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ishanb1

How manufacturers calculate ex-showroom price?

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Dear Autocar India Team

Is there anyway or any case study or study material which can tell us how manufacturers decides on ex-showroom price especially for locally produced vehicles? What kind of margin do they work on? What are the various factors in calculating the same?

Thanks

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Thats a very complex question you've asked there, ishanb1!! Answering it won't be easy at all!

As you might know, Cost of Production (Raw Material, Labour, Overheads etc.) + Profit Margin = Selling Price

Profit margin varies from manufacturer to manufacturer and even from model to model.

While no manufacturer will expressly tell you their profit margin, a detail study of the audited balance sheets and the annual reports of such manufacturing companies would give you a better idea regarding their profit margins!!

But if you ask, per model how much they have earned?

That's next to impossible to know, unless you have someone working in the senior management of such manufacturing company who is ready to hand over such details.

I know i haven't done justice to your question, but i tried my best!

But, if i may ask, why do you need such details? Are you working on any project?

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Ex-showroom Price of Car is the is the price at which a car dealer sells a car to Retail Customers which includes Dealer Margins, Transportation costs and applicable Excise, State Taxes and Octroi Charges. Ex-showroom Price is called the basic price of the asset exclusive of any registration, insurance or loadings.

Ex-Showroom price is the cost that the dealer charges for procuring the car from the manufacturer and the tax that it pays to the state government on procurement. The state government charges excise duty on cars. It is also known as the supply price of a car. In some states and cities, ex-showroom price may also include octroi tax. This is the tax collected by the local authority for bringing articles from outside the region for consumption in that region. Ex showroom prices differ from state to state. For instance, ex-showroom prices are higher in Mumbai or Bangalore than in Delhi.

What you are talking about is Ex-Factory price. It is the price Car Dealer pays to Manufacturer to lift the car from them i.e it is the price at which a car manufacturer sells the car. Ex-Factory Price Terminology is not so common as it is between the Manufacturer, Dealer

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The costing varies from plant to plant and from model to model apart from manufacturer to manufacturer. It also depends heavily on the operating markets, their government's policies (local as well as central and foreign land's) as well as on the vagaries of forex rate fluctuations etc.,

To start with, let us take the plant. The basis for any plant to be economically viable is to calculate (to the extent possible) and ascertain the fixed costs and the variable costs. This is the major crux of the problem. Depending upon the cost of capital expenditure, interests thereon, and the life of a plant is determined, after factoring fixed costs like running costs, labour costs, taxes and levies payable to various agencies etc., When once these fixed costs are almost finalized (or near finalized), comes the question of attempting at the variable costs. These include, inter alia, the model development costs, number of heads/hands used for the same and for how long, the expected OEM vendors factoring costs (for them to develop, produce and supply the needed sub-assemblies, and components), and then the actual cost of producing one unit of vehicle (on a matrix scale of less than 1000 units per month to more than 100000 units per month etc.,) depending upon the expected demand and the historic experience (and the current trend in the market). The variable costs also include, the costs of development of dealer network, distribution network, logistic support, spares management and the costs of setting up and servicing the ASS networks, in one or more markets where the cars are sold (or planned to be sold).

Then comes the costs of marketing, advertising, media management and the like. Plus the incremental costs of adding a product to the existing line staff at all levels. All these are factored before a car's price is nearly finalised.

The manufacturer will also incur a lot of expenditure on conducting customer surveys, both professional and otherwise, to know what the customer wants, and at what cost. This is the most difficult part and most manufacturers wait till the last moment to announce the prices. Just before the product is show-cased, an approximate figure would emerge from these various variable costs and the management will sit tight till all the data flows in.

Depending upon the customer (prospective) feedback and response, they will try to pitch the product at a price point. In a majority of cases, the pricing is done at a loss. The profits will pour in only the product click. If not, the loss needs to be carried over to the next product. This overhanging loss is also one of the variable costs for the next cycle.

I hope you must have got some idea of how it works. This is in a nut shell. Explode it by over a thousand times to get an actual feel of the process. And, explode it by another thousand times, then probably, you would know exactly how it's done. It is no simple maths. It is full of uncertainities and dynamically changing parameters.

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So basically this industry is full of loopholes.

I asked this question because of following observation.

I was in Australia for 2 years. An average pay per month there is AUD 4000-5000 and you can purchase Honda City for AUD 20000 which mean a person can payout his loan in 1 year.

But in India an average pay is Rs.30000/ month and Honda City cost 9 laks rupees(just an example). There's a lot of disparity between an average pay and cost of a car.

It clearly shows there's a huge gap and disconnect in government policies. And if this is a case why more and more manufacturers are showing interest in Indian market?

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So basically this industry is full of loopholes.

I asked this question because of following observation.

I was in Australia for 2 years. An average pay per month there is AUD 4000-5000 and you can purchase Honda City for AUD 20000 which mean a person can payout his loan in 1 year.

But in India an average pay is Rs.30000/ month and Honda City cost 9 laks rupees(just an example). There's a lot of disparity between an average pay and cost of a car.

It clearly shows there's a huge gap and disconnect in government policies. And if this is a case why more and more manufacturers are showing interest in Indian market?

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Well, as of today 1 AUD = 55.71 INR. So if we do the math, a Honda City in Australia costs approx. 11.14 Lakh Rupees, which is similar to what it is priced in India.

Having cleared that, i would like to state that Labour in India (skilled/ unskilled, physical/ mental) is a lot cheaper than what it is in Australia.

Average Salary Project Manager (IT) in Australia is 98,126 AUD which translates to approx. 54.66 Lakh Rupees.

Source: http://www.payscale....ogy_(IT)/Salary

Where as the Average Salary Project Manager (IT) in India is 10 Lakh Rupees.

Source: http://www.payscale....ogy_(IT)/Salary

Hence the disparity.

And it doesn't end there!! Cost of Living in Australia is much much higher than the Cost of Living in India.

According to a study, Sydney is world's 3rd most expensive city for expatriate employees, where as Mumbai is world's 2nd most cheapest city for expatriate employees.

Source: http://en.wikipedia....riate_employees

To further prove this point, i visited a website where i compared actual costs of items sold in Sydney, Australia with the cost of those same items sold in Mumbai, India.

Link 1: Cost of Living in Sydney, Australia [Prices converted to INR for easier understanding] (http://www.numbeo.co...layCurrency=INR)

Link 2: Cost of Living in Mumbai, India [All prices are obviously in INR] (http://www.numbeo.co...dia&city=Mumbai)

Open those two links above side by side and you shall get my point!

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@ishanb1

You are totally wrong when you say that the industry is full of loopholes.

Either you are totally unaware of how the motor industry (or for that

matter any industry producing new items/products) works or totally lost

on basic differences between two countries. And, thereby the resulting

differences in the purchasing powers respectively.

When you said `loopholes', I think, that you meant 'uncercertainities' which

mean that there are so many uncertain parameters and dynamically ever

changing inputs. In the above discussion, we did not discuss the impact of

competitor's products or their plans to introduce new products. That is one

of the major deciding factors for pricing a product suitably.

Coming back to your Australian example, how can any one compare what is

available there with what is available here. The places, the inputs, the controls,

the markets, and the consumers and their requirements are different and totally

non comparable.

It is like comparing the cost of a Masala Dosa in Chennai with that of a similar

Masala Dosa in Sydney. And, deducing that Sydney is full of loopholes.

Is itn't silly ?

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I think I have started a sensitive topic. I am sorry if I have hurt someone's feelings, were not my intentions.

My only point was why India doesn't have simplied tax structure across all cars across all states.I mentioned Australia as an example because taxes is simple over there and pay to lifestyle ratio is actually low hence low cost of living,if we don't convert dollar to INR.

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I am sorry if I have hurt someone's feelings ...

No need to say `sorry' mate. All of us, here, are trying to share our concerns,

knowledge, experiences, opinions etc., all related to auto world. You get to know

a lot only when you differ, discuss and assimilate. That's the way to learn. So,

contribute liberally, differ and discuss. No hard feelings and no sorrys please.

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If we don't convert into INR, cost of living is low ya!!

Its just the economy.. Theirs is much better..

And yes, i do agree.. Taxes here can be a bit too complex..

Why they are so.. I don't know.. They just are!!

And as rameshbabu.n rightly said, you don't have any reason to apologise! So relax!!

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