Mini cars will soon lose their flavour

For several years now, automakers have focused on designing and developing low-cost cars (LCCs) to woo potential customers in emerging markets such as India. The target has been to build and sell products that meet the affordability levels that characterise these countries.

However, it is apparent that things have changed over the last few years and buyers no longer want to be seen in ultra-cheap cars. The experience of the Tata Nano, dubbed with enormous fanfare as the ‘world’s cheapest car’, has shown this. The company is now repackaging the Nano as a smart city car with more features and a higher price tag. The Tata product also prompted Renault-Nissan to think of something similar and enter into an alliance with Bajaj Auto for the ULC (ultra low-cost) car project. Like the Nano, this was tipped to be priced in the Rs 1.5 lakh range but eventually never saw the light of day as Bajaj, instead decided to make the RE60 quadricycle which is scheduled to debut soon.

Buyer sentiments aside, another deterrent to the rapid growth of LCCs is the rising income levels in emerging markets. This, in turn, is giving birth to a new class of customers with much higher aspirations.

For instance, India’s real GDP per capita on a PPP (purchasing power parity) basis is expected to reach almost $5,000 by 2018 according to Oxford Economics, up from $4,000 this year. Similarly, the real GDP per capita on a PPP basis in Indonesia is estimated to rise from $5,000 in 2014 to $6,000 by 2018.

With this increasing affordability, we believe buyers are likely to shy away from LCCs and instead choose value-for-money products. Since LCCs are typically entry-level mini cars, we believe that growth of the mini car segment (which includes models such as the Nano, the Suzuki Alto and the Hyundai Eon) will be much lower than the overall passenger vehicle growth in India.

According to LMC Automotive data, the mini car segment in India is forecast to expand at a CAGR of four per cent over the next seven years. In comparison, the sub-compact car market is likely to grow much faster at a rate of 17 per cent through to 2021, taking away the volumes from mini cars as more buyers skip the entry-level segment.

As a result of this weak growth, the share of mini cars in India’s passenger vehicle market is expected to shrink from 33 per cent to 17 per cent by 2021 while that of sub-compact cars should improve from 40 per cent to around 50 per cent.

A similar situation is also likely to play out in Indonesia, where the government implemented its Low-Cost Green Car (LCGC) programme in 2013. With the first LCGC models coming out in September 2013, full-year volumes reached 51,000 units, or 24 per cent of all passenger cars sold in the market. Indonesia is a huge multi-purpose vehicle (MPV) market.

The LCGC volumes helped raise the share of mini cars from just one per cent of the total passenger vehicle market in 2012 to six per cent last year. Going forward though, we estimate the mini car share to remain stable at 16 per cent against nearly 60 per cent for the dominant MPV segment. Elsewhere in Southeast Asia too, mini cars play a smaller role in the overall passenger vehicle market. Over the long term, the segment’s share is projected at four per cent in Thailand, nine per cent in Malaysia and nearly 12 per cent in the Philippines.

Therefore, depending solely on low-cost mini cars to boost volume and market share in emerging markets may not necessarily be the best strategy. A low sticker price is no longer the only (or even the major) purchase driver. Buyers are giving more credence to brand perception, quality and safety. It is vehicles which meet these criteria that will be the volume boosters.

The writer is Senior Market Analyst, LMC Automotive