New Delhi: Mathematicians say that the pyramid is the most stable shape invented by man.
Archaeologists say that the pyramids in Egypt are the most sustainable structure ever built by any civilization.
Social scientists believe that Maslow’s hierarchy of needs is fundamental to individual and collective development.
The Indian 4-wheeler industry thinks otherwise!
The 4W pyramid is unstable right now, at the bottom. The entry-level segment has been underperforming for quite some time now. Over the last one month, I have suddenly seen a spurt in media reports on this uncomfortable fact. There have been quite a few television debates too, and I have been part of one myself.
The July to September quarter was a disaster with the entry-level segment dropping by a whopping 75%. The early reports of October do not look much better though there has been a push on filling the network pipeline for the festive season. The leader of India’s leading automaker went on to make a significant announcement that the entry-level PV market which is indispensable for sustained growth in India will take 2-3 years to recover. Quite obviously, the leader is concerned. For all the right reasons, or should I call them the wrong ones!
What exactly is ‘entry level’?
Since the turn of the millennium, the Maruti 800 has been the definitive ‘entry level’ car in India. The Alto took its place after the Nano failed to deliver. We were talking of around INR 2.50 lakh for a person riding a motorcycle worth INR60,000 then. In 2023, the commuter motorcycle is at INR 80,000 while the Alto, uglier than before, starts at INR 3.90 lakhs! I do not need to do any complex maths here for you to question yourself on what really is affordable entry-level in India right now? One may present the used car as an option, but then the used bike can be a counter. So, when the leader talks about the entry level, it comes with the rider that the price point has almost doubled in 2 decades. Have buying power and savings gone up in tandem? Make your guess.
A gradual erosion
The drop in the entry level segment is not a post Covid phenomenon that most of us would like to think. The decline started post Diwali of 2018. It was actually a combined outcome of demonetisation, GST and errant monsoons, in no order of priority. While the monsoons have always played truant with rural and semi-urban buying, the GST was a much needed reform. About the first fiscal step, the jury is still out on its long-term impact on the Indian economy.
The pandemic lockdown of March 2020 only accelerated the erosion of the pyramid’s base. People at the bottom of the employment hierarchy lost jobs, underwent salary slashes, relocated outside of metros and underwent the highest levels of trauma and anxiety. The situation was never repaired as a large part of corporate India had adjusted with working with less and cheaper workforce. An Azim Premji University report cited government data of 2023 that over 40% of India’s graduates under 25 years of age are unable to find jobs.
Mirroring the economy
The Economic Survey of 2022-23 shows that India’s saving rate has been gradually dropping since 2010-11 to 28.2% in 2020-21. As per CMIE reports over the years, unemployment was at 10.85% in October 2023 vis-à-vis 8.0% in 2020, 5.98 in 2021 and 7.33 in 2022, implying it is higher now than when the pandemic hit us.
While India is surely moving towards becoming a USD 5 trillion economy, its growth is definitely not following the inclusive, pyramidal shape. In fact, economists devise new jargon like “K-shaped growth” and so on to shy away from the rude fact that the rich are definitely becoming richer while the poor are left to their lot. The Statista infographic based on the Credit Suisse Global Wealth Report 2022 further reiterates this anomaly in our growth.
Source – Statista / Credit Suisse
The 4W segment is mirroring the economic growth story. Those who already have cars are buying new ones…bigger, costlier and more feature-filled. Most have gone through their post-Covid ‘revenge buying’ cycle, to use another management jargon. Which is exactly why bigger vehicles, especially SUV-style ones, and higher end variants are selling for the last 18- odd months.
Building a wrong narrative
It is not because the 4W aspirant has suddenly become richer. It is because youth with jobs, in metros and class A cities have received good retention bonuses while the upper middle class have become richer and simply bored with their existing vehicles. The same Indians who had cars and two-wheelers in the family are buying new cars, for themselves, to safeguard themselves against another pandemic and lockdown.
If lots of new Indians were buying new cars, then lots of new Indians should have also bought new motorcycles and scooters, which is not happening. In fact, the slack demand for 2Ws in India since the end 2018 has been directly hurting 4W sales at the entry level. ET Auto itself has been reporting the same for quite some time now.
However, a large section of the media has been building this positive narrative about 4W sales over the last one year. Just like we have reports of flyovers and condominiums being built, we are painting optimistic canvases while unemployment goes up. There is so much being written about SUVs, sunroofs and super luxury sales. I am sure the journalists are not doing this at anyone’s behest but purely out of love for the nation’s image. Yet, the narrative is wrong and if perpetuated for some more time, dangerous enough to make us actually believe in our yarn being spun.
Profits, at what cost?
The 4W automakers are not really complaining at all, as their profitability keeps improving. The Alto looks so very ugly and uninspiring that India does not have a vehicle in the INR 3.00 lakh to INR 5.00 lakh price band. The average price point of an entry level car is more than INR 5.00 lakh now, starting with the Kwid. This is unacceptable for a country where car penetration is hovering around 25 per 1000 people.
The automakers have, as a sub-conscious cabal, moved the very price point up, making a car unaffordable for the millions of Indians riding motorcycles and scooters, but definitely profitable for themselves. Investments in electrification and digitisation cannot be funded at the cost of the entry level. Profit motive has taken the better of the greater purpose of “democratising mobility” as the current market leader had started its journey with.
The counter will be that increasing safety and emissions regulations have pushed costs up forcing them to pass it all to the poor customer. Only to be rebutted that if they plan for larger numbers, the per unit impact of all the improvements are bound to come down. If it can happen in white goods, consumer durables and smartphones, it can surely happen in automobiles.
The next counter will be that of the high GST levied even on smaller cars. Only to be rebutted that it is the duty of the industry, led by its industry body, to present scenarios to the policy makers on how the entry-level will be revived at a lower / sensible GST rate allowing for the increased revenues to cover the notional losses in tax.
I have been part of this industry for more than two decades but am sad to state that this short-sighted profit motive of the automakers does not bode well for the market’s future. Once the upper middle class are satiated with their more expensive cars, the pipeline will dry up. Their younger generation might think a personal means of transport is not ‘cool’. And the two-wheeler rider will get used to either a better two-wheeler or better public transport.
The pot of gold
The 4W segment is not in sync with the other industry segments, especially 2W. All the other segments are building their pyramids stronger, incorporating electrification and new mobility solutions.
A mention of the Auto Mission Plan 2026 [AMP] at this stage is critical to drive my point. It had foreseen a market of 6 million 4Ws and 60 million 2Ws by 2026. This was thought out with the clear objective of making the pyramid robust. With the 2W sales still at 2014-15 levels, the fissures at the base of the 4W pyramid are getting deeper and bigger.
Source – motor1.com
Some of the world’s most advanced automobile markets continue to have the entry level play a critical role in its sustainable growth.
The K-class car is still one third of the Japanese market as this infographic of 2022 sales shows, in spite of its very high vehicle penetration and maturity. It is this category that makes a brand like Suzuki both thrive and be profitable all these years.
Even in China, the minicar segment provides a robust foundation for the entire market of almost 28 million 4Ws per annum. The entire EV revolution is happening through the electric minicar segment with vehicles like the Ora Good Cat R3, Wuling Hongguang and Baojun E300 being best sellers.
In any developing economy, sustainable growth of the automobile market has only happened from the bottom of the pyramid, upwards. Even post-war growth in countries like the UK, France, Germany and Italy happened through entry level cars. Otherwise one cannot explain global successes such as the Fiat 500, Austin Mini, Citroen 2CV and the VW Kafer / Beetle. Each was an entry level car that helped build and nurture its respective market into a powerhouse.
Source – Capgemini / Financial Times
A 2022 study by Capgemini shows close to 58% of young Indian adults wanting to buy a car. Even if we assume that 25% of them are potential first time buyers, it is indeed a great position to be in. However, in spite of their aspiration, if they do not end up buying their first set of four-wheels, the blame lies squarely with the automakers and policy makers as a terrible tag-team.
They need to repair the pyramid. Now!
(Disclaimer: Avik Chattopadhyay is a brand strategy, marketing, and automotive product planning expert and the founder of brand strategy and solutions consultancy Expereal. He went entrepreneurial after 22 years in the automotive industry, across markets, cultures and organisations like Maruti Suzuki, ExxonMobil, Apollo Tyres, Stellantis and Volkswagen. Views in this article are his own.)
