Small cars lose sheen as buyers opt for bigger cars

Low-cost, compact cars are losing sheen in India as customers switch to premium hatchback and compact sedans over smaller entry-level cars that have long been the bread and butter of Asia's third-largest automotive market.

Smaller models like Maruti Alto & Estilo, Tata Nano, GM Spark and Hyundai Santro are on the decline even as bigger models such as Maruti Swift & DZire, Mahindra Bolero, Toyota Innova and Hyundai i20 maintain strong sales traction and are among the top 10 sold models in FY13.

"Consumer behaviour is changing. People are directly moving to bigger cars and giving the entry-level micro cars a miss," says Society of Indian Automobile Manufacturers' (SIAM) president S Sandilya. According to SIAM data, Alto retained its top selling slot in the Indian market, though sales slipped 15% to 2.66 lakh year-on-year.

Even the brand new Alto800 failed to revive sales. The micro car segment dipped 13% to 6.23 lakh cars in the last fiscal from 7.16 lakh cars sold in FY2011.

Popular models such as Nano, Spark and Santro fell out of the top selling list and this was largely responsible for the 7% decline in car sales, the worst in the past 12 years.

"The growth in Indian economy that has left customer with higher disposal incomes has increased demand for bigger cars and SUVs," says Abdul Majeed, Auto Practice Leader at PricewaterhouseCoopers. "India is not going to be a big car market like the US, but yes the domination of small models will eventually fade away with sedan and crossovers taking their place in an evolving market."

Global carmakers in India are already capturing the trend with more offerings in the mid-segment. Honda debuted a new sub-4 meter compact sedan Amaze to trigger a fresh wave of sales in the Indian market.

"The Amaze is a mid-size sedan especially made for the Indian market. We expect it to become our largest selling model, bigger than the Brio or the City. With higher incomes, the propensity to buy bigger cars has increased and that is reflected in mushrooming models in these mid-car segments," Honda Car India president & CEO H Kanayama said.

To be sure, car majors Renault and Nissan have entry-level car even as Honda has evinced interest in the same segment. But when economy slows, it is the entry-level car segment that is impacted the most, while it is the first to bounce back when sentiments improve.

Other major carmakers like Suzuki, one of the largest global player in micro-cars segment after withdrawing from the US last year, are focusing on the high margin mid segment models into the Indian market.

Suzuki has stopped selling its entry-level car — Maruti 800, in major metros and cities and will introduce a new hatchback closer to the pricier Swift hatchback.

"The belly is growing around the B&C segment cars and shifting away from the basic entry-level A segment cars. While the shift towards diesel cars has also played a critical role in the change, growing incomes are making bigger cars favourites for Indian customers," said a senior Maruti Suzuki executive.

The annual sales data also shows that bigger cars have not just increased their presence in the top-10 selling models, their sales have also jumped.

While the car market shrank 7% in FY2013, sales of mid-level cars like Maruti Swift jumped 20% to 1.84 lakh, Hyundai i20 hatchback sales jumped 18% while Mahindra Bolero sales jumped 17% to 1.17 lakh units in the same period.

The fortune of small models has changed even as government allows small cars with a lower 12% tax, while bigger sedans and SUVs pay a higher tax at 24% and 27% or 30% depending on the overall size and engine power.

But even in the slowing Indian car market, customers prefer to graduate to expensive cars albeit doling out a much higher price and taxes to the government exchequer.

Also read: Honda plans entry-level small car