Mercedes-Benz's profits hit by depreciating Rupee and increased import duties

Mercedes-Benz, the German luxury car maker, feels that the profitability of the company will be hurt by the free fall of the Indian National Rupee (INR) and hike in import duties on Completely Built Units (CBU). According to Managing Director (MD) and Chief Executive Officer (CEO), Mercedes-Benz India, Peter Honegg, the car maker had to price their models 5-6 per cent higher due to increased rates.

Talking about this issue, Honegg said, "The normal price increase will be around one per cent. But due to the government decisions we had to increase another 5 to 6 per cent on our cars.” He further added, "Because, this is what the government is asking us additionally. We can offset that only by asking our customers to pay more and they are willing also."

Honegg feels that against the fall of the Rupee compared to the Euro, the car maker can only hedge it for while but maintaining profitability in the long run would not be possible. He said that in case the Rupee stays at minus 20 per cent, Mercedes will either have to raise prices or stop selling some models that are not profitable. Both the options are not profitable for the company and if the Rupee further depreciates, all European car makers operating in India will suffer, not just Mercedes.

It will be the customers who will have to bear the consequences of increased import duties on the CBU vehicles. Industry body Society of Indian Automobile Manufacturers (SIAM) has already approached the government regarding this. In the last budget announced by the government, the custom duty on vehicles imported as CBUs was raised to 75 per cent from 60 per cent. The tax hike was levied on CBU units of bigger cars and Sports Utility Vehicles which cost more than USD 40,000.

In 2011, the car maker sold 7,100 cars and in the Q1 of 2012 it sold 2,130 car models in the country. The company has fallen behind its compatriots Audi and BMW in terms of sales and is making efforts to gain a larger market share. Therefore, Mercedes recently launched the all-new Performance Edition of the C-Class in India, which now comes with AMG sports package. The German car maker aims to set new benchmarks in the luxury entry level sedan segment with the new launch.

On being asked about the proposed trade agreement between India and European Union, Honegg said, "If implemented fully, there will be major relief in terms of import duties on SKD and CKD. It will change the landscape of the industry."