Sub-Four Car Segment: The New Success Mantra

Posted in Marketing & Strategy Articles, Total Reads: 3707 , Published on 19 May 2013
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The Article has been authored by Prateek Gupta, IIFT, Delhi

Indians are really different from the rest of the world. And when it comes to the choice of passenger vehicles this behavior is quite evident. When the large sedans and sturdy utility vehicles were popular elsewhere, it was the hatchbacks that were generating numbers for the global automobile giants present in the country.  The market was flooded by small cars. International blockbuster sedans like Toyota Corolla, Opel Astra, Honda Civic, Ford Escorts failed miserably in the Indian market. The auto giants who adapted themselves sooner were the ones who were successful in grabbing a larger pie in the ever-increasing market share and the ones who ignored suffered hugely. However, factors such as enhanced disposable income, falling borrowing rates in auto loans and proneness to westernization during later half of the last decade caused some shift in the consumer preference.



image:freedigitalphotos.net

Entry-level Sedans like City, SX4, Dzire, and Indigo started selling in good numbers. We also saw an unanticipated liking towards the utility vehicle segment recently primarily because of the significant price differential between diesel and petrol. This also testified the inclination of Indians towards “Value for money” products.


Notwithstanding, in the wake of minimizing the cost of the vehicle, the auto makers have now discovered an altogether new category of compact sub-four-metre sedans and utility vehicles that are gaining favour among customers. This is done to take advantage of the differential tax structures for smaller and larger vehicles, the first of its kind in any country. “Sub-Four” is the new buzz word for the Indian automotive industry.

How it began?

While the excise duty levied on sub-four-metre vehicles (with engine capacity <1.5 lt for Diesel and <1.2 lt for petrol) is at 12 per cent now, it is more than double at 25% and 27% (raised to 30% in the latest budget) for larger sedans and utility vehicles. The two different excise rates were introduced in 2006 budget by the then finance minister P Chidambaram. The apparent objective was to increase the revenues by charging higher excise on large cars, mainly the sedans and the UVs, considering them as “luxury items”. Till that time the length of every single model of sedans and UVs being sold in India was more than 4 metre. Since little was mentioned about the type of vehicle in the rule book, Tata Motors, the indigenous automaker became the first to exploit the loophole.

In 2008, Tata motors launched the new model of its already successful sedan Indigo under the nameplate “Indigo CS”, where CS stands for Compact Sedan. It dropped the length of the car from existing 4150 mm to 3988 mm to avail the advantage of lower excise duty on smaller vehicles which made the model a significant INR 50,000 cheaper. This model became an instant success for the company. However, it was only last year when other biggies like Maruti Suzuki and Mahindra & Mahindra launched their own sub-4 metre vehicles. Maruti launched the compact version of its sedan “Dzire” in February,2012 while M&M launched an altogether new model of utility vehicle under the nameplate “Quanto” which was based on the platform of its another not-so-successful MUV Xylo. Both of these models revolutionized the Indian automotive industry.

Manufacturers had got an idea that they can introduce products at aggressive prices in a cost-conscious market just by chopping off a few centimeters from the vehicle. This resulted in the creation of a category unique to India.

Figures speak

Since the launch of the sub-four version of Dzire, it has been consistently ranked in the top 5 selling models in India. In fact in the past 5 months it has fixed the number 3 spot after Alto and its lineage Swift hatchback. It outsells even some of the company’s best-selling hatchbacks.

In the last quarter Maruti registered 92 per cent of average monthly sales of 15,000 units of the DZire from the sub-four-metre variant; the rest comes from fleet operators’ demand for the longer one. Even at a time of prolonged slowdown, Dzire has managed to retain consumer interest and strong demand pull quite evident from its months long waiting period.


The same is the case with Tata Indigo and M&M’s Xylo. M&M got 10,000 bookings for the sub-four-metre SUV Quanto in less than 2 months since its launch in September.  The demand generated by the Quanto has prompted M&M to increase production of the vehicle by 40%.

Bigger is not better?

Indians have always loved small cars; India is amongst a few countries where smaller cars outsell the larger ones by a huge margin. The primary reason for this is Indians being extremely value conscious. However, with the advancement of technology they have become aware of what is available in the western world. They want the latest, most modern technology without having to pay a heavy price for it. There is no doubt that a bigger and better car is still considered to be a status symbol in the bourgeoning middle class of India. The recent launches of sub-four vehicles (compact sedans and mini utility) by the automakers have satisfied this section by providing their dream vehicle keeping the costs at bay.

Apart from the intended proposition for providing low-cost product, the compact vehicles serve many purposes. In the context of India the badly planned cities and bursting traffic definitely needed compact cars using highly efficient small displacement engines for the cost conscious buyer. The discovery of sub-four meter segment has provided the solution to the aforementioned issues. It has provided an option to the Indians of upgrading their cars at a smaller cost than what it was a couple of years back.


Models in pipeline

The huge success of Dzire and Quanto has necessitated other automakers to launch vehicles in this unique segment. The global giant Ford is all set to launch its much-awaited mini-suv EcoSport. With its offbeat appearance it is expected to garner the same excitement among the customers that was previously grabbed by M&M and Renault through their SUVs XUV and Duster respectively.  This will not only help them remaining competitive in the Indian market but also satisfy the newly emerged demand of the customers. Likewise very soon Maruti might think of bringing its concept SUV XA Alpha to the market that it showcased in the Indian Auto Expo last year.

After capturing the major chunk in the SUV market, M&M now wants to re-enter aggressively in the sedan segment by launching the chopped-of version of its not-so-successful Verito. The vehicle is expected to be launched by March 2013. On the similar lines Honda Siel India is also set to launch its compact sedan under the nameplate “Amaze”. This will be a sub-four meter vehicle based on the hatchback brio’s platform. This will also be the first time that any vehicle from Honda’s stable will have a diesel engine under its bonnet. Hence Amaze is seen by many as the direct competitor for Dzire.

There are also various other models lined up for the launch. These include VW UP sedan, Tata Aria’s mini version, Tata Manza CS, upgraded Swift Dzire, and not to forget, our very own Ambassador. The market has propelled even the lackadaisical Hindustan Motors to introduce the shorter version of Ambassador with a lower engine capacity so as to provide the customers their once-beloved car at a much lesser price.


Future

There are around 15 million vehicles in our country. Of these, around 10 million vehicle owners are looking to switch to a better car. Offering the value-for-money and aspirational products keeping these people in mind will create a win-win situation for everyone. The trend of customers moving towards premium cars is also being pushed by the large base of customers wanting to upgrade. The Government has also left the duties unchanged for the sub-four meter vehicles (with <1500 cc engine) in the recent budget even though the excise duties on larger SUVs were raised from 27% to 30% thereby demonstrating its intention to give further boost to this new segment. Hence there is not an iota of doubt that this new segment holds a lot of promise in one of the fastest growing markets in the world.

The Article has been authored by Prateek Gupta, IIFT, Delhi

Reference

http://www.business-standard.com/article/companies/sub-4-metre-sedans-open-up-new-segment-for-indian-carmakers-112120300088_1.html

http://www.livemint.com/Politics/veGtDCQaaJgStkq4Ag5K8L/The-fourmetre-race.html

http://defenceforumindia.com/forum/general-multimedia/37717-hm-ambassador-turning-compact.html



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