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Racing Ahead
Utility vehicles are steadily gaining on small car sales and auto companies are going all out to keep volumes high
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Two-three bags with camera gear and the same number of assistants,” Arjun Dogra lists his essentials for an assignment. The ad stills photographer used to cram all this and himself into his Maruti Swift and drive up to 400 km a week in and around Chennai. Not the most comfortable experience, especially if the drive is up to Bengaluru or Goa. In September, Dogra spent Rs 10 lakh on a Renault Duster. “Long journeys are more comfortable now,” he says, adding that he wants the utility vehicle to act like a “regular car” over weekends, negotiating city traffic and congestion with ease. “The clutch is a little hard for city driving, but it’s okay,” is Dogra’s verdict.

Up north, Yash Malhotra had his own reasons for buying a Mahindra XUV500. For this 40-something entrepreneur and property dealer, the shiny new toy confers both utility and status. Hailing from Gohana in Haryana, 86 km from Delhi, Malhotra had been driving a Hyundai i20 for the past two years. “Everyone in my town turns to see my XUV,” says Malhotra proudly. A more practical advantage is that the deeply devout Malhotra can pack his like-minded joint family — four more adults and three children — into the SUV for their pilgrimages to Haridwar and Vrindavan.

 
 
“Prospering agrarian markets mean more people can afford UVs"—Takayuki Ishida, MD and CEO, Nissan Motor India
 
 
There was a time not too long ago when a road trip with many people meant hiring multi-seater vehicles. Most families stuck to their sedans and hatchbacks and nobody you knew owned a utility vehicle. That’s changing — and how. Since its launch last September, Mahindra has sold over 35,000 XUV500s and there’s a two-four month wait for delivery; Maruti has sold 40,000 Ertigas since April and Renault, over 85,00 Dusters since its launch in July. In fact, during H1FY13, some 255,895 multi-utility and sports utility vehicles (SUVs and MUVs) were driven out of showrooms all over India, an impressive 56% more than the 164,209 sold during the same period last year. This growth happened at the same time as passenger cars and vans sales dropped 0.27%. So, although compact cars still account for over 70% of the market, SUVs are taking up more parking space than before. “India is now experiencing now what the West experienced decades ago, and China a decade ago. In the US, ratio of SUV to other passenger vehicles is almost 1:1,” says Pravin Shah, chief executive, automobiles, Mahindra & Mahindra. Indeed, SUVs now account for 20% of the 2.6 million Indian passenger car market, having grown at 9%-plus over the past five years. And auto companies are in overdrive to ensure the momentum continues in the foreseeable future.

Muscle cars

Mayank Pareek, chief operating officer, Maruti Suzuki, points to internal research that about 58% compact car owners change their vehicles every five years. “People like to upgrade to a sedan or a better model. Now, many of them are upgrading to a utility vehicle (UV) at a similar price,” he says. But what is a UV? The Society of Indian Automobile Manufacturers (SIAM) defines it as having off-road capability, a two-box, ladder-on frame and seating between five and 10 people. Based on that description, currently, there are 41 different UVs in India — from Mahindra Scorpio, Renault Duster to Nissan Evalia — with prices ranging from Rs 5 lakh for the Premier Rio to a jaw-dropping Rs 8.5 crore (for the newly launched Evade from Canada’s Conquest Vehicles). But if you’re willing to be patient, you can choose from some five or six more — the Ford Ecosport, Maruti XA Alpha, Chevrolet Trax and Force One 4x4 are all expected to hit the road soon.

 
 
“We expect growth in UVs to continue for at least the next 10 years"—Sandeep Singh, Deputy MD, marketing, Toyota
 
 
Most auto makers in India have already launched or are planning to add SUVs to their portfolio, given their growing popularity among Indian consumers, so expect even more launches as 2013 progresses. Toyota, for instance, will launch its mini-SUV Rush by the end of next year, by when Honda would have already unveiled the facelifted CR-V. Volkswagen, too, is working on a compact SUV, which may be ready for launch as early as 2014, while Nissan and Toyota are said to be considering mini-SUVs for the Indian market. Interestingly, many of these new vehicles aren’t full-length SUVs — they’re planned as sub-4 metre length with engine capacity of under 1.5 litres (diesel) or 1.2 litres (petrol); that qualifies the vehicle for lower excise duty, making them affordable. “With the introduction of new products in this segment across a wide range of size and price points, customers have more choice,” says Sandeep Singh, deputy MD, marketing, Toyota Kirloskar Motors.  As this segment matures, he believes there will be more defined segments within the category, offering even greater choice. “Utility vehicles are best suited for India’s patchy infrastructure,” Singh adds.

Gear shift

While the demand for SUVs seems to be self-sustaining at present, auto companies are also ensuring that Indian consumers’ top priorities, when buying a car, are covered even in SUVs. They’re making the vehicles affordable and fuel-efficient (relatively speaking, of course: SUVs are notorious gas guzzlers). It helps that the same manufacturing platform can be used for several vehicle models. For instance, Mahindra’s Scorpio and Xylo share a common platform, as do Toyota’s Fortuner and Innova. Going forward, Mahindra’s recently launched Quanto will reportedly share a platform with its planned monocoque range, while Nissan is working on a compact SUV on joint venture partner Renault’s Duster platform. “It’s all about catering to customer’s unmet needs with a constant focus on cost,” says Shah.

Sharing common components and engine architecture not only brings in efficiencies, it also means economies of scale — all of which add up to quicker launches and, hopefully, cheaper vehicles. Not surprisingly, then, the practice will only become more widespread in the coming years. A white paper by research firm Evalueserve shows that globally the top 20 passenger car platforms contribute to 40% of the production volume and estimates that this share will reach  around 45-47% by 2015. The report also adds that “OEMs will increasingly adapt their existing platforms and develop new ones” specifically for India and China given that these markets will account for a higher proportion of global sales over the next few years.

 
 
“India is now experiencing what China did a decade ago"—Pravin Shah, CEO, Mahindra & Mahindra Auto
 
 
Of course, manufacturing is only half the battle. Potential buyers may be tempted by an SUV but may baulk at the final purchase decision. That’s where the dealer comes in — by handing out higher commissions on UV sales, companies are ensuring there’s enough incentive to push sales. If a dealer gets on average Rs 9,000 on the sale of a compact car, he gets up to Rs 15,000 on an SUV sale. That’s in addition to his commission from the financier — 1-1.5% of the loan, which is usually higher for  a SUV compared with a compact car.

While captive financiers like M&M Finance and Tata Motors Finance offer attractive deals, independent auto finance agencies, including nationalised and private banks, have also contributed in pushing volumes. Nearly 90% of SUV buyers opt for finance, points out Ashok Khanna, business head, vehicle loans, HDFC Bank. “SUVs tend to bring in high ticket size. So it’s a lucrative opportunity,” he adds. HDFC Bank’s UV finance business grew 30% y-o-y in FY12, while the compact finance vertical is slowing.

Finance aside, auto companies are also working on making it easier for their customers to reach them by expanding their sales and service networks. “The customer must be sure that wherever, he goes, he can get his car serviced. This is especially true for utility vehicles, since people travel off-road with them,” says Pareek. Maruti has 3,100 service stations, up from 2,800 last year, and aims to cross 4,000 by 2015. The company also has 870 dealers across 800 locations all over India. Although it’s no match for Maruti, Mahindra has the advantage of its legacy as a commercial vehicle and farm equipment manufacturer — it has 1,000 service centres and over 400 dealerships. In addition, it also has Mahindra First Choice, a 150-centre strong multi-brand car servicing chain, which is working towards having 500 centres by 2015. Companies like Renault, Toyota and Nissan, too, are beefing up their networks substantially. The idea being that no matter where the potential buyer is, there’s a dealership somewhere close by.

Room for more

The biggest driver of the UV market right now isn’t the slew of launches, accessibility and attractive finance offers — it’s the preference for big, spacious vehicles that aren’t just symbols of their owners’ growing affluence but also their changing lifestyles. “There is a growing preference for leisure travel with family, alongside daily travel needs,” agrees M&M’s Shah. “UVs with more seats and power fit the bill perfectly.”

 
 
“I drove a compact before but now everyone turns to see my XUV"—Yash Malhotra, Property developer and XUV500 owner
 
 
And it’s not just in the metros. Points out Nissan Motor India MD and CEO Takayuki Ishida, “Prospering agrarian markets has meant that populace in these locations have higher disposable income than ever before.” While city-wise break-up of SUV sales isn’t available, most analysts agree that the popularity of the big vehicles extends to tier 2 and tier 3 cities as well, albeit not at the same scale as metros. “It’s a national phenomenon,” avers Hormazd Sorabjee, editor, Autocar India. At a car showroom in Raipur, Chhattisgarh, Manish Singhania nods his head emphatically — the past couple of years, he’s seen a 30% jump in SUV sales and has hired women to deal with enquiries from women. “For the first time since we took on the Mahindra dealership 12 years ago, we have families visiting our showroom,” he says.

Some 1,200 km south, Venkatesh Kumar, senior manager at the Maruti dealership in Guindy, Tamil Nadu, is used to women and children visiting the showroom ­— after all, Maruti has been a family car for a couple of generations of Indians now. But like Singhania, he, too, sees a distinct pattern among SUV buyers: they’re usually around 40, own a car, upper middle class and have a family of at least four. “They come for the Ertiga,” he says, “and don’t mind waiting weeks for the diesel version.”

And that’s where the greatest attraction of SUVs lies. Remember we said these monsters are gas guzzlers? Well, they chug diesel, and that’s an auto-buy for many customers obsessed with fuel efficiency. Diesel prices in India are kept artificially low through subsidies, making an SUV as cheap to run as similarly priced petrol-engine sedans. For instance, a Toyota Etios will take you about 630 km on a full tank of petrol (14 kmpl and a fuel tank capacity of 45 litres), whereas with a Renault Duster you can go as much as 850 km on a full tank of diesel (17 kmpl on a 50 litre fuel tank).

Analysts however, point out that roughly 60% of all passenger vehicles sold today are diesel, up from 40% in FY11 — with SUVs, the ratio is even more skewed towards the cheaper fuel; in fact, Pareek admits that the lack of a diesel version played a huge part in the failure of Maruti’s Grand Vitara (launched in 2007). “The diesel price differential is a strong driver,” points out Ajay Srinivasan, auto analyst at Crisil. And that’s what also raises questions on the sustainability of this sales spurt.

On-road

In September, the government announced a sharp hike in diesel prices of Rs 5 a litre; the subsidy on premium diesel, meanwhile, has been done away with completely, raising its price by a staggering Rs 21 a litre. There is talk of another round of price hikes in the next six months and of imposing extra levies on diesel SUVs. Will the popularity of utility vehicles survive such purse-pinching measures? Opinions are divided. Deepesh Rathore, MD, IHS Automotive India a consulting firm, takes an extreme stance: “It can kill the segment.” Others, like Autocar’s Sorabjee, believe that as long as the petrol-diesel gap remains, the demand will continue to grow.

 
 
“Long trips are now easy but the clutch is hard for city driving"—Arjun Dogra, Photographer and Renault Duster owner
 
 
But there’s a bigger challenge. Those scorching SUV sales growth figures are on a minuscule base and India remains a determinedly small and compact car country. Against the 255,000-odd SUVs bought in H1FY13, Indians drove away 676,416 new compact cars and 233,556 sedans. Granted, there was a blip in compact sales this year, but it may well be a one-off given the general economic conditions and the fuel price hikes. Srinivasan cautions: “This type of supernatural growth won’t sustain for many years.” He predicts a 15% growth over the long-term for the segment, against the current 56% (H1FY13); the predicted growth rate for compacts: 5-7%. Toyota’s Singh, not surprisingly, doesn’t buy that. “We expect the growth in the UV segment to continue for at least the next 10 years,” he says.

As with most products in India, continued affordability will be the key to success. The maximum growth, say industry sources and analysts, will come in the Rs 7-10 lakh sub-segment. And certainly, that’s where most of the new launches are placing themselves — the Toyota Rush is expected to cost Rs 7 lakh, Ford’s Ecosport at Rs 6 lakh, while Chevrolet Trax and Maruti Suzuki XA Alpha will be under Rs 10 lakh each. But given rising input costs, it will be a challenge to maintain those price points. To cope, auto companies usually negotiate three-year contracts with suppliers to ensure input price stability; they also uses common platforms that help achieve economies of scale. But obviously, such measures can only help up to a point: all the major auto companies have already announced price hikes this year. The increase in prices is higher than for compact cars: the Duster, for instance, has become costlier by Rs 40,000 (diesel variant) while Audi’s Q3 now costs Rs 50,000 more.

Back in Gohona, Malhotra paid Rs 15 lakh for his XUV500 but candidly admits he would have bought it even if it meant paying several thousand more. It doesn’t matter that the roads where he lives aren’t made for SUVs and he’s had to build a shed at his farm 2 km from town for his vehicle. “That’s no inconvenience, given the stature it gives me,” he laughs. Now, if only more people think like him, auto makers will be a happy lot.

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