Missing in Action: Where Have India's Car Buyers Gone?

Indian businesses are seeing a cyclical downturn as is quite evident from the slowing earnings for several companies, including consumer-facing companies.

How long could this slowdown last?

It turns out that it is becoming tougher to project that mostly for two reasons. First, no one seemed to see the slowdown coming or at least kept it a closely guarded secret if they did.

Second, there was a clear post-COVID surge in spending, evident in many parts of the world and of course India.

How long will it be before normalcy returns, now that the effects of this surge, reflecting higher than normal consumption, have started to wear off?

The answer is not clear.

Moreover, there are some surprising and even shocking insights within the automotive market which should also hold lessons for the rest of the economy. In August, Maruti Suzuki chairman R.C. Bhargava said that low-cost and small cars were necessary for India’s economic and social conditions. And that a temporary setback, which is falling sales, would not change strategy. At that point in the financial year, Maruti’s mini and compact segment sales had fallen some 12% while utility vehicles were up over 16%.

Indeed, for most of India’s automotive industry, SUVs and premium cars have been doing well or better, even as dealers were staring at record inventories of over 80 days. Last week, Mr Bhargava in an interview with the Business Standard sounded more grim. According to him, while gross domestic product growth is expected to be over 7% this year, the car market is not following suit.

The pent-up demand for cars that emerged post-pandemic, combined with supply constraints like the non-availability of semiconductors affecting production, has now dissipated, he acknowledged, adding that they were seeing negative growth in the sub-Rs 10 lakh car segment, which represents two-thirds of the market. Only the over-Rs 10 lakh segment is growing, so overall growth is muted.

Clearly, a 7% growth rate cannot be sustained when one-third of the market is growing while two-thirds is shrinking, he said. One reason according to Bhargava is that higher safety standards have meant more expensive cars and the load is higher on smaller cars.

As a Federation of Automobile Dealers Associations (FADA) head told me several months ago, incomes have not kept pace with the rise in prices for small cars, up from Rs 6 lakh to Rs 10 lakh.

The interesting point that the Maruti Chief tangentially raises of course is why GDP growth numbers unlike before are not running parallel with car sales.

This by the way is something other consumer-facing industries are also pointing out that they are seeing a divergence between overall economic growth numbers and their own growth.

Possibly this reflects the heavy weightage of Government rather than private spending in GDP numbers. Possibly.

Bhargava also suggests that this could be one reason why two-wheeler sales have been doing well in recent years, people are not upgrading to cars as they would traditionally do but upgrading to two-wheelers.

This is the surprising part because it means a behavioural shift, caused either by prices or by some other factor, like the attractiveness of the latest generation of two-wheelers.

Remember until now it was a fairly linear progression from two-wheelers to cars for families in India.

So when could demand return?

This is the somewhat shocking part.

Bhargava says growth will not exceed 3-4% for a few years until economic growth helps bridge the affordability gap in the lower end of the market. “So, the 7-8 per cent per annum growth will take a while to return — I don’t know exactly how long,” he said.

So what is Maruti or presumably other companies in a similar boat doing?

Bhargava says since it's clear that the passenger car market in India won’t grow very fast, they need to focus on exports.

“We are tapping into markets like South America, South Africa, West Asia, and East Africa, among others. We are also starting with EVs and see a good market in Europe. Few companies make small internal combustion engine (ICE) cars now, but there is still a market for them, he says.

The good news for Maruti is that its market is not the United States.

Trump's new tariff regime, if implemented next year, could negatively impact exporting businesses worldwide.

That's a fresh set of problems people would rather kick down the road.