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Downturn be damned, the super luxe car market in India is in top gear

HAUTE WHEELS
For an emerging economy, India has rich tastes. No wonder, German automobile giant Mercedes-Benz was a bit surprised when Indian customers snapped up all 125 of its new top-of-the-line imported S-Class luxury cars costing Rs 1.57 crore ($250,000) apiece within 16 days of its India launch in January 2014.

Mercedes-Benz competes with arch rivals such as Audi A8L priced at Rs 1.12 crore, BMW 7 Series at Rs 1.03 crore and Jaguar XJ at Rs 92.10 lakh.

To cash in on this appetite for “the best or nothing” from the growing legions of both the well-heeled and the aspiring new generation of successful businessmen, women, entrepreneurs and successful executives, the Stuttgart-headquartered Daimler company soon started assembly of the powerful top limousine at its Chakan facility near Pune.

The Mercedes S-500 debut in India just three months after its global launch in October last year indicates the growing market appetite for luxury brands.

“While we are a trusted strong brand, we were a bit surprised when we sold 125 S-Class cars in just 16 days in India,” Eberhard Kern, managing director and CEO at Mercedes-Benz India told Financial Chronicle with visible excitement. What’s more, the customers had bought them without actually seeing them, he said.

Talk about blind trust.

In less than three months of the S-Class launch, Mercedes-Benz, India’s second largest luxury car maker by sales, started local assembly of the S-Class at Chakan. It competes with German compatriot rivals such as market leader Audi and BMW, third in the pecking order, and Tata Motors-owned British iconic brand Jaguar Land Rover.

The demand for the new S-500 limousine was so overwhelming that it was booked till June, when delivery would begin. The ‘made in India’ new S-500 petrol limousine costs Rs 21 lakh less with an aggressive sticker price tag of Rs 1.36 crore.

Sales of Audi, BMW and Jaguar Land Rover cars along with super-luxury car brands such as Bentley, Lamborghini, Porche, Rolls Royce, Aston Martin, among others, are also rapidly increasing in the growing luxury and super luxury car market in India.

Audi scored a lead over archrival Mercedes-Benz to retain its tag of India’s biggest luxury car seller in the January-March quarter this year. Mercedes-Benz, which outsold Audi in the final two quarters of last calendar year, closed the first quarter of this year at the second spot, with Audi having a lead of 186 units.

The brand with four rings sold 2,740 units during the January-March quarter as against 2,554 units sold by Mercedes-Benz, the world’s oldest automobile company, in the same period. (None of the companies shared their April-June quarter sales figures ahead of this report going to press.) BMW has stopped releasing quarterly sales data. Jaguar Land Rover India does not share quarterly sales data.

Audi, which was the first among luxury carmakers in India to cross the 10,000-unit sales mark, sold a total of 10,126 cars in FY 2013-14; in calendar year December 2013, it sold 10,003 cars. Mercedes-Benz sold 9,003 cars in calendar year 2013, clocking a growth of 32 per cent over the previous year and grew 47 per cent in FY 2013-14, selling 9,500 cars in India. BMW sold a total of 7,745 (BMW - 7,327 units and Mini - 418 units) cars to customers in calendar year 2013. Sales at Jaguar Land Rover grew 22 per cent at 2,913 units in calendar year 2013.

“The double achievement of selling 10,000 units in a single financial year and calendar year validates the strength and stature that the brand has achieved in India. We are looking forward to consolidate our position while growing profitably in the future as well,” Joe King, head at Audi India, told Financial Chronicle. He said this was Audi’s best ever quarterly figure in India since it entered the country seven years ago.

Analysts said for calendar year 2014, the Indian market would see launches of about 25-30 new luxury models and variants to excite buyers.

As per a forecast of IHS Automotive, sales of luxury cars could touch the 50,000-mark in 2014.

The segment clocked a significant chunk of volumes from entry-level vehicles priced at Rs 20-30 lakh in 2013, driven by new launches like the Mercedes’ A-Class and B-Class and BMW’s 1 series hatchbacks, among others.

Audi is expected to introduce A3 sedan with aggressive pricing this year, while Mercedes will launch CLA sedan. Analysts said these models could generate an additional volume of 2,500 units each. Once the local assembly of cars like A-Class and B-Class starts, it would further expand the market with new buyers in its fold, they said. “Local assembly depends on multifarious factors. We will take the decision to localise new generation cars such as A-Class and B-Class when the right time comes,” Kern said.

Company honchos and analysts said for the really rich, economic downturns have a negligible impact on luxury spending. They said the wealthy and the aspiring successful new generation are much less sensitive to high interest rates and are more resilient overall to a weak economy: remember, it grew just 4.5 per cent in 2013-14.

“Currently, the market stands at around 33,000 units which is expected to grow to 250,000-300,000 in the next six to seven years. There is ample growth looking at the low penetration,” said Abdul Majeed, auto expert and partner at Price Waterhouse.

Subrata Ray, senior auto analyst at Icra Research said the demand for premium and luxury cars in India has been rising steadily, aided by rising disposable income levels, increasing pace of new product offerings by OEMs and a relatively minuscule base.

“Over the last six years, the demand for luxury cars in India has grown at volume CAGR of 37 per cent to reach annual volumes of over 30,000–33,000 units in CY2013,” Ray said.

While part of this has been driven by a broader model range, attractive pricing and financing availability, it also reflects rising consumerism at the upper end of income levels.

Ray said given the low penetration levels (it is minuscule compared to 1.2 million units/year in China), he expects the strong growth momentum to continue in the luxury car market over the medium term.

This apart, given that India boasts of the world’s 12th largest population of high net worth individuals (HNIs) which has been growing fast, the demand for premium and luxury cars is only expected to increase over the medium term, Ray said.

Analysts expect the luxury car market to grow at a volume CAGR of 15-18 per cent over the next five years. While in the near term, the expected deluge of new models will make the market space cluttered, it is a necessary investment from the OEMs’ standpoint, who are looking to make inroads into the Indian market that has a strong growth potential over the medium to long term.

Abhay Gupta, founder and CEO at Luxury Connect, a boutique consulting firm, says the luxury market in India is recession-proof. “The very fact that despite a global economic slowdown as well as the turmoil within our own country, the luxury and super luxury segment within an otherwise generally slowing down automobile sector has grown, is proof enough of this phenomenon,” he said.

While the high end of the luxury pyramid crossed prices beyond a crore for several models and brands, the mid- to entry-level names (in the luxury automobile space) really created ripples, Gupta said.

“A global phenomenon of luxury brands ‘trading down’ to offer attractive prices and stripped down versions of either their established products or creating new lines / categories to attract and encourage the new consumer in emerging markets is shaping up strongly,” Gupta said.

Mercedes-Benz India registered a robust 47 per cent growth in FY 2013-14 as compared to the same period last year, selling 9,500 units. This growth makes Mercedes-Benz India the fastest growing luxury car brand in India. The strong growth in FY 2013-14 is also significant in the midst of negative sentiment dominating the industry.

Significantly, Mercedes-Benz India has maintained the growth momentum from last year buoyed by some of the most fascinating product launches assisted by unique brand experiences and network expansion.

“We are the fastest growing brand in the country. We grew robustly 47 per cent selling 9,500 cars in FY 2013-14. Some of the most interesting products like the CLA-45 AMG and the GLA-Class are planned for an India debut later in the year,” Kern said. It has also sharpened its focus on the AMG brand this year by launching the most powerful SUVs in India and opening three state-of-the-art AMG performance centres in Delhi, Bangalore and Mumbai.

Last year, it launched eight new models and this year it plans to take it to at least 10 new models for the Indian market. “We have launched as many as seven new models this year, the latest offerings were the ‘Edition 1’ of the A-Class and B-Class. We still have some of the most awaited products lined up for the second half of the year,” Kern said.

“BMW India has left behind its competitors by ranking highest in sales satisfaction and customer service in the Indian luxury car segment in both JD Power Asia Pacific Sales Satisfaction and Customer Service Index Study 2013,” Philipp von Sahr, president at BMW Group India, told Financial Chronicle.

“BMW is a very successful luxury brand in India even as it witnessed an unprecedented price war from its competition for market share,” Sahr said. “But, we have made our price decisions with all due care and consideration. They will pay off in the long run in profitability and growth. We want to increase our sales volume — but not at any price,” he said.

BMW, which was the biggest luxury car maker by sales a couple of years ago, now insists that it does not give discounts. “We have decided to stand ground in a fiercely competitive environment with new ideas and the strength to promote our new products. BMW India has started its strategic realignment,” Sahr says.

BMW Group India also has the largest, youngest and the most attractive product portfolio. In order to achieve growth, it is also expanding its product range to cover all opportunities in the luxury car segment.

Earlier this year, BMW launched the all-new BMW 3 Series Gran Turismo and the all-new BMW M6 Gran Coupe. The all-new BMW X5 will be locally produced at BMW facility at Chennai from the third quarter of 2014. These cars will cost in the Rs 42.75 lakh to Rs 1.75 crore range.

“Later in 2014, we will be launching the all-new BMW M3 sedan, the all new BMW M4 coupe, the new BMW M5 sedan and the BMWi8 as completely built-up units (CBUs),” Sahr said. The last is ‘a plug-in hybrid drive with the heart f a sports car and a mind of a responsible citizen’. BMW India will also launch the all-new BMW 7 Series Active Hybrid in India 2014.

Audi has also its strategy in place to continue as a market leader. After launching a total of nine models last calendar year, it has lined up an impressive product portfolio this year. “This January, we launched the sporty spearhead Audi RS 7 Sportback (Rs 1.29 crore), followed by updated flagship — the new A8L,” King said.

In line with its top-down strategy, Audi would be launching Audi A3 sedan later this year. “Globally, the Audi A3 has been a great success. It overcame the challenge from 23 other cars to win the world car of the year title in 2014. I feel that it is just the right product for the Indian market and will open a new customer segment in the country,” King said.

“After Mercedes-Benz, we are the fastest growing luxury brand in India with a market share of 10 per cent despite not having small cars,” Rohit Suri, vice president at Jaguar Land Rover India told Financial Chronicle. “Our growth is substantial in the product range we have at present but if we had smaller cars, we could be contending for market leadership in the country,” he said. In FY10, when it entered the Indian market it sold 226 cars, 891 units in FY 10-11, and zoomed to 2,288 units in FY 11-12, a growth of 157 per cent.

“We are a premium to the German brands and we do not sell our products at discount like others,” Suri said. He said the Jaguar XJ sedan launched in June at Rs 91 lakh (assembled at its Pune facility) had already sold over 60 units with over a thousand firm enquiries across cities and affluent towns.

Suri said the new entry-level Jaguar XE will be launched in the UK later this year. “We will bring this model eventually to India,” he said. India is one of the key markets for the company and while designing new products, the Indian market was very much considered.

Suri said JLR had a huge line-up of products in its portfolio which would eventually make it to India at the right time.

As ownership of Audi, Mercedes-Benz, and BMW, JLR, and potential further entrants becomes more commonplace, the fun-seeking affluent would move from the luxury to the ultra-luxury segment.

“While affluent may retain a 7-series, S-Class or A8L for their everyday drives, they will in increasing numbers look for Porsche, Bentley, Rolls Royce and other brands to provide them with the excitement and differentiation that they crave,” Wilfried Aulbur, managing partner at Roland Berger Strategy Consultants told Financial Chronicle.

In parallel, their expectations regarding service from these brands would continue to increase, raising the bar for OEMs operating in this space, he said.

Analysts also point out that luxury carmakers are investing more in strengthening local assembly and production in India to make them affordable and boost sales. As a result, prices of luxury car models have dropped by Rs 10-30 lakh in the past couple of months.

The Mercedes’ S-Class 500 now retails at Rs 1.36 crore, down Rs 30 lakh while Jaguar managed to cut down Rs 25 lakh off from its XJ sedan, reducing its price down to Rs 91 lakh. The third generation BMW X5, a sporty utility vehicle, was launched with the price tag of Rs 70.90 lakh, about Rs 10 lakh lower than the outgoing model.

Significantly, Jaguar has managed to bring down prices by resorting to local assembly at its facility in Pune and through cost savings it manufactures more than one model on the same platform.

BMW and Mercedes-Benz source engines for some of their models from Pune-based Indian commercial vehicles maker Force Motors. This has helped them cut costs and pass on price benefit to buyers.

In 2011, BMW launched its ‘affordable luxury’ SUV X1 at a starting price tag of Rs 22 lakh and in September 2012, Mercedes Benz launched the B-Class (a compact sports tourer) at a starting price of Rs 21.5 lakh.

Analysts said the biggest impact of lowering of entry price points for luxury cars was on the premium car segment comprising of models including Skoda Superb, Volkswagen Passat, Honda Accord, Toyota Camry, Hyundai Sonata and Nisan Teana which saw their volumes plummet from 6,429 units in 2011-12 to 4,387 units in 2012-13 and to 2,542 units in 2013-14.

Sales of Mercedes Benz A-Class launched in June 2013 and BMW 1-series, a hatchback, launched in September 2013 are zooming with affordable price tags. Audi A3, a sedan, is scheduled to be launched over the next few months.

These new cars, in the price bracket of Rs 20-25 lakh, analysts said may accelerate the trend in erosion of volume run-rate of some of the premium segment cars, while democratising the luxury car market space in the country. For instance, more than 2,500 entry-level Mercedes-Benz A-Class and B-Class, launched a year ago, are running on the Indian roads. Most of the owners are the first time buyers. It is not surprising that about 20 per cent of the total sales come from A and B Classes.

However, premium carmakers such as Volkswagen India, Skoda India and Nissan Motor India disagree that these luxury hatchbacks have eroded their market. Some premium carmakers said the luxury hatchback cars have not impacted sales of their premium cars.

They also said the luxury hatchback models were the stripped down and naked version of the luxury brand, selling merely on the strength of the “luxury badge and snobbish value”.

“We believe we have a very strong position in the Indian market within the value luxury segment. Our products are premium and our emphasis on quality is what elevates our products to that of the luxury segment,” Sudhir Rao, chairman and managing director at Skoda Auto India told Financial Chronicle. Skoda Superb models sell in the Rs 19-25 lakh bracket in India.

“Some of the features we offer are on par with products from the two segments above. As the market matures, consumer psyche will evolve to a more balanced equation between rationale and emotion, and the obvious choice will then be a brand or product which offers value,” Rao said.

That is where the company is focusing on building the Skoda brand in India, he said. “The clear distinction between segments will erode and there will be an overlap between brands,” Rao pointed out.

A Nissan Motor India spokesperson also said its top-end model Nissan Teana had sold over 1,134 units since it was introduced in India in FY08. The imported sedan, which costs in the Rs 21–26 lakh had been sold out and a few left over CKD stocks were available, the company said.

“The Teana model has come to the end of its lifecycle,” the person said, who is not authorised to be named.

Similarly, Volkswagen India said currently it is not offering the Passat in its India line-up. The Passat model (internally codenamed B7), which was imported as a CBU, sold out earlier this year, and Volkswagen India has no more stocks. It sold a total of 4,472 units of the Passat in the Rs 31-33 lakh range in India, from 2009 to 2013.

Volkswagen India said the global launch of the new B8 (again, a codename) Passat was slated in Europe in October/November this year. Following the global launch, Volkswagen India would take a call if and when the sedan should be launched in India.

The rapid growth of the luxury car market in India began with Mercedes-Benz setting up shop in 1994. And the journey for the luxury carmakers, including the late entrant like Jaguar, has been remarkable.

Aulbur, earlier managing director and chief executive at Mercedes-Benz India, said this growing luxury market would finally move from being a fringe player to a centrepiece, going by the strategies of global OEMs. The complex psyche of the Indian customer and continued fierce competition would also ensure that this journey remains a very exciting one, he pointed out.

michaelgonsalves

@mydigitalfc.com

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