Smaller, cheaper vehicles take centre stage amid economic slowdown

As the poor economic scenario takes a toll on individual incomes and the job market, car buyers are now opting for smaller and cheaper cars, away from premium hatchbacks and sedans. 

The result has been a steady decline in per-vehicle revenue for car makers. Revenue break-up of car makers also suggests that buyers are now changing their cars less frequently, compared to the past. Consequently, revenues from spare parts and vehicle servicing are growing at a faster clip than revenue from vehicle sales in the domestic market.

Volume car makers, including Maruti Suzuki, Hyundai Motors and Honda Cars, have seen a steady decline in their average sales realisation in the last three years. This indicates a consumer’s growing preference for cheaper and entry level cars. 

Industry leader Maruti Suzuki’s average sales realisation in the domestic market declined by nearly 11 per cent between FY17 and FY19. Maruti earned revenues of Rs 3.97 lakh per vehicle on an average in FY19 down from a record high of Rs 4.43 lakh in FY17.  The numbers are based on Maruti Suzuki’s domestic sales volume and revenues from vehicle sales net of export revenues.

The decline in realisation for Hyundai Motors India was even more steep. Hyundai’s average realisation (for domestic sales) declined by 14.2 per cent from Rs 5.62 lakh in FY17 to Rs 4.82 in FY19. Honda Cars average sales realisation during the period was down 11.5 per cent from Rs 8.41 lakh in FY17 to Rs 7.45 lakh in FY19.

In FY20, domestic sales of Maruti’s entry level and compact cars were down 17 per cent year-on-year (YoY) against a 45.3 per cent contraction in sales of sedans. 

The economic shock from Covid-19 has given a further filip to this trend in the industry. In the first six-months of FY21, Maruti’s sedan sales were down 67 per cent YoY against 23.1 per cent decline in sales of its mini cars. 

“In the last few years, sales of entry and compact hatchbacks have grown faster than premium models and sedans. This could have some bearing on car makers’ revenue mix,” said Motilal Oswal auto analysts Jinesh Gandhi. He attributed this to the poor income growth in urban areas and the tough job scenario. 

This has broken the historical trend of a steady rise in car makers’ average sales realisation as buyers upgraded to premium models over the years. 

For example, Maruti’s average sales realisation grew at an annualised rate of 6.2 per cent between FY10 and FY17 from Rs 2.91 lakh per vehicle to Rs 4.43 lakh. In the same period, Hyundai’s average sales realisation has grown at a compound annual rate (CAGR) of 6.9 per cent.

Some analyst see it as cyclical downturn. “This is the longest dry spell for the industry and it started sometime in 2017,” said Shailendra Kumar, chief investment officer at Narnolia Securities. 

Others see it as a natural evolution. “There has been a shift in preference  towards compact SUVs in recent years and this has cannabilised sales of sedans,” said Suman Chowdhury of Acuite Ratings & Research.