Union Budget deals a body blow to SUVs

The UV/SUV sector has been the silver lining in a gloomy automotive sales scenario. Will the excise hike change that or will buyers shell out more? Brian de Souza reports.

Autocar Pro News DeskBy Autocar Pro News Desk calendar 19 Mar 2013 Views icon4916 Views Share - Share to Facebook Share to Twitter Share to LinkedIn Share to Whatsapp
Ahead of every Union Budget, observers watch carefully for changes in personal income tax policies and more so, if you’re in the automotive segment, the finance minsiter's (FM) proposals that impact cars, fuels and service tax. Like every Budget, the one expectation was that the FM would announce sops for the automotive segment. The industry had every reason to hope so. Firstly, passenger car sales are growing at their slowest in many years and at its meeting in January 2013, SIAM said sales of cars were expected to be between 0 and 1 percent. Effectively, sales of cars (as against UVs and SUVs) would be flat.

For passenger vehicles, the category which includes UVs and vans, the prediction of growth was in the region of five percent, effectively flat as last year when the industry recorded a five percent increase.

In last year’s Budget, the excise rate were raised by two percent across the board and so effectively, the lower concessional rate for vehicle under four-metres was abolished. It had been given as a sop in the aftermath of the global slowdown in 2010.

But clearly this year is different. Automakers in general have wanted two key decisions: that diesel vehicles not be taxed and that some sops be offered for a slowing auto sector.

So when this year’s Budget shocker was announced, that rates on SUVs would go up by three percent to 30 percent, the industry reacted with horror. SUVs and UVs, their smaller cousins, so to speak, have been the best bit of news in a year that has been very gloomy for the automotive sector. Spurred by new launches and a customer preference for sporty cars, the SUV segment saw a sales growth of nearly 56 percent for the April 2012 to January 2013 period. The new products that have caught the fancy of the sector are the Maruti Ertiga and the Renault Duster, both of which have been lauded for their fuel efficiency and space, two attributes that attract Indian buyers.

But the Budget’s proposal for higher taxes affects vehicles that have to meet three key parameters: engines under 1500cc, a ground clearance of 170mm and above and a length of over four metres. Thus, the successful Ertiga has escaped this but the 1.6-litre petrol-engined Duster has driven straight into this space. However, given that most Dusters sold are diesel versions, the impact will not be that much for Renault India.

Among the vehicles that will bear the brunt of the excise duty hike are the Tata Sumo and Storme; the latter has been launched in a new avatar that its manufacturer is banking on, and the Mahindra range comprising the XUV500, Bolero, Scorpio and Xylo. Among these, the Bolero which received a refresh a year ago has set the charts ablaze, totting up over 10,000 units in a month on several occasions. Understandably, M&M was not pleased with the proposals as it affects several of its brands, many of which are popular in semi-urban areas. However, the Quanto launched a few months ago escapes the new hike and with sales going up, this vehicle has much promise. Thanks to its pricing, sales have exceeded that of the Xylo. Also, Tata Motors' Storme, has seen a sales uptick ever since the vehicle was launched.

The SUV excise hike also impacts Toyota whose Fortuner and Innova are selling briskly. Toyota will hope that with its strong brand, buyers will not mind paying out more. The proposal to hike duties on SUVs affects a segment that sells an estimated 300,000 vehicles with the Bolero accounting for a third. The Toyota duo of the Innova and Fortuner account for nearly 75,000 units, based on sales figures for 2012-13. While petrol prices were liberalised in June 2010, diesel prices were untouched. Last month, the government allowed oil PSUs to hike diesel prices in small doses and this will potentially lower the diesel-petrol price differential. The government’s overarching aim has been to cut its subsidy bill, and help ensure that India’s sovereign rating was not reduced to junk.

From the time that the former minister, Jairam Ramesh had SUVs in its sights, the sector has been in the news. A booming SUV sector with its high use of a subsidised fuel was roped into that effort.

Imported cars dearer; no sops for EVs

Pricey imported cars just got pricier thanks to the 25 percentage point increase in customs duty. In other words, an imported four-wheeler will now attract a customs duty of 100 percent, instead of the 75 percent earlier, while an imported two-wheeler (of 800cc or more) has to bear customs duty of 75 percent, up from 60 percent earlier.

The move is seen as a step by the government to generate more revenue as well as promote further local assembly by foreign OEMs. While premium bikemaker Harley-Davidson India has added three more models to its locally assembled range, premium car and SUV makers may take a little longer to take similar steps. Market leader BMW is learnt to be expanding its assembly facility in Chennai. Mercedes-Benz India has recently doubled the capacity of its paint shop to 20,000 units annually. Its assembly plant will reach the same level by end of 2013. Audi is likely to tap the Volkswagen facility in Pune to assemble some of its models.

India’s luxury vehicle market is pegged at around 50,000 units annually, says a Frost & Sullivan report. However, while the luxury vehicle industry was handed an additional customs duty, the EV industry received no additional sops with the government deciding to continue the duty exemption on parts for hybrid and EVs. Mahindra Reva had hoped for some stimulus to promote electric vehicles.

Will the sops for the CV sector help?

With the second edition of JNNURM being flagged off, public transport has got a boost. In the run up to the Budget, the commercial vehicle industry looked to obtain some sops to revive a largely tepid sales performance. The combined impact of a continuing economic slowdown, high interest rates and the hit that sectors such as mining and road building have suffered has resulted in the CV sector bearing the full brunt.

The medium and heavy CV segment, for the period April 2012-January 2013 suffered a loss of over 20 percent as against the year-earlier period with good carriers bearing the larger part. Reflecting this, truck leader Tata Motors has seen a 30 percent fall in sales of M&HCVs while that for Ashok Leyland was 12 percent.

Can anything be done to revive the sector that is synonymous with the barometer of economic growth? Interestingly, the Budget has two key policy proposals that can help. The first is the allocation for buses under the JNNURM and the second is the one percent subvention on chassis.

The JNNURN issue was first broached by the Union minister of state for urban development, Saugata Roy at the SIAM meeting in September 2012. Now the Budget proposes an investment of Rs 14,873 crore compared with the revised Budget estimate of Rs 7,383 crore to facilitate the sale of 10,000 buses under the second edition of the JNNURM.

Under this scheme, state transport buses were able to buy new buses as well as replace old ones. According to the JNNURM website, orders were placed for an estimated 15,260 buses. A majority of these buses were placed by the companies that run services in the cities. Therefore, Chennai, BEST in Mumbai and BMTC in Bangalore, to mention a few, placed orders for 1,000 buses each.

It would be pertinent to mention that the funds disbursed under the JNNURM benefitted a handful of states including Maharashtra, Andhra Pradesh, Delhi, Tamil Nadu and West Bengal. In the Budget, the FM indicated that the government would like the scheme to benefit the hilly states in the North East. This would help give an overall fillip to states in the eastern part of the country and with this part of the country having good roads, this can be a boon. So far, for all the North East states including Sikkim, just over 500 buses have been sold.

The most visible impact of the first phase of the JNNURM has been the low-floor buses that one sees in the metros. Clearly, there is a need for buses in the small cities which have not so far quite received the attention that they deserve. The Budget proposal, therefore, has been welcomed but sources say that it could take between 8-9 months before these buses become available. The CV sector hopes that the roads building programme that the budget spoke about will boost CV sales. An area of concern is that the GVK and GMR groups have withdrawn from the NHAI-sponsored roads.

If the government can resolve the mining issue, it would give a huge fillip to the commercial vehicle sector. Sales in this month are expected to be good on the back of the usual depreciation sops as well as replacement demand. Tata Motors’ sources said that the use of telematics by sectors such as pharmaceuticals and petrochemicals has helped garner sales. As far as the sop for excise duties on chassis, the estimate is that this could lower prices by about 30, 000 on a Rs 19 lakh truck. Overall, only an economy-wide boost can give the CV sector the much needed impetus it so urgently requires.

Hike in CBU bikes may not impact demand

The Budget for 2013-14 has significant implications for India’s superbike segment. The prevailing customs duty of 60 percent on imported bikes falling in the category of 800cc and above is now proposed to be upped to 75 percent. While the buyer will undoubtedly feel the pinch of the extra duty, the news might turn off potential customers looking at the specific superbike CBU models such as the 803cc Ducati Monster (earlier ex-showroom Delhi – Rs 5,99,000) or the 805cc cruiser, Suzuki Intruder M800 which will still be offered at an ex-showroom Delhi price of Rs 9,50,000.

Reacting to the hike, Atul Gupta, vice-president, sales and marketing, Suzuki Motorcycle India, said: “While the increase in customs duty is not helpful, we do not envisage a significant impact on the demand in the 800cc and above category. As of now, we will not increase the price of Suzuki superbikes. Given the considerations that go into the purchase of a superbike, we do not foresee a significant change in market size or demand patterns.”

While Suzuki plans to absorb the hike in the customs duty for the time being, others are looking at passing the burden onto the end buyer. Ashish Chordia, chief executive officer, Precision Motor India, sole importer and distributor of Ducati, said that “going by the trend of the increase in import duty every year, it is prudent to think that the long range plan will be affected. Current orders or clients who have decided to buy will not be affected so much but new prospects considering a purchase will be impacted. At this rate, the supply price of the product will be higher than the expected price in the Indian market.” On the other hand, Ravi Chopra, chairman and managing director, Piaggio Vehicles, a 100 percent subsidiary of Piaggio & C SpA of Italy, believes that the hike in custom duties will not bother trueblue superbike buyers and enthusiasts. “Passionate superbike buyers and enthusiasts in India will not bother about the 15 percent customs duty hike on the imported CBUs. They will continue to indulge themselves with these iconic machines,” said Chopra. Piaggio has recently brought the legendary Italian motorcycle brand, Moto Guzzi which shares retail space with the Aprilia brand at the company’s showroom in Gurgaon, Delhi NCR.

According to industry experts, the superbike segment’s (600cc and above) market size in India for calendar year 2012 stood at around 1,400 units. While bikes around 600cc to 900cc sell in majority numbers in this category, the market size of 1000cc bikes and above comprise around 350 units, in which Yamaha Motor India has an 18 percent share. Yamaha currently imports and sells three superbikes in India – the 998cc YZF R1 and FZ 1 and the 1679cc VMAX.

While importers and sellers such as Honda Motorcycle & Scooter India, Yamaha Motor India, Aprilia and Moto Guzzi, BWM, and Ducati will have to face the customer resistance in the wake of recent hikes, the segment below 800cc remains unaffected and will more or less gain foothold in the near future. According to the officials at DSK Hyosung, which currently imports and sells five models all falling below 800cc capacity, the total duties currently levied on such bikes stand at 28 percent. The company imports and sells bikes ranging from 250cc to 700cc and is further looking at assembling some of them as soon as it establishes its plant in Lonand, Maharashtra. Besides Hyosung, Kawasaki is another player in the below 800cc segment which sells the 649cc Ninja 650 and the 250cc Ninja 250R.

AMIT PANDAY
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