The companies justified this increase saying that their industries depend on imports of components and parts from overseas, and due to the depreciating rupee, these imports cost more than they did before.
Now, the companies have transferred this added cost directly to the consumer. They have even demanded extra payment from people who made their bookings before the price hike, spreading confusion among people. The question is: does the consumer really have to bear such a cost and are the auto manufacturers legally allowed to increase prices?
Let’s break it down and see if the price increase is fair and reasonable.
How Costing Works
Starting out, let’s break down the process and see how companies set a price for their products.
The total price (which the consumer pays) is basically an addition of the cost (the company had to incur to make the product) and a profit margin – which can either be fixed as per company policy or variable for each product depending on its cost.
Now, what does the ‘cost’ area of the total price include? Here are a few examples,
- The cost of materials (components, parts, assembly items etc.) used for production,
- The cost of labor,
- The cost of any non-production costs (for example delivery costs, holding costs, taxes, and factory rent too in some company policies),
Do note that the endmost price for the consumers to pay depends entirely on the company’s policy – in short, they can keep it whatever they see fit. To make a profit, a company adds a profit element into the total cost that was incurred to bring the product to its ‘consumer worthy’ condition. The profit element is either calculated by adding a predefined percentage into the total cost incurred for the product or by adding a fixed amount the company wants to gain on each sale.
Should Rupee’s Devaluation Affect Prices?
According to the companies, the cost of their production components has increased owing to the rupee’s depreciating value. Imports actually do cost more if your country’s currency falls below the default payment (USD) currency. Think about it, the trade or the currency ‘exchange’ becomes disadvantageous if what you’re buying has a relatively lower value than what you’re having to pay.
If the imports cost more, the ‘material cost’ (mentioned above) increases which also increases the total cost of the product.
Say, a company has a policy to earn at least 20% profit per product so a product which costs Rs. 100 will be priced at Rs. 120 – if the same product starts costing the company Rs. 110 (Rs. 10 material price increase perhaps?) then following the same 20% profit policy, this product will now be priced at Rs. 132 (do notice that the company is making the same percentage of profit in both cases).
Is the Price Increase Legal?
Moving to the case of older bookings, in which the companies have started demanding extra money from the buyers who made their booking before the price hike, the added price, unfortunately, has to be paid because it’s also part of the company’s policy and written in the sales contract sealed per transaction.
The policy says that the amount written on the ‘invoice’ has to be paid by the buyer. Remember; the invoice is received after the vehicles are shipped. At the time of the booking, an invoice is not printed and if the price changes – which occurred before the completion of delivery – it needs to be paid by the buyer as written on the invoice.
So Are the Companies Right?
Since most buyers never really read the fine print when booking vehicles while paying the full or partial amount in advance, auto makers can use this opportunity to ‘blackmail’ the buyers into coughing up more cash. We recently saw BMW do the same in Pakistan and its a common practice among Pakistan’s auto sector to not only push the burden onto the buyers but also make extra profits where possible.
If a buyer pays the full amount in advance (or even half the amount), it means the company has put the vehicle in queue. Its obvious that these companies have the parts, used for manufacturing, already in warehouses. No large scale manufacturer ever orders components after receiving payments for the product.
So what happens is that the people who have already booked the vehicles are asked to pay for additional costs for parts which were already in stock. This helps the company earn more profits and also negates the entire purpose of paying in advance. A “full payment” should mean there are no extra charges left, except any variances in taxes, but these companies make use of their monopoly to make use of a customer’s needs.
Without a doubt, the current prices of cars assembled and sold in Pakistan are way too high. Though the high price does account (somewhat) for the heavy custom duties and taxes along with import costs, it also includes a hefty profit margin (or mark-up).
The monopolizing car companies are already earning a heavy sum, they don’t wish to lose it (even though a relatively minor rupee devaluation on only some of the parts doesn’t really affect their fortunes).
We have high hopes for the auto-industry because of the new auto-policy and newer brands – Hyundai, KIA, and Renault – entering the market. Let’s see what the future holds and if the new companies follow the profit-focused trends of the current auto makers.
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