Fall of the Planet of Subcompact Cars in India

Irrespective of the sector, companies have always seen cracking the Indian market as a strategic and rather necessary move. According to The European Automobile Manufacturers Association (ACEA), Indian automobiles are ranked fourth in terms of production as of 2019, with the production touching 22.65 million in FY 2021. We are also one of the biggest automobile consumers in the world, with the hatchback segment holding a majority share of 43.9%. Many analysts see India as a growth center and expect the market to grow at a CAGR of 11.3% from 2020 -2027.

It all seems well and good when a general overview is taken, but coming to the segment in discussion- the A-segment cars (small cars), things have not been going the way manufacturers intend it to, from declining sales to stoppage of production, many companies like Maruti Suzuki whose market share in this segment fell from 50% to 42% over the past couple of years are currently in a tough spot.

In this week’s article, we look into what exactly is happening in this segment and how it may forever change the face of the Indian automobile industry.

So, what exactly is the problem with the small car segment?

Technically speaking the problem does not lie alone with the cars that make their way into the market, but mainly with the change in consumption trends and legislative norms that have altered the very nature of these cars.

A breakdown of these consumption pattern changes would help us paint a better picture of the downfall of the segment:

1) Change in customer buying pattern:

The small car segment took up the pace at the beginning of the millennium with the relatively younger population wanting to lead an aspirational lifestyle, which meant having the luxury and status symbol of a car. Now, at that time most of them were not able to afford a sedan, as it was too expensive. With the advent of small Hatchbacks, they found the perfect match which had the best of both worlds. The likes of Spark, WagonR, and Alto are some of the major cars that were preferred by these buyers.

However, over the past many years, the market has seen a significant change in the age of first-time buyers. With an increase in the number of younger new income earners purchasing cars than before, their choice of cars differs drastically from before. These buyers now demand more from a car, whether it be the features or space, and want their cars to be value for their money.

2) New legislative reforms:

Over the years, the government has introduced many safety norms that the OEMs have to incorporate into their models such as the mandatory feature of ABS, Reverse sensors, etc. These norms have forced the manufacturers to either hike the price or compromise on quality and features provided and have in their basic form altered their very nature. This trend can be seen by the fall in sales of these cars on a Y-o-Y basis. While at the same time a spike in the sale of compact SUVs of the same makers is seen.

How did these two factors alone alter the fate of the sub compact car segment?

Though these two can be said as the direct factors affecting this segment, there are indirect factors that are commonly overlooked for instance:

Aggressively priced premium models:

In the past many years, premium car makers like the German trio have introduced new models like the 2 series, Q2, A-class, etc that aim to cater to the younger and first-time buyers, who are looking for a compact, premium yet affordable car that suits their lifestyle.

It is not just the luxury car makers that make their cars affordable, brands like Skoda, Volkswagen, and Hyundai have made their models more luxurious yet managed to keep their pricing competitive. Take the now discontinued Skoda Rapid for instance; at under Rs.11 lakh( Base model) one could get their hands on a car that had the build quality of a luxury sedan, which was years ahead of its competitors in terms of comfort and performance for the price of a hatchback. This naturally made the consumers go for the sedans and other categories that offered more.

2. Better financing options:

CarDekho’s Umang Thakur revealed that almost 70% of the new purchase of cars happen through loans. I mean why shouldn’t it, with the banks being all the more aggressive with their loans, EMIs, and schemes the consumers find incentive in purchasing premium cars.

Rise of the planet of the SUVs: and how it took over the market?

Well, not really. Not the gargantuan Fortuner or the G wagon, but the baby SUVs like the urban cruiser or the Venue, Creta and Seltos. A segment with just around 20% of first-time buyers in 2019 increased to an impressive 36% by 2022. Why the sudden surge, you ask? One word, road presence. Being a more rugged and practical vehicle, consumers get the best out of their car for being affordable and feature-rich. At the same time, producers do not require to create a new platform as these compact SUVs can work on hatchback platforms which also gives the consumer Tax benefits.

But, why the sudden fall in this segment?

Remember the Chevrolet Beatz? Honda Brio? Tata Nano? Or the recently departed Volkswagen Polo? It is not that this is a pattern we noticed recently, but it has been happening for around six seven years now. Even though manufacturers have stopped manufacturing many sub-compacts, the fact that a perfect substitute was ready to take its place, meant that the consumers weren’t left disappointed.

Finally, What has the future got in store for this segment?

Analysts believe that this segment may not even exist beyond 2027, as the consumers move away to bigger and newer segments. For the OEMs like Maruti Suzuki, who is the market leader in this segment may even have to stop producing them, Hyundai has already stopped production of the Eon a couple of years ago and has recently discontinued the Santro. However, one cannot entirely predict how this will play out and will have to wait and watch if the OEMs will abandon or resurrect this segment.

Curated By: Rohan Boby

(Rohan Boby is a 2nd year student pursuing B.Com(H) at St. Xavier’s College (Autonomous), Kolkata and a Research Analyst of the Xavier’s Finance Community.)