Small cars vroom into spotlight, sales set to hit a four-year high in Jan

After losing out to utility vehicles for years, small car sales are set to hit a four-year high in January

India’s small car segment that has been losing out to utility vehicles is back in the spotlight — thanks to the new Santro. 

Since its launch on 23 October, the new generation Santro has garnered over 45,000 bookings. The company is expected to stop taking bookings temporarily and resume it next month once new orders touch 50,000. With demand far outstripping production, there is currently a waiting of three months for the model. One thing  this sales momentum has done is to defy the belief that small isn’t beautiful for car buyers in India.

Driving this growth are first-time car owners. One in every two who have booked the Santro will be owning a car for the first time and live in tier two and tier three cities, says Puneet Anand, senior general manager at Hyundai Motor India. Anand expects the Santro to lift monthly sales of the mini car segment that comprises models such as the Wagon R, Celerio, Tiago and the Alto to 35,000 to 38,000 units in January. “This will be the highest in four years and will be largely led by the Santro,” says Anand.

Partly this growth may be owing to the acceleration in sales after a new launch.  “There is a high correlation between new model launches and spike in a segment. Trendy looking new models at an attractive price will always lead to an uptick in sales,” points out Kavan Mukhtyar, partner and leader, automotive, at PWC.

It was true for the new Swift, which clocked 100,000 units within two months of launch in January this year. If bookings for the Santro continue at the same pace for another month, it will reach the same level.

For the industry, Santro sales may not be enough to herald a shift in the trend of the the past five years, but it does mark a revival in demand for small cars. Utility vehicles have been growing at a faster pace than cars (all segments) since fiscal 2013. From FY13 to FY18, the compounded annual growth rate of utility vehicles stood at 11 per cent, whereas it was 3 per cent for cars, according to industry body Society of Indian Automobile Manufacturers.

The  Santro competes directly with Maruti Suzuki’s Alto that has been the undisputed leader in the segment, clocking a steady sale of over 20,000 units every month even in a slowing market. Maruti is boosting its small car portfolio too. With the launch of the new Wagon R early next year, the first-time car buyers will have more options to choose from. With the new Wagon R, which is expected to be peppier, structurally stronger with a host of creature comforts, Maruti expects to strengthen its hold in a segment that is unlikely to go out of favour, says R C Bhargava, chairman, Maruti Suzuki.

“The market for small cars will always be growing as there are 200 million two-wheeler owners in this country who are potential small car buyers,” says Bhargava, attributing the subdued growth in the segment to absence of new models and production constraints at Maruti. The production of mini car models of Maruti, including Wagon R, Alto and Celerio, have remained almost unchanged year-on-year because these models are made on the same line as the Vitara Brezza, the company’s compact SUV offering that has been topping the sales charts. The company, therefore, had to curtail production of the mini car model to make room for the Brezza, explains Bhargava. 

The stagnant sales have also been a function of lack of new models and an overall sluggishness in the sales, he adds. “New model launches always lead to higher sales volumes that is how growth has taken place in this market.” 
 

As much as Maruti and Hyundai remain optimistic of the mini car segment, other global car makers are unlikely to jump into the fray, say experts. “It’s very difficult to make money in the segment, unless you have huge volumes. You really need scale to compete in the segment,” says Mukhtyar. The challenge in the segment is not “engineering capability,” it is about the “economics of volumes,” he says. Nobody can vouch for this better than Renault India, which generated a lot of excitement with its Kwid only to see it fizzle out after a year. 

After topping the sales charts in 2016 and emerging as a formidable challenger to the Alto, Kwid sales started tapering off in 2017. Its monthly average sales have come down to around 5000 units from the peak of 9,500 in 2017. 

“People are discounting steeply in the market and I cannot afford to do that. We do not have deep pockets to buy market share,” Sumit Sawhney, MD and CEO, Renault India told Business Standard in an interview in July.

Sawhney’s statement  summarises the predicament of other multinationals in the small car segment. By virtue of having a large portfolio of models which comprises both affordable and premium cars, Maruti and Hyundai can boast of a competitive cost structure and price their models competitively, but a lack of a similar “portfolio approach” makes small cars unviable for others.  Local arms of Ford, Toyota, Honda and Nissan have learnt this the hard way as their attempts to crack the high-volume, price sensitive segment haven’t paid off.
 

But for homegrown players too it hasn’t always been a smooth journey. “Eventually, the fortunes of the car market remain closely tied to job creation and pick up in the economy and small cars, like rest of the segments too shall benefit if the latter gathers pace,” says Bhargava.