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Luxury Car Market Faces Speed Bumps in India

Luxury Car Market Faces Speed Bumps in India

Luxury carmakers in india should be in cruise control given rising demand, but supply-chain disruptions have ensured a pothole-ridden ride.

 ROUGH RIDE ROUGH RIDE

India is home to more than 200,000 millionaires and some hundred-odd billionaires. But these figures are hardly indicative of the country’s luxury car industry. In fact, they’re a total contrast. Last year, only 21,400 luxury cars were sold in the country. “This number should be 10fold,” says Martin Schwenk, Managing Director and CEO, Mercedes-Benz India. Not only do those 21,000-odd cars represent a 37 per cent decline from 2019, they also account for less than 1 per cent of the overall auto market (in China, it is 13 per cent). For the likes of Mercedes-Benz, Porsche, Bentley and others, this share has remained unchanged over the past five years. Industry estimates suggest it will take around two more years for sales to reach pre-pandemic levels of 35,000-40,000 units a year.

Sharad Agarwal, Head of Lamborghini India, is quite blunt: “The growth in the super luxury segment will look smaller than the overall passenger car industry. It’s not like the demand for the segment is going through the roof. The right way to look at how the segment is shaping up is to look at 2019 and start looking at 2021—and treat 2020 as an aberration.”

Even dissected that way, the numbers aren’t promising. Take MercedesBenz, for instance. India’s No. 1 luxury carmaker sold 4,857 units in the first half (H1) of 2021. That’s 39 per cent more than the 2,948 units it sold in H1 2020, but a 13 per cent drop from the 5,500 units of H1 2019.

There is, thus, a long road before growth recovers, experts say. “Passenger vehicles in the mass segment have clocked the highest-ever sales in the third and fourth quarters last fiscal. But that is not true for the luxury car segment. They are still growing, but off a low base. They are now expected to grow by 30 per cent in the current calendar year, but they are still way off from the earlier peaks,” says Ashish Modani, Vice President, ICRA Ratings. That rate is expected to moderate to a CAGR of approximately 15-20 per cent over the next five years, according to research firm Mordor Intelligence.

What luxury carmakers are betting on is the growing number of people, such as millennials, who not only want but also can afford to splurge on swanky cars. What’s more, a large number of these potential buyers are from the smaller towns and cities. It is this India growth story that attracts global automakers.

Lamborghini, for instance, expects India to be among its top 15 markets in 2-3 years. “India is not among our top 10 markets. Despite that, it is one of our strategic markets with respect to future growth in volumes,” says Agarwal. The Italian supercar maker’s sales peaked at 52 cars in 2019, barely 1 per cent of its global volumes. Although he expects 2021 to be another record year for Lamborghini in India, he remains reluctant to call that growth. “In India, the volume of growth doesn’t represent the true potential of the market. There are things in our control and there are external factors like how the economy is growing, how the macro-economic variables are playing, exchange rate, inflation, how the government is supporting the segment by bringing consistency in taxation and policy, how road infrastructure is developing, etc.,” says Agarwal. “We want to do the things that are in our control right.”

These external factors could hobble the industry’s longterm growth. Plus, a shortage of semiconductors—used in cars for navigation and infotainment systems, among other functions—could stymie growth in the near term. But while these concerns mar their horizon, luxury carmakers are focussed on the post-lockdown recovery for now.

CRUISE CONTROL

Luxury carmakers say there was a V-shaped recovery in terms of sales once the lockdowns ended after the second wave of Covid-19 this year. As an example, sales of luxury vehicles almost doubled year-on-year this August, points out Vinkesh Gulati, President, Federation of Automobile Dealers Associations, which represents Indian auto dealers. “The segment caters to that category of individuals who have a disposable income of Rs 1-2 crore plus. Money is not a problem for them. They don’t have to think of savings for healthcare, like others. These customers witnessed an increase in savings due to the pandemic,” says Gulati. And those savings are translating to purchases.

Mercedes-Benz’s recovery after the second wave was much more robust than after the first wave, says Schwenk. “Last September, we had peak Covid-19 and by November, business was relatively stable. But this year, even though the health crisis was tougher in April and May, we did come back very strong. The second wave had much more impact on the individual and healthcare system but the impact on business was smaller,” he says. “The overall economy did not crash like it did in the first wave.” Schwenk expects to piggyback this momentum by launching new models: “We have a very young product portfolio and on the other hand, we see that the overall passenger car market has come back. We have seen that people are prepared to spend maybe a little bit more on personal mobility.”

Bojan Jankulovski, Head of Operations, Maserati India, concurs with this view. “The evolving consumers are laying focus on whether the brand resonates with their personality and lifestyle choices. Hence, our challenge is to understand this segment and offer a product line-up to suit the evolving palates of consumers. As a super luxury brand, distinguishing ourselves is imperative,” he says.

Jankulovski says carmakers have had to adapt their sales strategies as the market evolved. One such strategy is focussing on digitalisation and online sales. “Digital and contact-less experiences are going to play a more crucial role,” he points out. The other strategy is to tap into demand from Tier II and III cities. Maserati is seeing new customers from cities such as Lucknow, Kanpur, Indore, Bhopal, Mangaluru and Chandigarh. “Over the past year, we have witnessed an increased demand from these Tier II cities. These cities have the potential to continue providing sizeable opportunities in the future, too, and are proving to be catalysts in spurring demand. An evolved customer base, coupled with higher disposable income, is leading to the growth of these emerging markets,” he says.

Lamborghini’s Agarwal, too, has an identical viewpoint. “These trends tell us where the future will lie. Four-five years back this demand was concentrated only in metros. But today we have 25 per cent of our business coming from Tier I and Tier II cities. This shows that the demand is coming from the length and breadth of the country. We will see better and consistent growth in years to come,” he says.

Another trend Agarwal points out is that while earlier largely thirdand fourth-generation businessmen were the biggest clientele, they are increasingly being replaced by firstand second-generation entrepreneurs.

It’s amply clear that demand isn’t the problem, which means supply is.

FASTEN YOUR SEATBELTS

“Whilst the market and the demand are already at the level of 2019, it’s not easy to fulfil that because of logistical and supply issues,” says Schwenk. This, he says, has stretched Mercedes’s waiting period to 8-16 weeks after a booking. One big reason for the delays is the global dearth of semiconductors for the past few months. These chips are essential, especially in luxury and electric vehicles, for navigation control, collision-detection sensors, etc. They are, therefore, also in high demand. The global auto chip market, according to Mordor Intelligence, is expected to balloon to $129.17 billion by 2026 from $48.13 billion in 2020. The main reasons for the current shortage, experts say, are supply-chain disruptions due to the pandemic, inadequate investments and preparedness, and the rising technology demand due to the work-from-home culture.

There is a global shipping crisis as well, with huge backlogs at most ports. That has not only caused delays but also pushed up freight prices. And while the luxury car industry generally works with longer planning cycles—in some cases stretching to nearly a year—Schwenk is concerned that the impact of these constraints will show up a little sooner than expected and linger through next year.

“We soon hope to cross pre-Covid-19 levels. We have had good September sales. I would assume that it continues. A little bit of concern is that we need to make sure we supply on time. Deliveries later than the festive season don’t help my sales numbers this quarter. I believe the supply-side issues will have some impact on the current quarter,” he says. “Because of issues related to semiconductor shortage, shipment delays, air freight costs, it is very hard to predict what will play out next year.” He adds that demand should be similar to that of 2018-2019.

And if the supply-side issues ease, Mercedes is ready with more than 25 products in its line-up. “There is no other OEM with that kind of variety,” says Schwenk. The company has another ace up its sleeve. “We also have strong localisation. There are 13 models which we produce locally.” In fact, while Mercedes manufactures cars in India, other luxury carmakers merely assemble their cars locally. Because while demand is growing, sales volumes are too low to make local operations financially viable.

“The Indian luxury market is still very small in terms of volumes. Complete assembly here is impractical and not economically viable,” says Modani of ICRA Ratings. That is why Maserati’s Jankulovski says point blank, “There is no plan for localisation.” That means that the majority of luxury cars sold in India are imported. And therein lies the next issue for carmakers—India’s tax structure.

India levies 100 per cent tax on imported cars priced above Rs 30 lakh and 60 per cent on lower priced ones. Luxury cars also attract GST of up to 50 per cent and another 15 per cent for registration. It is an issue that even Tesla CEO and Founder, Elon Musk, has publicly cribbed about.

All these taxes push the selling price higher, making India one of the most expensive markets in the world. “Car prices have gone up in the past couple of years. Earlier you had an entry-level luxury car at Rs 25 lakh from the big three luxury car players. Now the entry-level is around Rs 40 lakh,” says Modani. This, in turn, has dampened demand and sales, which keeps carmakers from manufac turing locally—a classic chicken-and-egg problem.

But it is a problem that carmakers have to tackle and resolve. Because as Jankulovski says, “Maserati is committed to the Indian market and our India operation is an integral part of our regional and global strategy. India is an extremely diverse country. The affluence and reach of India’s metros cannot be ignored for growing top lines.” And that is why, despite Musk’s cribbing, Tesla is gearing up to fight for India’s luxury car market.

@PLidhoo