Small (car) is beautiful

The Indian passenger vehicle industry has had a stellar year. In 2023-24 (FY24), PV sales grew up by an impressive 9 per cent. Carmakers are now trying to assess where the next spurt of growth can come from. Will it be from small towns? Will it be from small electric vehicle (EV) buyers? “Smaller towns the next pit stop for carmakers”, read one headline (Business Standard, March 18, 2024). “JSW MG Motor eyes a ‘Maruti moment’”, read another (Business Standard, March 21, 2024).

If you look at the sales numbers of various models, they tell an interesting story. SUVs have been growing and are reported to account for almost half of all cars sold last year. The largest-selling model over the last few years has been Swift (in FY24, Wagon R seems to have scored a small win), and all others in the list of top ten cars are possibly bigger than the Swift.

Having worked on passenger vehicle advertising for more than 15 years (handling the Tata Motors account), I am often worried about the way carmakers are trying to ‘upgrade’ Indian buyers. There was a time when Maruti 800 was the dominant model, accounting for a market share of over 80 per cent. That changed with the launch of Hyundai Santro, Tata Indica and Daewoo Matiz. Suddenly, car buyers had a choice. Maruti saw the writing on the wall and launched Wagon R as a model that Maruti 800 users could upgrade to. 

Then came the launch of the Swift, which became a runaway success. Maruti did not ignore the entry-level small car (Maruti 800) buyer. It launched the Alto as its replacement. The Alto had a great run for many years. But if you look at the leaderboard over the last few years, you will notice that cars smaller than Swift have not had a great run: i10, Alto, Celerio, Tiago et al do not feature in the top 10.

This defies logic. In India, in category after category, it is almost always that the small model, which offers maximum value for money, sells the most. This is to be expected given the huge middle- and lower middle-class (interestingly, even in motorbikes, we are seeing a decline of the standard 100cc bikes). What could be the reason?

The first could be the rapid rise of small car prices, thanks to the implementation of the new pollution control norms – from BS IV to BS V, and soon to BS VI. All these changes end up increasing the cost of manufacture and the price to the consumer. The price advantage that a very small car enjoyed is no longer so attractive.

The second could be the availability of second-hand vehicles. Why buy a new Alto when you can get a five-year-old Swift? While trying to understand the tradeoff between new car and old car, I chanced upon an interesting article in the Economist (March 9, 2024). Prof George Akerlof won the Nobel Memorial Prize in Economic Sciences in 2001 for his work on the analysis of asymmetric information in markets. Information asymmetry is when two parties don’t have access to the same information. Prof Akerlof presented the topic in his article, “The Market for ‘Lemons’”. The subject: used cars. 

He proposed a simple model; there are used cars and there are new cars; then there are good cars and there are bad cars. When you buy a new car, you know what you are getting (unless the dealer is pulling a fast one on you). But when you buy a used car, you don’t know enough. The seller knows more about the car he or she is selling. Unfortunately, sellers tend to sell a bad used car as a good used car. Buyers get taken for a ride, in more ways than one. They develop distrust and hence tend to offer the lowest of low prices for a used car. This drives out sellers of good used cars (they tend to hang on to their cars for longer, I suppose). And the market is left with ‘lemons’. 

For the uninitiated, ‘lemon’ is the term used in America for bad cars. One of the all-time great Volkswagen ads had the word ‘lemon’ as a headline; the body copy then explained how a ‘lemon’ never leaves the factory. Coming to the point we started with, used cars tend to command a lower price than they deserve because they are crowded out by ‘lemons’. A seller with a good old car tends to withdraw from the market. The buyer is always a little worried about a used car.

We don’t know if this is happening at scale in India. We also don’t know how digital tools are helping buyers and sellers navigate the ‘market of lemons’.

There could be one other reason why small cars are not growing, and this may be the bigger issue. Carmakers have stopped actively advertising their small cars (lower profit margins, higher service costs etc). And the lack of advertising and brand building inputs has removed the badge value and pride of ownership of small cars. 

Remember the iconic ‘Alto Let’s Go’ campaign? Or the ‘Indica Club’ that Tata Motors used to run? If carmakers want to attract small-town and rural buyers to buy new cars, they have to invest in brand building. If they can do this, then small car sales will boom in small-town India and we will see continued growth of PVs in the country. Small cars hold the big key to growth.  

The writer is a brand coach and founder, brand-building.com; he can be reached at ambimgp@brand-building.com