Indias Low-Cost Cars And Motorbikes Market May Not Return To Its Heyday

The glory days of budget cars and motorcycles may not return anytime soon.

The two trailblazers of affordable mobility in India—Maruti Suzuki India Ltd. and Hero MotoCorp Ltd.—have joined the industry’s shift towards a premium future. India's largest carmaker launched its most expensive vehicle yet, while the nation's biggest two-wheeler company unveiled a middleweight motorcycle in partnership with Harley-Davidson Inc.

That marks a change underway in the nation's Rs 7.5-lakh-crore automobile market as the contribution of affordable, entry-level vehicles shrinks. The trend reflects continued stress among budget buyers as India's low-income households cut back spending after the pandemic took away livelihoods and inflation make everything costlier. By comparison, demand for expensive gadgets and appliances to luxury homes continues to grow.

Wherever there’s space in the industry, auto companies will come there, Vinod Aggarwal, president at the Society of Indian Automobile Manufacturers, said. "But you can’t say that it is at the cost of other segments. So, if there’s a space available in the premium segment, why will they not enter? It’s a natural tendency.”

Brave New World

The Maruti 800 made it possible for India's middle-class families to own a car before the economy was opened to global competition. The company maintained its dominance even in the post-liberalisation era with one out of every two passenger vehicles sold being manufactured by the company controlled by Japan's Suzuki Motor Corp. That last decade and a half saw that dominance being challenged.

Maruti Suzuki's market share has dropped to around 40-41% as Indians started preferring roomier utility vehicles over affordable hatchbacks, a category still dominated by the company with 70% share. The pandemic hastened the pace of this change.

India's No. 1 carmaker is now betting on utility vehicles to claw back ground with four launches in a year including the Grand Vitara and Jimny. Last month, it unveiled its first premium offering in the Invicto, a seven-seater utility vehicle priced at around Rs 25 lakh--the costlier in its stable.

“The premiumisation in the industry has been on rise both in terms of average prices going up and the top variants seeing more demand,” Shashank Shrivastava, senior executive officer of marketing and sales at Maruti Suzuki, told BQ Prime. Buyers on the lower end seem to be either holding-off purchases or looking at the used car market, he said.

The market has tilted towards higher-priced vehicles as, Shrivastava said, higher commodity prices and increased costs on account of new emission and safety norms made carts costlier.

In 2018-19, more than 85% of the cars sold in India were priced below Rs 10 lakh. That dropped to 60% in FY23 and 56% as of June.

While sales of passenger cars rose 0.5% to 4.14 lakh units, utility vehicle sales powered ahead with a 17.7% jump to 5.47 lakh units in April-June. Utility vehicles now account for nearly 55% of the market, up from around a third a couple of years ago.

By contrast, sales of mini and micro cars including the Maruti Suzuki's Alto and S-Presso, and Renault's Kwid have tumbled over the years. In the first quarter ended June, the segment recorded sales of nearly 46,000 units, a 66% slide from the peak of 1.35 lakh units four years ago.

The Harley-Davidson X440. (Photo: Hero MotoCorp website)

If Maruti Suzuki triggered the small car revolution, Hero MotoCorp took mobility to India's low-income households with its affordable motorbikes, first in partnership with Honda Motor Co. and then alone.

The maker of Splendor and Passion motorcycles launched X440 in collaboration with Harley-Davidson to taken on Royal Enfield in the middleweight segment.

Its quest for a share in the market for bigger motorcycles is driven in waning demand for entry-level two-wheelers. New emission norms and surge in commodity prices has priced out buyers as hikes disproportionately exceeded the income growth. Since the FY19 peak, domestic two-wheeler sales have dropped 25% to 1.59 crore units in FY23.

"The economy motorcycle and moped segment showed muted demand. The potential customers were the most severely impacted," Ralf Speth, chairman of TVS Motor Co., told shareholders at the company's annual general meeting. "These customer segments are yet to fully recover from pandemic-induced challenges, most notably depleted personal savings."

Hero MotoCorp, the dominant company in the category, suffered the most. Its market share in the domestic two-wheeler market has fallen from 36% in FY19 to 33.2% in FY23. Similarly, the company’s motorcycle segment share fell to 47% from 50.7% during the period.

Pursuit Of Profits

India's push to curb emissions and making vehicles safer hurt razor-thin margins on entry-level models for automakers. The premium category offers much better profits.

"Clearly, a lot of product offering in terms of innovation, in terms of on ground activation is now closely focused on the 125cc upwards," Dinesh Thapar, chief financial officer at Bajaj Auto, told BQ Prime in a media call to discuss June quarter results. "...we should over a period of time look at this relative premiumisation continue to play out."

That gives automakers rook to differentiate, which is difficult in the entry-level category, he said.

The premium motorcycle market in India is close to 25% of the overall two-wheeler market, Niranjan Gupta, CEO of Hero MotoCorp, told Mint at Harley Davidson X440's launch. Last year, the category grew 30%, twice the pace of non-premium market, he said.

X440 falls in a sub-segment that is a third of the premium category by volumes and yet accounts for half of the profit, Gupta said.

The Ride Ahead

Mass segments are unlikely to make a strong comeback in the near future. Maruti Suzuki expects the share of SUVs to continue rising for at least next three years to 52% of the overall market from the current 45-46%.

The company aims to be India's top SUV seller by end the of the ongoing fiscal even as it wants to maintain its share in hatchbacks, Shrivastava said.

Things are no different in the two-wheeler market. In the first quarter, sales grew 10-11% to 41.41 lakh units, according to Aggarwal. At that pace, the industry sales will be around 1.8 crore units in the full year against the FY19 peak of about 2.2 crore.

What that means is that volumes may not reach that record levels even by the end of FY25.

Bajaj Auto's Thapar said premiumisation of the industry will continue as large part of the market is moving up the value chain.

According to Puneet Gupta, director at S&P Global, the decline in the share of low-cost vehicles may reverse only when feature-rich, new-age vehicles come within the reach of the frugal but aspirational buyers. "Till then, the industry’s march up the ladder may continue.”