The SIAM Executive Segment is Dead. Long Live….

New Skoda Octavia
New Skoda Octavia is not aggressively priced

What Skoda’s pricing for the Octavia tells us about things to come…

A few days back, Skoda launched the latest generation Octavia (SK371) in the Indian market. Priced above the Laura (previous generation Octavia in the Indian market), the Octavia will continue alongside the Laura (SK351) for some time till Skoda pulls the plug on runs out of kits of the older generation.

The new Octavia has been introduced with three engine variants, one more than the Laura, and a choice of manual or automatic transmissions.

However, it is the pricing that takes one by surprise. The base Octavia Active 1.4 TSI is priced at INR 1.57million on-road in Gurgaon. That seems to be a high price compared to the last generation. Admittedly, the Laura never had a 1.4-litre TSI motor so it may be better to do an apples-to apple comparison.

The Laura Ambition 2.0 TDI CR AT has an on-road, Gurgaon price of INR 1.795million. In comparison, the new Octavia Ambition 2.0 TDi CR AT is priced at INR 1.984million on-road in Gurgaon. That is a price jump of nearly INR 200k for a new generation model.

In fact, the top-of-the-line Octavia – Elegance 2.0 TDI CR AT – is nearly INR 2.2million on-road in Gurgaon. That is a price bang-in-the-center of the Premium segment, one notch higher than the Executive segment.

Mind you, that is not even an L&K variant!

In a market where every other manufacturer is offering significant discounts, Skoda daring to price it’s new offering nearly INR 200,000 higher than the previous generation is stupid spectacular. It also indicates that the brand is not serious about volumes or market share.

It is profitability that Skoda is looking at….

Now OEMs have different ways of defining profitability – some look at platform profitability, some look at program profitability while many look at the overall profitability of the company.

And then there are some more who don’t look at profitability at all as the CEO’s KRAs included worrying about playing golf market share, and not profits.

However, the almost brutal pricing of the Octavia indicates that Skoda is looking at profits on every unit, and is not willing to compromise. Not too surprising considering the brand recently axed their poorly selling, budget hatchback Fabia because it wasn’t profitable enough.

It also indicates that Skoda does not consider the Executive segment healthy enough to fight for a share. It would rather have short-term profits on low volumes than fight for a long-term share of the market at the cost of profitability.

The Decline of the Executive Segment

Skoda’s strategy starts making a lot of sense when we look at the Executive segment. SIAM data indicates that the segment ended at slightly more than 28000 units in 2012. Sales are nose-diving in 2013 and the year is expected to end with less than 19000 units getting dispatched.

Executive Segment - Rapid Fall
As the EMAAA forecast explains later, you won’t see the 2010 peak again….till 2016!  

This is a far cry from the nearly 48,000 units the segment accounted for in 2010. Since then the segment has consistently declined even though the number of participants has increased.

Even before 2010, the segment’s growth has been patchy, and highly reliant on the freshness of products in a particular year.

Skoda is not alone…

Skoda is not the only brand losing interest in the Executive segment. Nearly the entire industry, barring a few manufacturers, is doing likewise.

Honda, the strongest player ever in the segment, was the first to blow the whistle. In 2007, when the entire segment accounted for slightly more than 41000 units, Honda sold more than 18,000 Civics (UH) in the year. This is a record for the Executive segment till date for any year.

And yet, only five years later, in 2012, Honda did not hesitate too much in pulling the plug on the Civic. The reason was the unavailability of a diesel engine when the segment was essentially becoming a diesel game. As of early 2013, all remaining stocks of the Civic have been sold.

Skoda’s sister brand Volkswagen has the Jetta (VW 361) sedan in the market. The sister of the Laura, the Jetta is priced between INR 1.5million and INR 2.09million on road in Gurgaon. Sales, which once were once close to an average 300 units a month, are now down to 200 units.

Yet, Volkswagen is not in a hurry to reduce prices. The Jetta is priced over INR 100k higher than a comparable Chevrolet Cruze but that doesn’t matter as Volkswagen prides itself as a pricey premium brand.

[one_half boxed=”true”] Skoda’s Pricing – Other Factors?
Admittedly, the new Octavia packs in more power and higher kit than the Laura. It is also a new, and more capable platform. Hence a higher price is justifiable. The weak Rupee has also affected Skoda’s pricing. Since most of the content in the Octavia is imported, a weakness in currency has a brutal impact on the pricing. However, even after considering the above factors, the Octavia’s pricing is more take-it-or-leave-it and the car will mostly appeal only to Skoda lovers or enthusiasts. [/one_half]The Cruze (D1SC) itself is busy getting its nose rubbed in the ground. Post two stupendous years – 2010 & 2011 – when sales were above 11000 units for the year, the Cruze has fell to slightly more than 5800 units in 2012. Going by present trends, EMerging MArkets Automotive Advisors (EMMAAA) forecasts Cruze sales at around 2300 units in 2013.

Renault Fluence (L38) sales peaked at slightly more than 1600 units in 2012. Sales in 2013 are expected to close at just above 1300 units.  The product has been what the Teana is for Nissan, a placeholder with little significance in the long-term.

The Kizashi has been a poor seller for Maruti and the company sold off the last few remaining units at considerable discounts. Maruti-Suzuki is unlikely to return to the Executive segment in the near future and the upcoming next generation SX4 Crossover (YAD) is likely to be the flagship product for the carmaker in the future. There is also the upcoming replacement for the SX4 sedan (YL1) which may be a notch above the present model but still not in the Executive segment.

Fiat has the Linea (200) sedan in the segment. However, the Linea pricing and positioning matches sedans a segment lower, and is categorised as part of the Executive segment only because of its dimensions. Sales peaked at above 12600 units in 2009 and it has been a rapid decline since then.

The recent price correction with the Linea Classic variant has taken prices to a ridiculous level, less than half of comparatively sized sedans and the last few months have seen a perk in sales. EMMAAA forecasts Linea sales in 2013 at around 2000 units, a near 20% fall from 2012.

Elantra and Corolla holding strong in 2013

In the face of the above turmoil, the only products that are still going strong are the Hyundai Elantra and Toyota Corolla Altis.

Surprisingly, both have different reasons of being on the top.

The Elantra (MD) is fresh out of the oven and has a futuristic, stylish feel to it, much like the Civic had in 2006-07. A fresh product, with high level of kit and a competitive pricing make the Elantra the preferred model in the segment.

On the other hand, the Corolla Altis (243L) is old in the tooth. However, Toyota’s (and Corolla’s) brand is quite strong and the diesel variant of the Corolla Altis finds favour in the luxury taxi segment.

Lifecycle Issues

The Cruze is the most telling example in the Executive segment. The Chevrolet sedan sold a healthy 11000+ units in 2011. It lost half of that volume in 2012, even though the overall passenger car market was quite stable. The Cruze is forecasted to further lose more than 60% of its previous year volume in 2013.

Together, at the end of 2013, the Cruze would have shaved off more than 80% from its 2011 peak volume of 11500 units. Significantly, the sharp dip happened in the 3rd and 4th year of the Cruze’s expected five-year lifecycle in India.

This staggering decline in volume, while extreme for the particular model, is not isolated to the Cruze itself. It is a characteristic that plagues nearly all products in the Executive segment.

Take the Civic – from the peak of nearly 18200 units in 2007, the popular Honda sedan saw its volume decline to just above 5000 units in 2009. Again the sharp drop came within the 3rd and 4th years of the lifecycle. The Civic in India had a relatively long seven year lifecycle.


Executive Segment - Lifecycle of a Moth
It’s the 3rd year curse as Executive sedans stop warranting their share of showroom space after about 36 months in their lifecycle

The same happened with the Linea, which saw a collapse from 12600 units in 2009 to 5700 units in 2011. Similar to the Cruze and Civic, the Linea too experienced a sharp fall right after the first two years of the product lifecycle.

Even the torchbearer of the segment, the Corolla has witnessed a sharp dip in sales post 2012. However, in Toyota’s case, the volume momentum was sustained for slightly longer due to the mid-cycle launch of a diesel variant. Volumes started dipping, again after three years into the lifecycle.

The severe dip in sales volume after the initial two years 30 months of the lifecycle is a characteristic, which poses a huge challenge for manufacturers. For them, it often means that the first 30 months are the only ones to milk profits from. Post that, a sharp dip in volumes brings the numbers down to a trickle and keeping the product rolling through an elongated 6-7 year lifecycle means sharp discounts becomes a major challenge.

The dip in volumes is attributed to the typical customer of the Executive class cars. The customer is a high earning individual with significant wealth and high aspirations. Significantly, he is often highly educated and well travelled. He desires freshness, exclusivity and high level of kit in his car. The typical customer is also likely to change his car more frequently than a buyer in any of the lower segments.

With the above characteristics, the customer is naturally attracted to the freshest product in the segment at any particular time. The freshest product is likely to have the best features, most gizmos and a high level of kit.

[one_half boxed=”true”] Vehicles immune to lifecycle?
A look at the Jetta volumes reveals that Volkswagen has been able to sustain volumes much better than the competition. However, the volumes themselves are low. The reason for this inherent stability in volume has been because of two factors – first, the Jetta received a significant mid-cycle facelift in 2011, continuing the momentum. Second, and most importantly, an expanding dealership network has supported any decay in volumes. With the increase in dealers, Volkswagen has been able to bring the Jetta to a wider base of customers, supporting the volume levels. This is often a characteristic of new brands as they go through an early expansion. Renault too is witnessing the same as the fall in Fluence volume has been comparatively much lower than the competition. [/one_half]

Overall Decline of the Segment – Where is the Customer Going?

Unlike the lower segments where the prices have stayed considerably stable, Executive segment cars have seen a spurt in their prices. Unlike smaller cars, most Executive segment models have very little local content. This makes them susceptible to external concerns like currency values. The recent weakening of the Indian Rupee is a considerably big negative factor.

Executive segment cars like the Laura Ambition 1.8 TSI MT, which three years back was priced at INR 1.35million on-road in Gurgaon, are now priced at INR 1.65million. This significant increase in acquisition price also percolates downwards to components and servicing costs, making the overall vehicle ownership expensive.

The increase in prices of the Executive segment has pushed some customers downwards towards the Mid-Size segment.

The Mid-size segment, earlier dominated by the Honda City, has now expanded significantly with the launch of the new Hyundai Verna, Skoda Rapid and Volkswagen Vento. All of them offer a sedan body style, large boot spaces and a choice of diesel engines.

Executive Segment Deserters
Customers are leaving the Executive Segment for models upwards, downwards and sideways

Most importantly, these cars now also provide a comparable level of kit as compared to the Executive segment. The top-end variants of these cars now reach up to INR 1.2million on-road in Gurgaon.

So, it appears that some of the Executive segment buyers may have shifted downwards.

Some may also be moving upwards considering that there is very little gap between the Premium segment and the Executive segment. The top-end Skoda Octavia (petrol) variant costs INR 2.06million on road in Gurgaon. In comparison, the entry-level Skoda Superb Ambition 1.8 TSI MT costs INR 2.097million on-road in Gurgaon. Both cars share the same engine.

As the price difference is not very large, some top-end Executive segment customers may feel tempted to move to the bigger cars in the Premium segment.

SUV killed the Executive Sedan (At the tune of Video killed the Radio Star…)

However, the most damage to the Executive segment has been done by the SUVs, particularly the Mahindra XUV 5oo.

Retailing at between INR 1.33million and INR 1.62million, the XUV (W201) presses upon the lower end of the Executive segment. At the same time, the vehicle offers better interior space and a comparable level of kit as a typical Executive sedan. Being a monocoque, the XUV also delivers a mileage only slightly lower than Executive sedans.

Add to that the Indian’s unquenched desire for a decent SUV in the less than INR 1.5million range. The XUV became a hit as soon as it came out September 2011 and average monthly sales soon crossed 4000 units, with long waiting lists.

Arguably, many of these buyers would have purchased Executive sedans were the XUV not been in the market.

Along came Duster

The Renault Duster did further damage to the Executive sedan market. Launched in July 2012, the Duster (H79) soon became an extremely popular model with waiting lists stretching a few months.  While the Duster retails between INR 883k and INR 1.365million on-road in Gurgaon, the more popular variants (110PS diesel) are available at above INR 1.2million only.

The market would get even more competition with the impending arrival of the Nissan Terrano (rebadged Duster) which would retail at nearly same price points as the Duster.

And then the used car market

The healthy used car market also compounds problems. A typical customer who is demanding and ambitious means that he is easily attracted to high quality used cars from higher segments if they are available at the right price point. And the choice at the INR 1.5million – INR 1.8million price range is huge. From very low mileage Camrys, Accords, Superbs and Passats, the buyer can also get a decent quality 3-Series, C-Class or A4.

How does the future look like? Forecast

In view of the above challenges, the future is not very bright for the Executive segment. Most major manufacturers – Maruti, Tata and Mahindra – don’t have any products will leave the segment alone. Most of these manufacturers will circumnavigate the segment with SUVs / Crossovers to attract customers.

Executive Segment - Forecast by EMMAAA
EMMAAA is pessimistic on the segment, forecasting only a 5.2% CAGR till 2018; Closer inspection reveals that there would be intermediate peaks much earlier

This leaves the field open for competition between mainstream players like Hyundai, Chevrolet & Toyota and marginal players like Renault, Skoda & Volkswagen. Some of these manufacturers may also decide to exit the segment owing to a lack of growth in volumes.

On the other hand, the relative lack of competition may encourage manufacturers like Honda to return to the segment in the future.

EMMAAA forecasts the 2018 volumes for the Executive segment at above 38000 units. However, this is not a straight-line growth. Varying lifecycles of products will result in an intermediate peak of more than 51000 units being reached in 2016.

At 38000 units in 2018, the Executive segment is forecasted to deliver a 5.2% CAGR over the next six years. However, as explained above, it would not be correct to look at the CAGR in view of the volatility. Lifecycles would be the key to success in the segment.


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