Two facts tell the story of the state of the passenger vehicle (PV) industry. The first is that sales are stuck in the slow lane and will not exceed 3-4% for at least a few years, as predicted by Maruti Suzuki Chairman RC Bhargava. The second fact is that the industry is also changing gears — from being predominantly a small car market (there’s a slowdown in sale of cars priced below Rs 10 lakh), consumer preference is moving towards sports utility vehicles (SUVs) as is evident from the fact that vehicles priced higher are doing well. The October sales numbers released by the Society of Indian Automobile Manufacturers bears this out. While the total year-on-year growth in sales during the month was just 1%, those of smaller cars declined by 17.3%. However, SUV sales were up 13.9%. So, the overall numbers were pulled down by cars, a bulk of which cost below Rs 10 lakh. The April-October numbers also tell the same story — overall car sales are down 18.4% but SUV sales have registered a growth of 13.3%.
The changing consumer preference can be best captured by the fact that the share of cars in the overall PV sales has come down to 31.6% in the April-October period from 65.7% in FY19. Meanwhile, the share of SUVs has climbed from 27.9% to 64.7% during the same period. As Bhargava points out, the sub-Rs 10 lakh market, which was 80% of the total cars sold in 2018-19, is not growing at the moment. That’s a cause for worry. Had this segment moved on to the SUV segment, overall sales would have been brisk, which is not the case, so clearly there’s an affordability factor.
Going by Bhargava’s analysis, the slowdown in small car sales is because of about 60% increase in their production cost since 2019 to meet safety and environment guidelines — a car priced Rs 6 lakh now costs Rs 10 lakh but the income of consumers has not risen in the same proportion. Clearly, this has slowed the process of consumers upgrading from two-wheelers to cars. The industry has clearly read the writing on the wall and is planning the product portfolio accordingly. Maruti Suzuki managing director Hisashi Takeuchi said recently that the company will only upgrade the sedans it has but won’t launch new products. However, it will launch new SUVs. Manufacturers are moving to electric vehicles (EVs) and hybrids, which are finding traction amongst consumers. With lower goods and services tax (GST) on EVs and states like Uttar Pradesh waiving off registration tax on hybrid vehicles, these new technology vehicles would become attractive propositions for consumers. Some like Mahindra Group CEO Anish Shah, while acknowledging the impact of inflationary pressures on value products, also highlight the consumers’ preference for premium products, which will push Indian manufacturers to develop better products.
The new reality is that PV sector growth is not going to be as brisk as it was between FY22 and FY24. In fact, a 3-4% growth which Bhargava sees would still be better than a 17% decline in FY20, which was a normal year before Covid broke out. Going ahead, industry growth would be largely linked with the launch of new products in SUVs, EVs, and hybrids. As far as small cars are concerned, perhaps the government may look at reducing the GST on them from the current 29%, which includes 1% cess.