All smoke, no fire

It’s getting to the stage where auto firms may soon pay you to buy cars. That’s probably an exaggeration, but consider what’s on offer currently: Maruti is giving you ₹50,000 off on the Swift and ₹91,500 less on SX4; at Hyundai, it’s ₹35,000 off if you go for the i20 and ₹32,000 less on the i10; Fiat is offering a ₹1 lakh exchange bonus on Punto and Linea Classic; and Chevrolet is selling cars on zero down payment and throwing in an extra year’s maintenance free. 

Even the luxury segment has seen sweet deals, with dealers offering benefits and offers on luxury cars such as Mercedes, Audi and BMW. Not surprisingly, Mercedes and Audi deny the trend. One reason for that could be that no luxury brand would like to be labelled as a ‘discount’ brand. Eberhard Kern, managing director and CEO, Mercedes-Benz India, says,“At Mercedes-Benz, we are focused on sustainable and profitable growth and not on short term discounting strategies,” he says. 

But industry watchers strongly maintain that there are discounts in the luxury segment on ground. Kumar Kandaswami, senior director, Deloitte India, points out, “I would be an absolute idiot to go and buy a four- to five-month-old car model at list price when there are enough negotiations on special prices and free accessories.” 

You don’t have to look far for the reasons for this unprecedented rush to offer price-offs and freebies. Last year, the Indian auto market went into reverse gear for the first time in a decade. Overall volumes fell from close to 2.7 million vehicles sold in FY13 to just 2.5 million in FY14. If that’s not worrying enough, there was a decline in demand for small cars — which make up 55% of passenger vehicle sales — in a country where car still means small car. According to data from industry body SIAM, India’s staple mini passenger vehicles saw a drop in sales in FY14, from 570,023 units in FY13 to 568,234. That may not sound like much, but this is the first time ever that the sub-segment has seen a drop. And the latest available figures, for April 2014, prove that the disturbing trend is continuing — mini passenger vehicles clocked sales of 35,271, down from 47,800 sold in the same month last year. “The industry, unfortunately, is passing through one of its toughest phases. It posted a drop of over 11% (in April) despite excise duty benefits being duly passed on to customers. So, to bring back buoyancy, all OEMs may end up offering discounts to buyers. They help drive customer traffic and increase enquiry levels,” says Maruti Suzuki’s official spokesperson.

Little wonder, then, that carmakers are turning to discounts and offers to rev up an indifferent market. Vinay Piparsania, executive director, marketing, sales and service, Ford India, explains the rationale. “Marketing offers play a key role during challenging times in rewarding loyal customers and addressing pent-up demand. Such offers provide customers a reason to advance their purchases.” 

But there’s also a more pressing reason. “Whenever discounting comes into the market, it has more to do with the inventory carried by dealers,” feels Siddharth Jain, senior consultant in the automotive and transportation practice, Frost & Sullivan. 

When volumes come down, the entire chain — from OEM to suppliers, to dealers — comes under pressure, and discounting is resorted to. Typically, the monthly interest cost on inventory is around 1% of turnover. With an average overall margin of around 3%, inventory, when unsold for long, starts eating into profits. “I would expect inventory in the market upwards of 50 days or so. You have to get rid of a product like this fairly early, otherwise it impacts everyone. Volumes have come down, except for some successful brands that have aggregated all the volumes,” echoes Deloitte’s Kandaswami.

Another contributory factor for customers’ cold feet on buying cars has been the high cost of ownership. “It went up by 30% in the past three years, in conjunction with rising fuel prices, high interest rates and high inflation,” says Ajay Srinivasan, head, industry research, Crisil.

Limited gains

So far, there don’t seem to be enough takers for the discount offers. Despite the excise duty cut announced in February, the market hasn’t picked up this year. At Hyundai, for instance, older models such as Santro and Eon still face a weak market. In April 2014, it sold just 9,124 units of the two models compared with 11,328 the previous month and 12,614 in the year-ago period. “The discounts on entry-level cars work more for customers in tier 2 and 3 cities, who are price conscious. Once we have a stable government and the monsoon performs, sales will improve,” says Rakesh Srivastava, senior VP (sales and marketing), Hyundai Motors India. Besides, he points out, the discount strategy is working very well in rural India. “In 2004, our share in rural India was 4%. In 2010, it was 11% and in 2014, it is 20%.”

The discount strategy doesn’t seem to be getting the desired results for the country’s largest car-maker either. Maruti’s entry-level cars (Maruti 800, A-star, Alto and WagonR) showed no signs of improving sales (26,043 units in April, compared with 40,085 in March 2014 and 34,927 a year ago). According to news reports, sales of its bestselling model, Swift, too, fell for the first time. 

A Maruti spokesperson, though, disagrees with this analysis. “Monthly sales reported by media are wholesale numbers (what we sell to dealers) and hence do not reflect the real ground situation. We have seen some growth in retail. But this is not due to discounts alone. Several aspects, such as customer engagement initiatives including test drives, focused on exchange, have helped us strengthen retail.” 

But how does Maruti defend falling sales of the Swift? “Wholesale figures for a month or two months do not convey the right picture. They could be the result of stock correction. Similarly, retails for a month or two do not give the correct picture. But, for the record, retail sales for Swift have grown in April,” says the spokesperson.

Changing preferences

While poor consumer sentiment could be one part of the story, the other aspect is that consumers are increasingly becoming choosy. Most agree that market leader Maruti failed to introduce enough new models over the past year and there was model fatigue for the rest of its portfolio. “Ford Ecosport customers never existed but the company created a new category: a low-cost SUV segment. Customers are typically migrating from the sedan segment,” feels Jain. Hyundai’s Xcent and Honda’s Amaze have pulled in many buyers as well. In sum, there has been no expansion or new customer addition in the car market: existing customers have migrated from older models to more exciting propositions. 

So, ironically, some OEMs are offering discounts on most of their portfolio even as there is a long waiting period on a few models. Maruti Celerio, for instance, has a waiting period and no discount. At Ford, you will have to wait two to three months for a Figo, but the moment you ask for Ford Fiesta Classic, there will be a discount.

Kandaswami believes discounts are here to stay. “You discount in a period when it has the highest impact, when the product hasn’t been completely overtaken by competitors but you’re not able to command a waiting list,” he says. 

Most companies and experts feel that now that a stable government is in place, it will still take six to seven months before the buying sentiment improves and growth is back on track. “It’s not that people don’t have money but that they’d been postponing purchase,” feels Srivastava. Till then, the car-makers will have to keep handing out lures in the hope that customers finally take the bait.