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Mercedes-Benz India cuts costs to stay competitive...
Reluctant to pass on the full extent of the price increase to customers
By : Swaraj Baggonkar | Published : August 21, 2012
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Mercedes-Benz India cuts costs to stay competitive...
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Hit by rupee depreciation and falling demand, Mercedes-Benz India, the country’s third-largest luxury car maker, is heavily cutting down expenditure and absorbing cost escalation to keep cars affordable for customers.

The German company was reluctant to pass on the full extent of the price increase to customers for fear of hurting demand further, a top official said.

Mercedes-Benz India’s sales fell nearly 24 per cent to 1,633 units during April-July, compared with 2,141 units sold in the year-ago period, according to Society of Indian Automobile Manufacturers (Siam) data. Total absence of cheaper products in the range of Rs 20-22 lakh has impacted the company.

Peter Honegg, managing director and chief executive officer, Mercedes-Benz India, said: "The rupee has had a terrible impact on the company. We are close to catastrophic mood means we are cutting costs wherever possible, our guys are flying economy (class), we are going to cheaper hotels, we are cost cutting wherever possible."

The company is forced to absorb Rs 3 of every jump of Rs 10 in prices to avoid impacting retail demand which has been under pressure. It has so far increased the prices of its cars by five-seven per cent this year, which also saw changes in government's taxation policy and high inflation.

“For every two-three per cent rise in depreciation of the rupee against the euro, Mercedes-Benz India had to swallow 30 per cent of the price increase,” Honegg said on the sidelines, while inaugurating the largest luxury car workshop in India owned by Auto Hangar.

“Up to Rs 63 we are hedged. The hedging was a little bit in the negative but it has helped a lot. If it goes to Rs 70 or above that then we have increase the prices which will have a direct impact on our numbers,” added Honegg. The rupee has been hovering close to Rs 68.85 on Monday to a euro, according to the RBI.

The company also feels restricted in increasing the level of localised components in its models which could have otherwise helped the company to drive down costs. Since the volumes of its largest selling car C Class are 2,000-3,000 units a year, the company finds it difficult to find vendors who could supply in such low numbers.

Only 30-40 per cent of the C Class components are sourced from within India, while the balance are imported after paying duties. This sedan is presently the cheapest in the company’s line-up at Rs 31.6 lakh (ex-showroom, Delhi). The C Class, E Class, M Class and the S Class are assembled in India through a completely knocked down operation the plant in Chakan, Pune.

To counter BMW and Audi’s rise in volumes riding high on the back of demand for cheaper sports utility vehicles (SUVs), Mercedes is gearing up to launch a compact SUV in 2014-15 in India, which would be sharing the vehicle platform with a soon-to-be-launched car A Class next year.

This new small SUV, which is under development presently, will be assembled in India and take on BMW’s X1 and Audi’s Q3 (both are SUVs) priced between Rs 21-25 lakh. The X1 makes up nearly 30 per cent of BMW's overall volumes in India.

Mercedes hopes to follow this up with the launch of the GLK SUV in 2015. The GLK, which was show-cased at the New York auto show, will complete the product portfolio for the firm. The SUV will compete with the BMW X3, Audi A5 and the Land Rover Freelander in the Rs 35 lakh and above category.

The German company will also make necessary changes in production capacity to accommodate more models. Presently, the company is operating at 10,000 units per year.

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