Indian luxury car market

• Growth of luxury car market in India
• Major players and their future prospects

The automobile market in India is one of the largest in the world and accounts for approximately 7.1 per cent of the country’s GDP. The major factors which contributed to the rise in automobile demand within the country were growing purchasing power (especially in the tier 2 and tier 3 cities), economic growth, rapid urbanisation and the drive to increase the car per capita ratio ([less than 200 cars per 1000 population, 2015], [currently one of the lowest in world’s top 10 auto markets]). The overall car market is expected to continue its high growth trajectory with increasing affordability, lucrative finance options and rising income levels.

Moreover, the overall automobile market is steadily gaining the growth momentum and even the niche luxury car segment witnessed a stable growth over the years. Although, the luxury car segment gained a significant traction from a very low base in the past  few years with 3 German carmakers; Mercedes-Benz, BMW and Audi dominating the Indian market, especially in the last decade. According to the 2017 data, luxury car sales stood around 40,000 and India became the 27 most attractive luxury car market in the world (Source: IBEF).

In 2004, Mercedes-Benz was the 1st luxury car brand to formally enter the Indian market, this was followed by BMW in 2006 and Audi in 2007. Mercedes was the leading luxury car brand and enjoyed a monopoly in the local market up to 2006. But over the years its rivals BMW and Audi have dethroned the company a few times from the top slot by means of higher sales volumes. The new product launches, particularly the smaller and more affordable models were the reasons for shuffling of the top spot.

Further, an examination of the statistics for overall luxury car market in India reveal that the segment grew at a CAGR of 17.7% in the last 10 years, while the mass car segment registered a CAGR increase of 7% (with a high base). Notably, the present luxury car penetration stand at a mere 1% as compared to the total car market (the global average penetration is around 9%). There is huge potential for luxury cars in India as the penetration level is minute as compared to China and other developed nations. But on a positive note, the sector is turning out to be of significance for the economy as it contributes roughly 8-9% of the market share in terms of the revenue (automobile segment) and 11-13% in terms of the indirect taxes.

Furthermore, with respect to the changes in the number of luxury cars sold in India, the highest car sales were recorded in 2010 when sales volumes of the top 3 players surged and marked a YoY growth of 81.6%. The major reasons for this growth was a continuous increase in affluent population with high disposable income and rising consumer confidence in the Indian economy, which registered a strong growth of 10.3% during 2010 (Source: World Bank). While the growth rate of luxury cars saw ups and downs in the subsequent years, a broader optimism via numbers persisted in the following years. Even the target customers, which used to be over 45 years changed to mid-30s. This occurred as there was a new breed of entrepreneurs and companies in India offered healthy pay packages to individuals passing out of top institutes or colleges. In the past few years, the number of HNIs (High Net Worth Individuals) in India also saw an increase at a steady pace and further added to the increasing  pool of luxury car buyers. Additionally, the demand for luxury cars heightened from tier 2 and tier 3 cities, this was in pace with the economic growth and development in these regions. In 2016, there was a drop in the sales volume for the very first time in a decade. The key reasons for the fall were curb on sale of big diesel vehicles in the first half of the year and demonetization in the latter half. This caused a roadblock for the segment. In 2017, the sales figure were back on track and it was the best year for the luxury car players. This, despite the fact that the overall sales volume growth was marginally on a slower side due to the revised GST ([Goods and Sevices Tax], [revised GST cess on luxury cars came into effect from September 2017]). Wherein, the GST raised the cess charges on bigger cars and utility vehicles to 25% from 15% and made the total tax incidences up by 53% (28% GST plus 25% cess).

In 2017, Mercedes-Benz registered the maximum sales as compared to its rivals BMW and Audi for the third consecutive year and sold 15,300 units. This was the highest ever sale in a year and a growth of 15.9% from the preceding year. The main reason for this increase was the introduction of more competitively priced products, new styles and expansion of its product portfolio. The progress was made with the launch of newer models including the high-performing AMG and a variety of model series to attract new buyers as the overall automobile market largely remained sluggish. BMW registered a total sale of 9,800 units in 2017 with a growth of 25% as compared to 2016. Additionally, in the same year Audi registered a growth of 2% with the total sales of 7,876 units. 

India as a nation is a price sensitive market and even in the exclusive-luxury car segment prices matter as much as the comfort and the brand value. It is this factor that prompted all the major players to increase their local investments by setting up manufacturing and assembly units (thereby to avoid the 125% duty on imported cars). Over the years, the luxury car makers have increased the level of localisation with all the 3 major players achieving a 50% or more localisation across multiple models in their product portfolio. Vikram Pawah, President BMW India commented that ‘we have been constantly localising our 16 models, eight-volume products are locally produced and have an average 50 per cent localisation, including engine.’ Similarly, an official spokesperson for Mercedes-Benz stated that ‘our locally value-added portfolio, in total 9 models, is the highest in the industry. We have a localisation content of up to 60 per cent on some models which is highest in the luxury car industry.’

In conclusion, it can be mentioned that unlike the mass car market segment where Maruti has held the top position and seem to retain the slot, the luxury car market is expected to see new entrants with every successful product or launch. The future of high-end car market in India is expected to be remunerative with further growth driven by network expansion (luxury car dealerships) beyond the metropolitan areas and other operations including auto car financing.