Slowdown impact: Entry-level passenger car sales take a beating

Lower jobs and income growth, selective financing by lenders and changes in emission norms played spoilsport.

Updated: November 27, 2019 7:14:06 AM


maruti suzuki's entry level car alto crossed 38 lakh sales mark

By Akhil Vishwanath

Small cars are no longer finding favour with the first time car buyers in the world’s fourth largest car market. Sales of Alto fell 45% to 36,779 units in the September quarter compared to the comparable period last year. In the same period, WagonR posted a 4.8% rise largely driven by demand from cab aggregators. The economic slowdown has played its part as lower jobs and income growth has made it difficult for first-time buyers to seek an upgrade from a two-wheeler or a previously-owned car. In addition, selective financing by lenders has also played a major role in keeping the first time car buyers away from the showrooms. Since March this year, sales of entry-level hatchbacks have declined 19% over the same period last year, while mid-level hatchback sales fell 31%.

According to Axis Capital, the share of cars priced at `5 lakh and below has steadily declined in the overall passenger car market. Demand for entry level cars was a good way to gauge consumer sentiment, as India for long has been predominantly been a small car market. Over time the volume mix has been changing in India. Compact SUVs have outperformed every other segment with a 6% rise in sales on year-to-date basis even as the auto slowdown hit its depth over the last one year.

Several dealers told FE that the confusion over BS-VI emission norms, talks of withdrawal of small diesel cars and a possible GST cut were additional deterrents in selling a car to first-time buyers. The new emission norms have made these entry level cars pricier by 15-20%, which could further deter purchasing decisions. Over the last one year, overhead costs such as mandatory insurance have risen sharply. Add to it the cost of car financing, which has made it difficult for a car owner with a less-reliable source of income to pay equated monthly installment (EMI), which includes interest and part of the loan.

On the retail front post festive season, market leader Maruti Suzuki is feeling the pinch in the small car segment, where it primarily competes with Hyundai. “If you see in the market today, Brezza and Ertiga are still moving. Brezza is out of stock. But inventory of Alto and WagonR remains,” said Vinkesh Gulati, vice president, Federation Of Automobile Dealers Associations (FADA). Maruti Suzuki launched the BS-VI compliant Alto model in April, a year before the official date of transition to the new fuel emission norms. The cost of producing these entry level cars like Alto and WagonR have risen substantially in the last one year thanks to tighter safety norms. “This also has been one of the factors where customers got impacted due to higher upfront cost of ownership,” said Jinesh Gandhi, Auto Analyst, Motilal Oswal Institutional Equities. The BS-VI version of an Alto with a petrol engine which sells at `2.88 lakh (ex-showroom) has seen a price hike of nearly Rs 25,000.

Due to the higher cost involved in manufacturing BS-VI compliant diesel cars and keeping in mind the price sensitive customers, Maruti Suzuki was the first to announce that it would discontinue production of small diesel cars from April 2020. Toyota is the latest to adopt the measure, deciding to stop manufacture of its diesel-powered hatchback – Etios Liva – post BS-VI transition. Availability of easy loans about two years ago had not only enabled a faster transition from a two-wheeler to a car, but had also helped first-time car buyers to aspire for a premium hatchback or a compact sports utility vehicle. However, auto financiers began to employ stricter metrics while approving a loan after the NBFC crisis. This selective and stricter financing has resulted in higher rejection rates for loan applications and the negative impact has been higher for first-time buyers, according to analysts at Emkay Global Financial Services.

Additionally, with the average age of the first time car buyer coming down steadily, preference has shifted towards trendier cars such as Maruti Suzuki’s S-Presso, which quickly took a place on the best selling list with over 10,000 units sold in October. “Today, Indian buyers have a clear inclination towards feature-loaded, safe, comfortable and easy to own entry level cars,” said Shashank Srivastava, executive director (Marketing & Sales), Maruti Suzuki India at the time of S-Presso launch. Jinesh Gandhi of Motilal Oswal Institutional Equities believes over time the share of entry-level segment will start moving to other segments.

Given the rise in cost of owning a new car, several first-time buyers have also turned to the used car market for better bargains. “It is true that the used car market is growing and showing an upward trend. This is primarily due to better availability of quality and certified pre-owned cars. The sector is getting organised with a change in consumer preferences and easier refinance availability in used car market. However this may not be the only reason for slowdown in the entry car market,” said SN Barman, vice-president, Sales, Marketing & Customer Support, Passenger Vehicles Business Unit, Tata Motors.

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