The Hindu Business Line : Moving into top gear

The automobile industry has nearly trebled in size during the last decade. Rising income, easily available car loans, and inadequate public transport systems are fuelling this growth.

NEashwaran, a middle-level manager in Chennai, has been looking for a car for a year. His criteria: "An affordable, fuel-efficient car with lots of boot space, reasonable looks, priced between Rs 3 lakh and Rs 5 lakh."

He could choose from Santro, Palio, Swift, Ford Ikon (the lowest-end model, Flair, costs around Rs 4.7 lakh); "anything above Maruti 800 and Zen," he adds. His dream car would enable him to go on long weekend drives or to favourite holiday destinations with his family. "I need not worry about connecting trains or a taxi for getting around."

Many like Eashwaran are looking at buying a four-wheeler, or have already bought one, thanks to falling prices, increasing income, and easily available loans. Today, banks and financial institutions are willing to fund vehicle purchase for annual incomes upward of Rs 1 lakh per annum, says a senior HDFC Bank official in Chennai. Salaried classes, followed by the business segment, are driving the volumes, he adds.

Consumerism came to India much before economic liberalisation in the 1990s. The television craze came in with the 1982 Asian Games in Delhi. Household appliances, telephones, home PCs, air-conditioners, mobile phones, etc followed. So is it now the turn of the automobile? Will the passenger car be the next crossover for the average middle-class Indian?

The signals are there for sure. The automobile industry has nearly trebled in size during the last decade and about 6.7 million new passenger cars (including vans and utility vehicles) have been sold in the last ten years. The passenger car industry reached a milestone after domestic sales crossed the magical one million mark in the FY 2004-05.

For a country with 40 million middle-class households, such growth looks impressive. For the Indian middle-class, a car looks tantalisingly affordable. But the paradox is that a large chunk of the growth in car sales has come in the last two years, when prices of both fuel and automobile inputs have rocketed.

Affordability has been the key factor for most households planning a car purchase. Two years ago, compared to an average American having to shell out three months' salary to buy a compact sedan, the average middle-class Indian household had to shell out about 15 months' income to buy even the humble sub-compact Maruti 800. But in two years the affordability index has narrowed down to just one year's income.

It's not only rising incomes but also easy availability of cheap finance for potential car buyers that is fuelling the growth of this industry. Small wonder then that nearly 80 per cent of all cars sold to individuals are now part funded through loans. It also helps that interest rates have dropped dramatically from 14-16 per cent five years ago to 7-9 per cent, on a reducing balance basis.

Apart from volumes, the increasing synergy between the car manufacturer, dealer and financier, makes the interest rates even more competitive. In an increasingly competitive marketplace, with lower finance costs being cross-subsidised by the three, the customer is the beneficiary.

There is one more important reason why more and more Indians are opting to buy a car — the lack of an adequate and reliable public transport system in most Indian cities. Sprawling cities such as Mumbai, Delhi and Bangalore are classic examples where the lack of a well-connected, user-friendly public transport system is leading to a boom in car sales.

Even though driving around the packed streets of metros is becoming a harrowing and time-consuming experience, an increasing number of residents are opting for the four-wheeler.

Moreover, the feeling of personal space that a car gives its owner is unique and drives this market. The freedom and flexibility that cars offer are unmatched... something that innumerable Indians are now discovering.

This newfound freedom is also taking the Indian car-owner places, quite literally. Car ownership is redefining the way Indians travel on vacation, for leisure or on business.

Lending credence to the oft-repeated saying that the cars come first and the roads come later, the quality of Indian highways has improved significantly in the last two years. The increasingly adventurous Indian now has a practical, economical and more personalised transport option compared to trains, that had remained for long the only choice for the middle-classes.

On the social front, the nuclear family has also been responsible for the increased popularity of passenger cars; parents want a better quality of life for their children... not to mention the upper-class Indian playing `Keep up with the Joneses'. Status-conscious car buyers are on the rise and this is evident in the jump in sales of entry-level sedans.

On a more macro-economic perspective, the key drivers for car sales have been rapidly rising salaries, particularly among the 25-35 age group, and growing business profits.

Different categories

Cars are classified in four segments... A, B, C and D.

A: Entry-level cars (less than Rs 2.5 lakh) — Maruti 800, Omni.

B: Between Rs 2.5 lakh and Rs 4 lakh — Alto, Zen, Santro, Palio, Sail

C: Mid-segment cars (between Rs 4 lakh and Rs 7.5 lakh) — Getz, Swift, Ikon, Esteem, Accent, Baleno, Honda City.

D: Rs 7.5 lakh and above — Skoda Octavia, Honda Accord, Mercedes Benz, Terracan.

The HDFC Bank spokesman says there is no ceiling on the percentage of the price one can get as loan and funding can be up to 100 per cent in deserving cases. He adds that sometimes test-drives are arranged by the bank for customers or displays arranged either near the bank's premises or at leading corporate offices.

In a telling development, HDFC Bank gave out Rs 16 crore in car loans in Chennai alone during June 2005; four years ago it was not even 20 per cent of this figure! This growth is largely driven by youngsters from the IT and manufacturing sectors, with most opting for mid-segment cars such as Getz, Ikon and Swift. Schemes like 2599 or 1575 (EMI payment) for entry-level cars have been very successful in attracting youngsters, says the spokesman.

But most financiers prefer the used-car segment, as they fetch higher interest — upward of 13 per cent. ICICI Bank, HDFC Bank and Kotak Mahindra Bank are market leaders in car finance.

The rural factor

Rural India is also powering car sales, and prosperity in the country's heartland is now making automobile marketers sit up and take notice. The Maruti 800 is a classic example. Over 65 per cent of all Maruti 800s are sold outside the top-ten Indian metros. Maruti Udyog, the country's largest passenger car manufacturer, sells about 50 per cent of all cars in the smaller cities and towns.

According to the National Council of Applied Economic Research (NCAER), demand for cars from rural consumers will rise from the current 8 per cent to about 11 per cent of total sales by the end of this decade.

But adding a dampening sentiment are projections that growth during the next five years may not be as attractive as during the past five. Yet, in reality the Indian love affair with the automobile is showing no signs of waning.

NCAER has also projected that the total ownership of car is set to treble during this decade, going up from about three per cent at the turn of the century to about nine per cent by 2009-10.

A recent online survey on global consumer confidence and opinions conducted by ACNielsen said that Indians are the most upbeat about the country's economic performance. Well, they are at least casting this vote of confidence by buying their favourite box on four wheels.

Inputs from Anjana Chandramouly

Picture by K. Ananthan

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