The market for entry-level hatchbacks in India has shrunk significantly over the past few years as rising prices have combined with relative economic distress to deter consumers in the ‘low-cost vehicle’ buying segment, while at the same time the market share of higher-priced cars has continued to climb on the back of ‘resilient incomes’ and lower sensitivity to price increases among ‘affluent buyers’, according to industry officials and automobile sector analysts.
Cars priced above ₹10 lakh, which fall in the premium segment, sold five times faster than those with lower sticker prices last fiscal, cornering about 30% of the passenger vehicle market, up from 24% in FY19, Crisil Research said in a note. During the last fiscal year ended March 2022, premium car sales grew 38% year-on-year, while sales of lower-priced cars rose by about 7%.
“The key reasons for this were a stark difference in income sentiment of the respective target consumers, a sharper rise in the prices of lower-end cars, fewer options (some manufacturers exited the segment), and a slew of new launches that have increased the preference for higher-priced cars,” Crisil Research observed.
First-time users
In India, which has been touted as the small car market, the sales of the entry-level hatchback segment are largely driven by first-time users. With the pandemic impacting the income sentiment significantly for entry-level car buyers, purchases and upgrades have been getting postponed.
As per Crisil Research estimates, the employee cost of large and medium companies — a proxy for income sentiment among affluent buyers of higher-priced car — has increased by about 20%-25%, outpacing that of small and medium-sized companies (0-10%), which typically account for a larger proportion of lower-priced car buyers.
“Over the past three years, the market at the lower end… for people who use either two-wheelers or smaller hatchbacks… that market has been shrinking considerably, which is worrying,” said R.C. Bhargava, chairman, Maruti Suzuki.
Pointing out that only 11.5 lakh units of hatchbacks were sold in India last fiscal, about 25% lower than the 15.5 lakh units sold in 2018-19, Mr. Bhargava added that because of regulatory changes, taxes of State governments, increase in prices of commodities, the prices at the lower end of the market had increased by such an extent that a large part of the population could not afford a four-wheeler transport. “These are the people who are on the margin. They are upgrading from two-wheelers… They take loans to cover more than 80% of their cost of the car,” he said.
For Maruti Suzuki, which is the country’s largest car maker, the price of its entry-level Alto has increased by about 20%, while those of mid-level hatchbacks such as Celerio and Swift are up by about 38%. In contrast, the prices of entry-level SUVs have increased by 13.5% and mid-level SUVs by about 20%.
Ashim Sharma, senior partner and group head at Nomura Research Institute, said that pre-COVID the income segments were seen moving a bit higher and hence people were opting for bigger cars. However, there had been a lot of churn because of the pandemic. “COVID started in urban centres, which led to job losses and pay cuts. So, a large part of the population, which used to buy the entry-level cars and two wheelers, fell on account of this. Then as the virus spread to rural India, the same thing happened there,” Mr. Sharma said.
He noted that the pandemic had also coincided with the implementation of the new BS6 emission norms that made vehicles more expensive. “The prices of cars also started going up and this segment is very sensitive to price rises, so the demand for entry-level vehicles saw some dulling. So, economic stress that came to the strata of society due to job losses as well as pay cuts and prices of cars going up cumulatively are the reasons behind fall in volumes of entry-level cars.”
Rohan Kanwar Gupta, vice-president & sector head, Corporate Ratings, ICRA Ltd., noted that the generally accepted definition of entry level segment — both in two wheelers and passenger vehicle categories — had undergone a shift over the past two or three years.
“One of the key criteria of identifying a vehicle as an entry segment is the sales price. However, due to the significant increase in the vehicle prices over the past few years, the definitions have had to evolve,” Mr. Gupta said.
For entry-level two-wheelers, which are below 110cc, the ex-showroom price has moved up from less than ₹50,000 in October 2018, to less than ₹70,000 now, while for entry-level cars, the segment price has gone up from about ₹2.8 lakh-₹3.5 lakh to ₹3.5 lakh-₹4.5 lakh.
Going forward, Crisil expects the share of higher-priced cars to remain higher at 30%, versus 25% previously, due to "resilient incomes of affluent buyers and traction for new models", and the share of higher-priced two-wheelers to remain above 40% of the market.
