From A to B

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Looking at isolated segments of sales data for last three years reveals that the Indian car customer is becoming upwardly mobile and his excitement for the lowest segments (Micro & Mini) is on the wane. At least that’s what data seems to be suggesting.

However, the data may be heavily skewed, as we shall see.

Statistics are often misleading. Drawing a pie chart (like we have done) of the market at the Base of the Pyramid (BOTP, comprising of Micro, Mini & Compact segments) for the last three years we notice that the Compact segment (B-segment) is gaining market share.

Mini, Micro, Compact Shares 2011 - 13

Mini, Micro, Compact Shares 2011 – 13 (Click to expand)

However, data also shows that the Mini segment has also gained considerable market share between 2012 and 2013, more than what it had lost between 2011 and 2012.

Thus, seemingly the only loser here is the Micro segment, which only has the Nano representing it. Between 2011 and 2013, the Micro segment has lost 3.31% share of the BOTP.

BOTP: Please note that this market share and all analysis in this report is for the Base of the Pyramid (BOTP) only, represented by the Micro, Mini and Compact segments. Any market share mentioned for any segment is with respect to its share in the ‘Base of the pyramid’ market.

Meanwhile, the Mini segment has gained 1.13% share of the market. However, the biggest winner has been the Compact segment, which has gained 2.27% of market share.

The Compact segment’s growing strength becomes even more apparent when one looks at the data of the first two months of 2014. During Jan-Feb 2014, the Micro segment had a 1.94% share (slight renewed interest in the Nano due to the Twist variant) in the BOTP; the Mini segment accounted for 40.18% while the Compact segment had managed to get a 57.8% share of the BOTP market.

Jan-Feb 2014-Mini, Micro, Compact Shares in BOTP

Jan-Feb 2014-Mini, Micro, Compact Shares in BOTP

Again, the Compact segment has managed to increase its share of the market while the Mini segment’s share of the BOTP  has gone down. Mind you, these numbers are from the time when Maruti-Suzuki had barely started dispatching the Celerio Compact segment car. Further gain for the segment in the coming months is not ruled out.

Lifecycles Screw Skew the Data

The Mini and Micro segments have terrific resilience to lifecycles. While a Compact segment hatchback starts feeling stale within three years of its launch, smaller hatchbacks in the Micro and Mini segments actually come to life after spending 2-3 years in the market. They can easily last a decade and more as compared to Compacts who are replaced much more frequently.

Due to these aspects, the sales data is often not a completely correct indicator of customer preferences. Looking at data from 2012, the weakness in the Mini segment was due to the aging Alto while the Compact segment benefitted from the brand new Swift. Customers further cut the Alto out from their purchase list as MSIL getting a replacement by the end of the year was public information.

As a result, the Mini segment lost nearly 2.5% share of the BOTP, nearly all gained by the Compact segment.

Come 2013, a brand new Alto800, and the Mini segment started regaining market share. In 2013, Mini segment grew its share of the Base of the pyramid by 3.6% all at the expense of the Micro segment.

However, over a period of time the lifecycle effect on these segments flattens out and the data becomes much more rational. As the data from the first two months of 2014 indicates, the Compact segment has gained a further 1.81% share of the BOTP market, all at the expense of the Mini segment.

Why a Change in Consumer Behavior?

The customer is more demanding and wants more features, better looks, more passenger space and reasonable boot space in their cars. Often Compact cars fare much better in these aspects as compared to Mini cars. Contemporary Compact hatchbacks often pack in features rivaling much bigger sedans while Mini segment cars struggle to even offer factory fitted music systems.

Manufacturers often keep the kit on Mini segment cars intentionally low, as most of the customers in the segment are bargain hunters. As a result, any one looking at better features looks at the Compact segment for answers.

While the price difference between the Mini segment and Compact segment cars is high, finance often brings them within a reasonable distance.

Compact segment also fare better on safety and as awareness increases, this is likely to develop into a major factor in favor of Compact cars.

Manufacturers Do Not Want to Sell Mini Cars to Customers

Like we said, data is funny. It can reveal a lot and hide even more. In case of the Mini and Compact segments, data indicates that the average Mini segment car sells much more than an average Compact segment car. As per 2013 data, an average Mini car sold 84247 units in the year. In comparison, the average Compact car sold only 40855 units in the year.

The reason is that most manufacturers do not have a presence in the Mini segment. Only Maruti, Hyundai and GM India service the segment. There were a total of seven models in 2013 and now there are only six. What is depressing that it is hard to fathom when the next model addition will happen in the segment.

In comparison, the Compact segment had 19 models and now it has 21. And some more may just be around the corner.

The bias in favor of the Compact segment is also apparent when one looks at the future model plans of most manufacturers. In the last five years, the only significant launches in the Mini segment have come from Maruti (Alto800, WagonR, A-Star) and Hyundai (Eon). This pales in comparison to the Compact segment, which has seen Maruti (Swift, Ritz, Celerio), Hyundai (i10 Grand), Ford (Figo), Renault (pulse), Nissan (Micra), GM (Beat, Sail UV-a), Honda (Brio), Mahindra (Vibe), Toyota (Liva) and Volkswagen (Polo) entering the market during the same time period.

Clearly global manufacturers have a bias towards the Compact segment and a reluctance (or inability) to play in the Mini segment.

Global Manufacturers Love Compact

The enthusiasm for the Compact segment (over the Mini segment) stems from many factors. The most significant amongst these is the keenness to align the Indian market with other global markets. Most manufacturers do not have sufficient volumes in India to justify a separate Mini segment car development and their best bet for the Indian market is to bring a global B-segment (Compact segment) car into the Indian market.

Global markets are more aligned at the Compact segment levels – Europe, US, LatAm, South America and even ASEAN are all Compact segment markets. Japan is high on Mini segment cars (Kei cars) due to tax breaks, but the traditional Japanese Kei cars are sophisticated and expensive. As a result, apart from Suzuki, no one else attempts to bring the cars or platforms to the Indian market.

Most global manufacturers lack the heritage and engineering experience to design reasonably priced Mini segment cars. However, de-contenting a Compact segment car and fitting it into the desirable price band of the Indian market is entirely doable.

Uniqueness Kills

Maruti-Suzuki has huge volumes in India and that allows the manufacturer to develop India specific Mini segment cars. At the same time not many of these India specific cars like the Alto800 sell outside India mostly because they are specifically designed for the needs and requirements of the Indian market. Maruti-Suzuki does export a sizable number of Mini segment cars (A-Star, Pixo) but then the same model does not do well in India.

Packaging Issues

One of the biggest reasons why manufacturers shy away from Mini segment cars is packaging issues. Owing to the small size, there are space constraints and often accommodating safety systems, telematics and increased electronics becomes an issue.

Engineering Issues

Mini segment cars also present engineering issues to carmakers. Typical global Compact segment cars use 1.2-liter to 1.6-liter engines with the frugal ones getting 1.2s and the sporty ones going as high as 1.8s. These engines can be fitted into a range of vehicles from Compact hatchbacks to Super Compact sedans to small Vans and small SUVs, providing good volume for the engines. The same is not possible for Mini segment cars who mostly make do with 0.8-liter to 1.1-liter engines. These engines cannot be used in any other segments because of size issues, limiting engine volumes.

Carmakers often work with modular engines and that means that the 0.8-1.1 liter engine is typically a two- or three-cylinder engine with one cylinder knocked off from a bigger cousin. Balancing smaller engines with fewer cylinders requires more engineering attention and is expensive. For a global carmaker planning to offer the engine only in the Indian market, this is a headache they can do without.

Carmakers are happy

If the customer shifts towards the Compact segment, global carmakers get a unique opportunity to sell the same model in nearly all global markets across India, ASEAN, China, Europe and even North America. This gives the manufacturer volumes and the flexibility to manufacture the vehicles at suitable competent-cost locations. India is such a location and Hyundai, Ford and Nissan are already using their Indian plants to supply Compact segment cars to the European, LatAm and African markets.

Rationalization of car sizes also automatically leads to the same happening for engines. The same family of engines can power the cars globally and there is an opportunity for low cost sourcing of components from bases like India.

Pricing Remains a Concern

However, many global manufacturers face the challenge of pricing the cars correctly. More often the Compact segment cars are designed primarily with the European market in mind. What this results in is the car being overpriced for India. While manufacturers do suitable de-contenting to make the car fit Indian budgets, often it is not a convincing job and many Compact segment car sales suffer because of inappropriate pricing.

Dusting-off Old Platforms

The solution to pricing is often in dusting off old platforms, re-skinning and right-costing them to make them fit the requirements of the Indian market and other similar markets. In thee cases the manufacturer is abandoning his global product strategy, often temporarily, to deliver an appropriate product for some of the fastest growing markets in the world. The results are cars like the Ford Figo and Datsun Go, which in some cases do wonder for the company. Increasingly, this would be the way forward for most struggling carmakers to find their mojo in India.

 

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