Contrary to popular belief that the credit squeeze has hit sales of small/compact cars, it is actually the mid-size car segment that has been hit the worst following the rise in interest rates.
According to sales data for the first quarter of this fiscal, the mid-size car segment has been hit the most following the continuous hike in interest rates by banks. While segments like compact and premium (Rs 10 lakh onwards) seem to have managed to protect themselves from the negative sentiment and poor demand, the base mid-size segment?comprising of models like Ford Ikon, Chevrolet Aveo, Mitsubishi Lancer, Honda City, SX4, Logan and Tata Indigo?clearly bears the brunt.
According to the Society of Indian Automobile Manufacturers (SIAM), the base mid-size segment managed a poor 5.5% growth in the domestic market in the April-June ?07 period at 52,264 units against 49,521 units in the same period last fiscal. Almost all the carmakers in the category suffered a slowdown in sales numbers, clearly hit by expensive financing as customers deferred new purchases. Importantly, the addition of two new models?Mahindra-Renault?s Logan and ?SX4? from Maruti-Suzuki?failed to keep the momentum in the segment. The segment had seen a 17.4% year-on-year growth in the first quarter of 2006-07, much in contrast to the numbers in the same period this fiscal.
On the other hand, the compact car segment?feared to be the worst hit due to the rise in interest rates?managed a smart 16% growth as carmakers, primarily Maruti, kept the tempo going. Total sales in the compact car segment stood at 1,93,053 units in April-June ?07 against 1,65,919 units in the same period last year, SIAM said.
Coming back to the mid-size segment, Honda Siel?the segment leader?suffered the most, going down for more reasons than one. The company, that sells the popular City model, saw sales in the first quarter go down a whopping 20.3% at 8,409 units against 10,563 units in the same period last fiscal. The company?s numbers took a beating due to pressure from two areas?expensive financing and the launch of SX4. Being a new model and that too from the stable of market leader Maruti, the SX4 impacted the numbers of City and, in fact, unsettled the segment leader in the very first month of its launch as it sold more than the City in May.
Others bearing the brunt was Ford India that saw quarterly numbers go down 10.5% on sale of 8,195 units against 9,158 units in the first quarter of last fiscal. For General Motors, that sells the Chevrolet Aveo in the category, the drop was even steeper as numbers fell by a whopping 68% to 1,290 units against 4,013 units in the corresponding last fiscal. Tata Motors remained relatively untouched as its numbers stood at 7,201 units against 8,316 units in April-June ?06, SIAM said.
According to analysts, the reason mid-size segment was witnessing a slower-than-industry demand was due to the fact that most of the buyers in this category were not first-time buyers but those who already had a vehicle and planned to buy an additional vehicle or wanted to upgrade. ?They can and are waiting for the interest rates to come down. On the other hand, a customer of a compact car cannot wait since, for many it is a requirement that cannot be delayed. In the other end of the premium car segment, buyers have not been affected much by high interest rates as it means just a small increase in their EMIs, which they do not mind,? pointed out an analyst.
Pradip Saxena, who tracks the auto sector at research firm TNS, said a strong support from companies was among the reasons why the compact car segment was insulated from the heat of higher interest rates. ?Manufacturers, especially big ones like Maruti, Tata and Hyundai who have big stakes in the compact car segment, have been supportive by absorbing some of the negative impact and by also through various promotions. Apart from this, we should not forget that credit squeeze has not impacted the car industry so much and financing here is still available, unlike the two-wheeler industry,? Saxena said.
Not suprisingly, poor sales in the mid-size segment has also meant that production cuts happen only here. While all other segments showed a rise in production with companies bullish on their demand, production in the base mid-size segment mentioned above dropped 10.2% year-on-year. Almost all the major manufacturers like Honda, Hyundai, Tata Motors and General Motors cut down production, well aware of the slump in the demand. Honda cut down production from 13,212 units in April-June ?06 to 9,892 units in the first quarter this fiscal, Tata Motors from 10,017 units to 7,891 units, Hyundai from 12,814 units to 9,088 units and GM from 4,443 units to 1,087 units.
Against this, production in the compact car segment grew 23.4% as companies produced more on expectations of a higher off take, despite negative pressures. The charge was led by none other than Maruti that increased production of its compacts like Swift, Alto and WagonR to 1,27,088 units, up a whopping 36.7% from 92,928 units in April-June ?06.
Interestingly, some experts attributed the slump in the base mid-size segment, despite the launch of new models, to a possible cannabalisation of models within the category. ?Esteem would have fallen after SX4, the Accent diesel due to Verna and Ikon on account of Fiesta,? an analyst opined. Others said custom-ers may be postponing purchases in the segment, waiting to find out actual road performance of the vehicles before deciding.