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Will Luxury Car Buyers in India Feel the Pinch?

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Mohit Arora

Surinder Singh (a fictitious name) currently drives a BMW 3 Series, is the male head of household and earns anywhere from Rs 1 lakh to Rs 5 lakhs (US $1,954 to US $9,770) or…infinity. This is the typical profile of a luxury new-car buyer from our 2011 India Sales Satisfaction Index (SSI) StudySM.

In March 2012, India’s Finance Minister Pranab Mukherjee announced a hike in the basic customs tax on luxury cars. Large cars (excluding imported models) over 4 meters in length and with engine size larger than 1.5L are subject to a new excise duty of 27%—up from 22% + Rs 15,000 (US $293) of the fixed duty. This means that luxury vehicles are set to become more expensive in India—by up to Rs 3 lakhs (US $5,748)—as automakers are compelled to pass on the additional burden to consumers.

Given the substantial increase in cost to the consumer, the question to consider is: Will the price hike deter buyers like Mr. Singh from making a luxury car purchase in the future?

Based on what Mr. Singh has indicated on our survey, the price hike would be equal to as much as another 3 months of his household income. While significant, this price point still makes a luxury car purchase affordable, considering the easy availability of financing and the prospect of future rising incomes in India. As a result, we do expect luxury car sales to surge in the very near term as prospective luxury car buyers are now given the further impetus to order their desired luxury car before the budget announcements take effect.

BMW 3-series

Luxury Automakers May Offset Price Hikes to Soften Sticker Shock

In the medium term, after the price hikes take effect, we believe that luxury OEMs will absorb some of the initial price shock, as profit margins are much higher for luxury vehicles and offer the OEMs flexibility compared to profits in other vehicle segments. This action would be strategic in forging positive customer relationships that will be essential for future purchase transactions from the OEMs.

It will be important for luxury OEMs to soften the blow of price increases because research shows that a happy and grateful customer is more likely to recommend the dealer to his or her friends and relatives. In fact, the J.D. Power India SSI Study indicates that recommendations from friends/relatives remain the top information source for new-vehicle buyers in India (just as it has been for the last six years). Even though India is becoming digitally connected, the average car buyer still prefers a direct word-of-mouth recommendation from a trusted source.

In the long term, as indicated by several OEMs, the price hikes are set to stay, but overall growth in GDP per capita is likely to create strong tailwinds for the luxury segment. Data from LMC Automotive indicates that while the total passenger-vehicle market in India will grow by 11% in 2012 vs. 2011, the luxury car segment has already expanded by 27% since last year. In January, each of the luxury car players performed better in comparison to the same period a year ago and the growth will continue to be bolstered by the larger number of high-net-income earners in India.—Mohit Arora, executive director at J.D. Power Asia Pacific, Singapore