Sinking Flagships

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Aircraft Carriers are an expensive indulgence; especially when their rudder hardly works, the planes are mothballed and the steam-catapult needs a boiler. From a projector of strength, they often turn into liabilities, unable to match the speed of the smallest frigates. 

Is this what is happening with Premium segment sedans?

In the last few weeks there have been two media reports concerning vehicle models in the SIAM Premium segment (Accord, Camry, Sonata, Teana, Superb and Passat) that caught our attention.

The first was Honda closing Accord sales and the second was Volkswagen doing ditto for the Passat.

Honda confirmed the media report but said that it will bring the next generation Accord to the Indian market soon. Accord volumes have been dipping (they sold all of 520 units in 2013) and Honda probably needs the next generation model to spruce up sales.

Volkswagen denied the news and confirmed that the Passat is still very much around. They sounded happy shipping the 60 odd units to their dealers every month.

Those 60 units are no laughing matter. That is more than all the Teanas, Nissan managed to sell in the entire year.

And that pretty much sums up the state of the entire Premium segment.

Global Bestsellers Get a Reality Check

The problem is not limited to the Accord or the Passat only. Nearly every model in the Premium segment is on life support.

Take the Hyundai Sonata for example. This is a much-toasted car in the US of A; a car that probably has the halo and capability to do the split between two reversing Globetrotters.

It sold less than 200 units in the entire year.

Considering that Hyundai dealers probably bought one each and some key suppliers did the same as well, it is likely that genuine customers purchased not more than a handful of Sonatas.

Or take the Camry, Toyota’s global money printing machine. Since 2009, the Camry has sold around 300 units every year. It didn’t matter that Toyota did a generation change as well as local kit assembly in the period – sales just refused to budge beyond 300 units a year.

Even cars like the Skoda Superb, which did well once upon a time have been slaughtered in recent months. The Superb is the only premium sedan to ever cross 4000 units in a year (4014 units in 2010), but sales in 2013 were only 1179 units.

Sales have been downhill post the 2010 peak

Sales have been downhill post the 2010 peak

How bad are things?

That 4014 units-a-year record is significant – EMMAAA expects it to stick around for nearly forever. Analysts at the research firm see very little chances of the Premium segment ever bouncing back.

But before we go further, a look at the present scenario

Total Premium segment sales in 2013 were all of 3012 units, a 36.4% fall from sales of 4734 units in 2012.  This (2012 sales) again was a 30% fall over 2011 volumes. And then 2011 was a 20% fall over 2010.

In brief, since the sales peak of 8485 units in 2010, sales have come down by more than 65% within three years.

Will Things Improve?

With this massive fall in sales to the point that the gross annual sales numbers for the entire segment do not even warrant kit production of a single model, the Premium segment is fighting for relevance.

Things are unlikely to improve, feels EMMAAA.

Over the next five years, EMMAAA sees stagnation for the segment. Though the economy and the overall automotive market is expected to rebound strongly post the second half of 2014, the Premium segment is forecasted to stay subdued.

Sales numbers over the next five years would rebound but EMMAAA’s forecast of the segment still falls short of the peak of 2010. The forecasted near-term peak of a little more than 7000 units for the segment, a little less than 1500 short of 2010’s peak.

The high CAGR is a technical issue - you see 2013 was doomsday requeim

The high CAGR is a technical issue – you see 2013 was doomsday 

Sales are expected to get a boost with next generations of the current lineup hitting showrooms over the next five years. Next generations of the Accord, Teana, Passat, Superb, Camry and Sonata are all expected within the next five years. However, even with these new generation models, overall sales in the segment would stay subdued.

Overall, EMMAAA forecasts a CAGR of 14.23% over the next five years. This may appear strong but the strength is mostly due to the insanely low base of 2013.

Where did the customer go?

The advent of premium SUVs (SIAM UV4 segment – priced very comparably to Premium sedans), especially the Toyota Fortuner, pulled away customers from the Premium sedan segment. A SUV like the Toyota Fortuner / Honda CR-V / Mitsubishi Outlander provides better interior space than Premium segment sedans, have better road presence and capability and provide comparable levels of equipment.

A SUV also appeals to the Indian male ego of preferring a vehicle with greater road presence, high ground clearance and high driver seat positioning.  To add, premium SUVs often come with competent diesel engines, which some of the Premium sedans like the Accord, Camry and Teana lack.

Premium Segment Customer is escaping to endless choices

Premium Segment Customer is escaping to endless choices

Why have Premium when you can go Luxury

One of the biggest killers of the Premium segment has been the entry level Luxury segment. In their zeal to garner larger volumes, the Luxury brands – Audi, BMW and Mercedes – have stooped low to the point that they literally upset the applecart. The lowering of prices at the bottom end of the luxury segment has left little space to maneuver for Premium sedans. Often entry-level Luxury sedans are priced only a few hundred-thousand rupees above Premium segment sedans (esp. if your name is Passat Highline DSG) giving the customer a very lucrative alternative.

The customer is not complaining though. He has happily moved to the conventional entry level Luxury cars like the BMW 3-Series, Audi A4 and Mercedes C-Class.

The move towards Luxury cars is further facilitated by aggressive finance schemes not normally available on Premium segment cars. This reduces the EMIs on Luxury cars considerably, bridging the gap between the Premium and Luxury segment cars even further.

Enter Entry-Level Luxury SUVs

The final proverbial nail in the coffin has been the recent advent of the new entry level Luxury SUVs. With BMW launching the X1 and Audi’s recent launch of the Q3, the entry barrier to the Luxury segment has come down considerably. These entry level SUVs start at only slightly higher than Premium segment sedans. In some cases – Audi Q3 Sport vs VW Passat Highline DSG, the price comparison is loaded in favor of the Luxury SUV. Again, aggressive finance schemes further tilts the balance towards Luxury SUVs. .

The allure of buying a Luxury segment vehicle, even though smaller in size, is quite strong. For a lot of buyers, it is an elevation in social strata. It is also often a one-way street – once the customer moves into a Luxury brand, he is unlikely to come down to a Premium brand.

The move towards Luxury brands is also something that is being witnessed in corporate buyers. Earlier corporates were one of the biggest buyers of Premium segment sedans, often rewarding their middle-senior level executives with the cars. However, with the society and corporates becoming more receptive to Luxury, the rewards have changed into Luxury segment cars. Perhaps, the executives also feel happier being rewarded by a Luxury segment car than by a Premium segment model.

Things will change…for the worse

Things would change for the worse when Audi launches the A3, Mercedes the CLA and BMW the 1-Series sedan. These sedans would be likely priced a bit lower than the current Premium segment cars. Again, the size of these luxury sedans may be significantly smaller but the brand allure of Luxury is likely to woo away customers from the Premium segment to these neo-entry-level Luxury sedans.

In a way, these three entry-level sedans may collectively write the epitaph for the Premium segment.

Lifecycle Issues

Very similar to the Executive segment, and much more severe, the Premium segment also suffers from lifecycle issues. In most cases, sales and brand managers have mere months to milk a model before the onset of Alzheimer’s.

Sales dip severely post the first two years of lifecycle

Sales dip severely post the first two years of lifecycle

Take the Sonata – from a new launch in 2012 with laughable annual sales of 351 units, numbers have halved the very next year.

Or the Superb, which has seen a 70% fall in numbers between 2010 and 2013. The other popular model – Honda’s Accord – has lost 80% volumes in the same timeframe.

In many cases, the customer – if there is one – is attracted to the latest navigation and electronic gizmo-wizardry in the Premium segment sedans. As soon as another model with a more updated trim enters the market, the customer gets attracted to the same.

Is Diesel a Strength?

This is quite confusing.

At first glance, especially noting the success of the Skoda Superb, a competent diesel engine in the Premium segment seems to be an option that any model cannot live without. Due to their size and bulk, Premium segment sedans often return poor fuel consumption figures. A diesel power plant is a good alternative.

The diesel engine strength gets further established when one looks at the Passat numbers. Despite being the most expensive Premium segment model, the Passat – offered only with a diesel engine – manages to be third best selling model in the segment.

However, the Accord’s relative success, second only to the Superb, shows that diesel engine option may be overrated. Honda’s Premium segment offering comes only with a Petrol engine and has done well for itself.

At the same time, the Sonata, the Camry and the Teana all exist only in Gasoline avatars and none sells.

The issue may be something else then.

Brand?

Yup.

A Premium sedan is nothing but the better-than-the-best of an otherwise mainstream brand. Often how you differentiate yourself in the volume car market determines your chances of success in the Premium segment.

Hyundai with all its success in the smaller car business finds it tough to move any Sonatas out of showrooms. The customer is unable to recognise the brand with premium sedans. At times, the sales numbers just don’t justify the attention of the marketing, sales and communication teams. They find it easier peddling a few thousand small cars every month than a few premium sedans.

While Honda succeeds with the Accord, Nissan fails with the Teana. The failure is mostly due to the limited reach the brand has in the Indian market. Future generations of the Teana – if Nissan continues the line up in India – may suffer due to having Datsun in the same showrooms.

Toyota finds it difficult to sell the Camry in India, even though the Toyota brand has a high standing, because of the brand’s association with utility vehicles like the Innova. Limited trim and transmission options on the car may be another factor weighing in.  [one_third boxed=”true”] A word of caution: Clubbing all the cars mentioned here in the Premium segment might be factually correct but there is a huge price band between the top end and the bottom end of the segment. The cheapest Premium sedan is the Skoda Superb 1.8 Ambition TSI MT with an on-road New Delhi price of INR 2.129 million. The most expensive Premium model is the Volkswagen Passat Highline DSG, which has an on-road New Delhi price of INR 3.18 million. This is a price band that stretches more than a million rupees and overlaps the Executive segment on one end and the Luxury segment on the other end.
No wonder it is often an apples to oranges comparison. [/one_third]

In light of this, Volkswagen does relatively well with the Passat. This is the most expensive range in the Premium segment but does well mostly because of the brand’s association with premium models even in the mainstream end of the car market.

Which must be quite frustrating as that very quality is hampering the brand’s growth in the volume car market.

Are Manufacturers Serious about the Premium Segment?

Most of these cars suffer from little localisation and little customisation as per Indian market requirements. All the models are either kit assembly or imported as completely built units meaning a local product-planning manager has to pick and choose from the company’s model product basket in other right hand drive markets.

Which is a disaster

A quick look at the offerings and the trims in the premium segment indicates that manufacturers often have a ‘take it or leave it’ kind of attitude towards the Premium segment. Apart from the Skoda Superb, the other models are offered in one engine option only. Trim levels are limited to 2-3 only and in many cases, the cars are loaded with exotic automatic and double-clutch transmissions, driving the price up.

It seems that not many lose sleep over the sales of these models.

 

 

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