homeauto NewsCar firms in India are adjusting to the vanishing middle class
auto | Apr 21, 2022 7:35 AM IST

Car firms in India are adjusting to the vanishing middle class


Business plans of automobile firms in India illustrate the rising income inequality. While a few want to remain invested in the small-car market as they command a significant share and tap those moving from the two-wheeler segment, most others see more profit in selling to the rising upper middle class and nouveau riche and the long-time wealthy.

After capturing the small-car market and putting one of every two cars on Indian roads, Maruti wants to up its game in the sport utility vehicle (SUV) and electric vehicle (EV) segments in a country where the average income is a little over $2,600 or Rs 200,000 a year.

Recommended Articles

View All

“In small cars, we already have more than half the market, but we can’t reach 50 percent in overall passenger vehicles without success in SUVs. So, we will make a comeback in the SUV category,” Maruti’s new MD Hisashi Takeuchi said. He also said building an “affordable small EV” would be “difficult” for the carmaker.
Rising costs make Indians hold back spending on cars despite the poor state of public transport and fares charged by cab aggregators like Ola and Uber surging.
Also Read:
Still, the only ones still largely making small cars are Maruti, Hyundai, and Tata Motors, as they already command a significant share in the segment. They also hope to tap those moving from owning two-wheelers to their first car.
Most other carmakers have given up the race to lure first-time car buyers. Companies like Nissan, Volkswagen, and Honda want to cater to the upper-middle class, the rising new rich, and the long-time wealthy. So, many are removing hatchbacks—the most-selling car type in India until recently—from production lines.
Nissan stopped producing the Datsun, Volkswagen pulled the plug on the Polo, and Honda will do the same with the Jazz.
Share of small cars going down
While overall car sales have been slowing for over two years, the sale of utility vehicles like the Tata Nexon, Hyundai Venue, and Maruti Vitara Brezza has been rising. In fact, nearly one in every two cars sold – 48.5 percent to be precise – in India between April 2021 and March 2022 was a utility vehicle, according to India Ratings and Research. 
Chart: Between FY09 and FY19, the small car segment logged a CAGR of 7% while logged a CAGR of 16%.
Small cars share has constantly declined from 65 percent in FY12 to 45 percent in the first nine months of fiscal 2022, a Crisil Research report states, noting the shift was felt more so in fiscals 2021 and 2022.
“The demand for hatchbacks remained impacted in FY22 as entry-level car buyers' income sentiments were impacted due to COVID and the significant increase in vehicle prices necessitated by inflationary pressures,” Rohan Kanwar Gupta, vice-president and sector head - corporate ratings, ICRA, told CNBC-TV18.
Tough fight ahead
The rising income inequality in India could explain the shift being made by Nissan, Volkswagen, and Honda from hatchbacks to SUVs, sedans, and EVs. But they still have to fight India’s small-car leaders in the costlier segments.
During the peak of the second wave in 2021, when the situation for the Indian middle class and poor worsened, some 50 Maybach SUVs Mercedes-Benz India planned to sell by the end of the year were lapped up within a month.
​The Indian luxury car market, valued at more than $1 billion in 2020, is estimated to double by 2026. At the same time, the $4.82 billion small car segment is expected to contract by 0.26 percent, resulting in a projected market volume of $4.77 billion by 2026, according to Statista.
Pandemic made income gap worse
The Indian middle class (incomes of $10.01-$20 a day) shrank by 32 million one year into the pandemic—accounting for 60 percent of the global retreat in the number of people in the bracket. As per the latest CMIE data, India’s middle class houses the largest number of unemployed and experiences an elevated unemployment rate of over 9 percent. Employment shrunk by 1.4 million to 396 million in March 2022, which was the lowest since June 2021.
The latest World Inequality Report (shown above) gives a peek into the growing income gap that carmakers might have started accommodating as they restrategise.
The other factor at play is the changing tastes of those who can afford to buy expensive cars. Those who would have bought a sedan a few years ago prefer utility vehicles now.
“This is largely attributable to the changing demographics of a passenger vehicle buyer, purchasing/replacing a higher value car at a much earlier stage of life, and their increased preference for more technologically advanced features,” Shruti Saboo, Associate Director, India Ratings & Research, told CNBC-TV18.
Chip shortages, Saboo said, also encouraged firms to prioritise the production of cars that were either seeing higher demand or were more profitable.
Check out our in-depth Market Coverage, Business News & get real-time Stock Market Updates on CNBC-TV18. Also, Watch our channels CNBC-TV18, CNBC Awaaz and CNBC Bajar Live on-the-go!

Top Budget Opinions

    Most Read

    Market Movers

    View All
    Top GainersTop Losers