faridabad Posts: 6,815 Thanked: 305 Times View My Garage	this is some serious margins...but I think the car company would never pass them to the consumer....and they will keep the sale price to which it is before....
	() Thanks

7th June 2007, 03:53	#3
rubin2006 BHPian Join Date: Sep 2006 Location: delhi/calgary Posts: 286 Thanked: Once	Intresting thing ,but you have been more technical than possibaly most of the indian buyers can be in there dreams ,if they make us fools by not giving us most BASIC of the options and robbing us poor indians , most importantly of it Air bags And Abs which they re giving in the Foreign markets when they sell cars at half the price they charge there How can we ask them what money we re gainng on our rupee which appreicated like a rocket ,car companies would not like to discuss this matter even as rupee is 40.6 to 1 dollar had the dollar gone up instead of rupee they would have made hue and cry but now they re sitting silent to even speak of it ,some of these car companies i feel act more disgracefully then our most corrupt Politicians Imagine the case of Toyota Camrey which Starts from Japan for 10 lacks which was 22000 Usd and now dollar hovering around 40 Rs this value is 20000 Usd so they re chargin us almost 2200 dollars extra ,and on top of it we have to pay 110 % duty which is 2500 more dollars as its a CBU Because if they reduce the value of Camrey Ex japan by 2000 dollars it will come cheaper to roughtly 4500 dollars which will be like 1.8 lacks cheaper ,but forget it you will not even hear any body talking about rupee Dollar situation other than Our IT companies cause they re loosing Big time
	() Thanks

7th June 2007, 07:43	#4
ako Newbie Join Date: Jun 2007 Location: New Jersey Posts: 1 Thanked: 0 Times	The rupee has started gaining drastically only in the last 6 months or so. I would think this is too short a period for car companies to make pricing decisions just based on this. Auto is very capital intensive and most contracts with suppliers would be long-term and locked in. However, if rupee appreciation persists in the long term, we could see import prices coming down.
	() Thanks

8th June 2007, 15:20	#7
risga BHPian Join Date: Mar 2005 Location: Mumbai Posts: 233 Thanked: 59 Times	Well, you must also consider the following before being too critical of automobile companies. Most companies utilise a product known as FX forwards, which helps to fix their Fx rate upfront (say, for a period of 6 month or so), rather than vary for each consignment. This is done to preserve their margins, as they cannot be changing the showroom price of their cars very frequently, unlike the neighbourhood vegetable seller. FX rate is just one of the components. If you go to the extreme, there is no end, example metals are traded on the London Metals exchange. Now, steel, aluminium prices change everyday just like shares. So, there would be long term contracts. Say, Maruti will contract steel from SAIL at a rate which will remain constant for next 12 months or so. Else, imagine prices of thousands of component prices varying everyday. And therefore, car prices varying just like tomato prices (in terms of volatility). Last edited by risga : 8th June 2007 at 15:22.
	() Thanks

8th June 2007, 16:51	#8
entropy BHPian Join Date: May 2007 Location: Lost Posts: 405 Thanked: 51 Times	I guess my query was a bit premature. Given these long term contracts so should we expect a revision sometime in say 6 months time frame given current INR forex rates more or less prevail .. Would be interesting to watch.
	() Thanks

8th June 2007, 19:07	#9
Zappo Team-BHP Support Join Date: Oct 2005 Location: Hyderabad Posts: 5,922 Thanked: 2,699 Times	You guys are talking of hedging practices against fluctuating forex. However whatever it may be the fact remains that this kind of fall in the dollar value (Rs46 to Rs40) has earned the manufacturers huge profits in the last 6 months or so. The ones who import CBUs or even CKD kits have benefitted hugely. While the indian arms of the global units gain by paying less for getting in the same car (or parts of it) for lesser rupees and then selling it at the same old price the global parent has a double bonanza. They not only earn bigger moolah due to the increase in profits of their indian arms but also gain on the royalty front. Most of the times the royalty is paid back to the parent company as a fixed percentage of the selling price of a car in the local market. So the same payment of the royalty as earlier now fetches the parent company more dollars.
	() Thanks

28th November 2007, 04:04	#10
entropy BHPian Join Date: May 2007 Location: Lost Posts: 405 Thanked: 51 Times	Well .. It's been nearly half year since I started this thread. Do I see any manufacturer rationalizing their prices esp. those with lower localization content or CKD/CBU units. None. I really think buyers are being taken for a ride.
	() Thanks

28th November 2007, 15:09	#11
serious_maniac BHPian Join Date: Sep 2004 Location: Bangalore Posts: 211 Thanked: 220 Times View My Garage	Rupee has only been appreciating against dollar or rather a more correct statement is that the dollar has been depreciating against all major currencies. Where are the parts imported from? lets say Malaysia then the question is has rupee appreciated against Ringgit? I do not think any parts are imported from US.... so cost savings for manufacturers seem unlikely.
	() Thanks

28th November 2007, 16:33	#12
tsk1979 Team-BHP Support Join Date: Feb 2005 Location: San Jose, CA Posts: 23,717 Thanked: 22,825 Times View My Garage	Actually its very simple. 1. When value of Rupee falls, car prices rise due to rise in import costs. Rupee is worth less so you need to pay same 2. When value of Rupee rises, car prices rise because exports suffer, and to cover up for that suffering you pay more. Your salary is same right, and its worth more, so why not share some buddy So either way car prices rise. If Rupee stays stable car prices rise anyways to cover up for steel price rise. If by some freak accident of nature the car price is reduced, the govt comes to rescue by raising taxes.
	() Thanks

28th November 2007, 17:58	#13
BaCkSeAtDrIVeR BANNED Join Date: Jun 2007 Location: Kochi Posts: 2,522 Thanked: 752 Times	Car prices are not a function of cost, but a function of "what the market can bear". If you read between the lines, most press releases accompanying new launch do say that "this is the price we think the market will bear"; and like the price reduction of chevy's models recently, (and rumbles about i10's price hike) when marketers realise that they product is over/under priced after all, they do tend to refix prices.
	() Thanks

8th December 2008, 14:38	#14
entropy BHPian Join Date: May 2007 Location: Lost Posts: 405 Thanked: 51 Times	Bump I guess as tsk1979 had mentioned, prices always move only one way. Up. Exchange rates etc are secondary. When Re appreciated we didn't get a break but as Re has depreciated now we all are hearing about rise in input cost due to import content blah blah. I think I now understand the answer to my original query when I started this thread. I leave it to mods to close this thread as they please.
	() Thanks