SUV surge no bubble; sustained moderate growth likely
Ajay Vaishnav and Rohit Joshi / Zee Research Group
It is common knowledge that the utility vehicles (UV) are spearheading the growth in the passenger vehicles (PV) segment in Indian car market. The promising growth of UVs at 54.5 per cent as against PVs paltry 4.1 per cent in the 11 months of the 2012-13 has forced car makers to align their business strategy to tap the segment.
It is, therefore, not surprising that almost all car majors have lined up a bevy of SUV product launches in next two to three years to carve their share of the UV pie. The product launches are being backed with ramping up of production capacity as well. The moot question, however, is: can the UV segment sustain itself in the medium to long term?
The pessimism isn’t unwarranted as the dynamics which previously favoured SUVs among car buyers is changing. Diesel deregulation even though partial and budgetary measures like additional excise levy of three per cent are being put in place to discourage a potential SUV buyer. Not to forget the (in) famous Jairam Ramesh quote that the “use of SUVs in India is criminal.”
Industry experts differ, however. They express full confidence in the growth potential of the segment despite negative policy measures. In fact, India Infoline’s Prayesh Jain believes that neither a full diesel decontrol nor excise hike will deter SUV buyers.
“Even if diesel prices are completely de-regulated today, the difference between petrol and diesel prices would be still large at Rs 12 per litre in Delhi. With mileage of diesel cars much better than petrol variants, the incremental capital cost of diesel variants will be recovered in 2.5-3 years,” Jain who tracks auto sector closely in the Mumbai-based firm stresses.
In the 11 months of the 2012-13, the UV volumes grew by 54.5 percent as against PVs 4.1 percent. According to SIAM data, Passenger Cars segment has shrunk from 78.9 percent in FY11 to 70.6 percent till February 2013. In the same period, UV and multi-purpose vehicles (MPVs) segment has grown from 21.1 to 29.4 percent.
Yet these volumes are said to be just the tip of the iceberg. There exists immense scope of expansion and no car maker wants to lag behind in the race. Maruti Suzuki, India’s leading car maker is contemplating to launch four new SUVs over the next couple of years. While a crossover variant of the SX4 is expected in 2014, Maruti is working on a new SUV called the XA Alpha scheduled for a 2015 release. In addition, the company is working on a sub-four metre Vitara as well as a SUV version of the Swift Dzire.
Maruti Suzuki’s spokesperson clearly states that the company’s strategy is to regain market share with new SUV and MPV launches. And it is already working with Ertiga selling over 70,000 units this fiscal (2012-13).
“The SUVs and multi-purpose vehicles segment has been growing very fast in India, but we are not growing there. We need to have a stronger presence there. Having just the Ertiga is not enough.”
But, what is triggering India’s largest car makers and others to shift focus on the SUV segment? The segment comprises roughly 30 percent of the PV pie which is 70 percent of the total auto sales. Are we experiencing a tectonic shift in customer preferences – from sedans to SUVs?
Ajay Shethiya, an auto analyst at Mumbai-based Centrum Broking agrees and suggests that shift has already happened. While Mahindra & Mahindra’s launch of the XUV 500 was the game-changer, the creation of the compact UV segment, hitherto non-existent, became the key growth driver. The entry of the likes of Maruti Suzuki Ertiga in April 2012 and French car maker Renault’s Duster in July 2012 unleashed customer fancy for an urban SUV.
“The larger role in shift of consumer preference was triggered by Mahindra’s XUV 500 and thereafter Renault’s Duster has boosted the excitement. There was a lot of excitement which was created on the back of product launches,” he affirms.
More product launches are scheduled in the UV space in the near term to take advantage of the rising segment. Some of the anticipated models (apart from Maruti Suzuki) are Ecosport from Ford Motors, Chevrolet Enjoy, Volkswagen’s Taigun, Ashok Leyland Stile and a Duster-type SUV from Nissan.
While a slew of product launches are scheduled in the UV space, the growth in the segment may moderate in 2013-14 as the impact of negative policy measures will become more prominent in coming months, suggests Jitin Makkar, assistant vice-president at ICRA.
“The growth in the UV segment is likely to begin leveling-off from Q2 2013-14 onwards due to the combined impact of a high base, rising diesel prices and higher excise duty on SUVs imposed in the Union Budget for 2013-14 (duty increased from 27 percent to 30 percent). However, the segment may still grow faster than the PV industry as a whole.”
While the growth in the segment is sustainable is shared by Centrum Broking’s Shethiya, he avers that going forward it will moderate from the current high levels.
“I don’t think that it’s a bubble. You need a right product at right price point. With introduction of Maruti’s Ertiga, Renault’s Duster, and the upcoming launches there are lot of options available to the customers. The growth rate in UV segment will continue but it will moderate from what you are seeing right now.”