The local unit of Honda Motor Co. expects sales of the City model to be depressed for the next few months as it faces a capacity crunch and interest rates dampen demand.
In the past three months, the company has seen the sales of its City sedan, the largest selling mid-sized car in the country, fall by 17% to 10,917 units compared with 13,197 cars in the same period a year ago.
“Last year, we had a smaller range of cars,’’ said Jnaneshwas Sen, senior general manager of marketing at Honda Siel Cars India Ltd. “Now, with the Civic, we have to divide production capacity” between the City, Civic and Accord models, he added.
The company manufactures 1,500 units a month of the Civic sedan, which Honda launched in July 2006 and is the largest selling car in its segment, said Sen. With an installed capacity at 50,000 units a year for all vehicles, Honda gets to produce less of the City model with the introduction of the new models. Honda would rather make the Civic, which is a bigger and more profitable model. Still, the company last year cranked out 65,000 units or 5,400 cars a month in fiscal 2007 by increasing the work week to six days a week and working on some Sundays.
“Now, we can produce more only when we increase capacity. That should happen by the end of December,” said Sen.
Honda plans to double capacity to 100,000 units a year. It is also building a factory in Rajasthan to make small cars. That factory is likely to start production in 2009.
“The interest rate rise has also impacted the sales of the City,” said Sen. Lending rates have risen by as much as 5% in the past six months as the central bank tightened liquidity in the market to rein in inflation. This has slowed down the growth rate in passenger cars. In ?April-May 2007, passenger car sales grew at 11% compared with 20% a year ago. “Mid-sized car owners are most sensitive to interest rate hikes,” said Huzaifa A. Suratwala, analyst at Emkay Share and Stock Brokers Ltd. “For most people, it is an upgrade from the B segment (compact cars). With interest rates up, priorities are changing and people would rather service floating rate housing loans.”
New launches such as the Suzuki SX4 and the Mahindra-Renault Logan, too, have contributed to the decline in sales of older models such as the City and Chevrolet Aveo, analysts say.
“New cars cause some excitement in the market for the first two to three months,” said S. Ramnath, vice-president at SSKI Securities. “Then the word of mouth starts. So it takes some time”, to gauge the impact of a new launch.