What Ails Small Car Sales?

ENTRY-LEVEL CARS, which once sold like hot cakes, have seen a fall in demand over past five quarters as potential buyers no longer find them affordable. Domestic sales of cars in the mini segment — which Society of Indian Automobile Manufacturers classifies as entry-level hatchbacks up to 3.6 metres in length and one litre engine displacement — fell 40% from 2,52,409 units in FY23 to 1,52,262 in FY24; in fact, sales have halved since FY20 (See: Falling Mini Car Sales). The biggest reason is price increases far exceeding salary hikes during and after the pandemic, say experts. The rise in prices due to regulations (such as mandatory airbags and stricter fuel emission norms) has been steep, says Partho Banerjee, senior executive officer, Marketing & Sales, Maruti Suzuki, adding the salaries have not kept pace. For example, the price of entry-level Maruti Suzuki Alto 800 went up from ₹2.94 lakh (ex-showroom) in 2019 to ₹3.54 lakh in 2023 before the Japanese carmaker discontinued production last year. Alto’s younger sibling, Alto K10, costs ₹3.99 lakh now, up from ₹3.4 lakh in 2019. The segment now has just three cars — Maruti Suzuki’s Alto K10 and S-Presso and Renault’s Kwid; Hyundai had exited before the pandemic.

Salaries have not risen much but cost of living and assets has gone up, says Neeti Sharma, CEO of staffing firm Teamlease Digital. “We had a large middle class able to afford a lot of assets. A large segment of the society is now unable to afford it (a car),” says Sharma. Average salaries of freshers in the IT sector, which employs a large chunk of graduates, have remained ₹3.5-4 lakh since the pandemic. In manufacturing, starting salaries have gone up but the base was so low that starting packages are still below ₹2.5 lakh. “Savings have come down. The number of people who are probably able to buy a four-wheeler is going down,” she says.

As per the National Account Statistics 2024 data released by Ministry of Statistics and Programme Implementation in May, household savings — physical and financial assets minus financial liabilities — fell to 18.4% of GDP in FY23 from average of 20% over 2013-2022. Net financial savings declined to 5.3% of GDP from average of 8% during 2013-2022. Households are saving less due to lower incomes or rising debt or tendency to consume more, says UBS.

Demand for entry-level cars (in line with entry-level two-wheelers) was hit as Covid significantly affected incomes of those at the lower end of the pyramid, says Rohan Kanwar Gupta, vice president and sector head, Corporate Ratings, ICRA. He adds prices of entry-level cars have risen 40- 50% over past few years due to inflation and stricter regulations.

There has also been a shift in customer preference with many first-time buyers skipping the segment and straightaway going for (compact) sports utility vehicles, says Gupta. Entry-level volumes shrunk sharply after March 2023 due to discontinuation of Alto 800, with market leader Maruti Suzuki attributing the decision to poor demand, he says.

SUVs Take Space

While demand for entry-level personal vehicles has been muted, premium cars, including SUVs, have been flying off the shelves. The reason for this dichotomy is income continuity of top earners during the pandemic vis a vis job/income losses lower down the order, says UBS. India’s consumption reflects a significant divide, says Tanvee Gupta Jain, chief India economist at UBS. “India is seeing K-shaped consumption recovery with affluent/premium segment doing well and demand for entry-level and mass-market goods remaining muted after the pandemic. This suggests that incomes of those at the lower end of the income pyramid, perhaps the most affected by the pandemic, have not recovered,” says Jain. Despite India moving towards becoming the world’s third-largest consumer market by 2026, the divergence between demand for premium and broad-based products persists, accentuated by income inequality, access to consumer credit and dipping household savings, says Jain. In passenger car market, first-time car buyers now account for 40-43% market compared with 50% earlier, while the share of people buying their second or third car is 38% (rest is replacement demand), says UBS. This highlights that demand is driven by the affluent who can afford more than one car.

India’s second-largest carmaker, Hyundai Motor India, which filed for an initial public offer in June, says the hatchback segment has lost market due to few launches, frequent prices hikes, increase in operating costs on account of rising fuel prices and unfavourable macroeconomic environment.

Used-car Market Shines

With new cars out of reach, many first-time buyers are turning towards the used-car market, which has become organised due to launch of several start-ups over the years. Given the rise in prices, some are opting for used cars, says ICRA’s Gupta. The appeal of buying a high-end model at a more affordable price is drawing people towards used cars, says Gajendra Jangid, co-founder and chief marketing officer of CARS24. “However, price isn’t the only factor driving this shift. Competitive interest rates have made used cars more affordable,” says Jangid. With new cars becoming more expensive, even sellers of used-cars are getting good prices.

“The used-car market offers a diverse selection across price range. Economic uncertainties, including inflation and job market fluctuations, have nudged first-time buyers towards used cars,” says Niraj Singh, founder and CEO of Spinny. Other factors include less upfront payment, lower insurance premium and slower depreciation rates, he says. Spinny says 73% buyers on its platform were first-timers in 2023, up from 60% the previous year. Their average age was 32.

Revival On Cards?

In spite of poor demand, Maruti Suzuki is not giving up on a segment that still accounts for a significant chunk of sales. “We expect the market to revive by 2026-27,” says Maruti’s Banerjee. India’s top carmaker is pinning hope on the two-wheeler segment. “A revival in the segment comes to four-wheelers with a lag. We are going to see an upside in the hatch segment,” says Banerjee. Two-wheeler sales are yet to touch pre-pandemic levels.

Also, out of 1,000 people in India, only 32 own a car. In developed markets, this number is over 600. “We are moving in that direction. By 2030, India will have 44 cars per 1,000 people. Obviously, people will migrate from two-wheelers to four-wheelers,” says Banerjee, adding it is a matter of time before the small-car segment revives.

Patience will be key. The expectation of a rebound in entry-level cars this financial year is a little optimistic, says Maruti Suzuki chairman R.C. Bhargava. “It will take more time. SUVs will remain dominant. The small car market is not rebounding this year or maybe not even in 2025,” he says. He, however, adds the sub-four metre segment cannot be ignored. “People have to move up from two-wheelers. They need a safer mode of transport. The sub-four metre segment provides affordable transport to a large section of people and requires special attention,” he says. “To make it safer, we have had to make investments, we have had to add costs and that is why sales have slowed or stagnated. That’s why other companies have gone out of this segment,” says Bhargava.

The market for entry-level cars may be declining but Maruti Suzuki’s share is high, says Hisashi Takeuchi, MD and CEO, Maruti Suzuki India. “This situation where everybody is leaving is good for us. Sooner or later, once the economy grows, people will start buying hatchbacks. Our high market share will help us. We will not give up the hatchback market. We will offer more models at an appropriate time,” he says. The CEO believes the hatchback segment will not disappear. “Lack of models from other OEMs at entry level is limiting category growth. When time comes, we will revamp other products also. Hatchbacks will continue and hopefully revive when the economy grows,” says Takeuchi.