Mumbai: Vikrant Mhatre, an executive at a Mumbai-based research firm, will be buying his first car soon. The 23-year-old is opting for Hyundai Elite i20 Asta 1.4 CRDi—the top-end model of the premium compact car that costs 7.99 lakh (ex-showroom, Mumbai).

“I wanted a hatchback with sedan-like features," said Mhatre. And so he is buying a sporty-looking car with a push-button starter, rear AC vents and glove-box cooling that keeps drinks chilled, besides other frills that are associated with a higher-end category.

Mhatre’s choice shows how the first-time car buyer in India has changed. Not only are people buying cars at a younger age, they want more than just four wheels and an engine.

The result is a decline in market share for small cars such as Maruti Suzuki (India) Ltd’s Alto and Wagon R, Hyundai Motor India Ltd’s Eon and General Motors India Ltd’s Chevrolet Spark. The market share of small, inexpensive cars priced at between 2.66 lakh and 5 lakh has shrunk to 20% in the first 10 months of 2014-15 against 27% in the same period of 2011, according to the Society of Indian Automobile Manufacturers (Siam).

Domestic car sales rose 3.62% to 2,125,551 units in the first 10 months of the fiscal year that will end on 31 March (FY15); of this, the entry-level small cars accounted for 430,609 units.

Overall, the share of all small cars in the passenger vehicle market has fallen from 68% in FY11 to 52% so far in FY15, while the share of higher-priced segments (sedans and utility, sport and multi-purpose vehicles) has risen from 24% in FY11 to 41% in FY15 so far, Abhijit Naik and Nitij Mangal, analysts with CLSA India Pvt. Ltd, wrote in a 23 February research report on Maruti Suzuki. Even within the small car segment, demand has moved from entry-level small cars to premium small cars.

“Indian consumers are clearly up-trading to higher-priced passenger vehicle segments, and we expect this trend to continue in coming years. This demand profile shift is negative for Maruti since it has much higher market-share in small cars than higher-priced segments," wrote the CLSA analysts.

When new safety norms kick in by 2017, which will make features like anti-lock braking system mandatory for all models, sustaining the current entry-level prices would be difficult and that may mean the end of the road for entry-level small cars, analysts said.

The local arms of Toyota Motor Corp., Ford Motor Co., Volkswagen AG, Nissan Motor Co. and Renault SA, among others, which were once betting on the segment, have met with a tepid customer response to the small cars they have introduced over the last five years. Encouraged by the low-car penetration in a country where only one person out of 50 possesses an automobile, these automobile makers launched small cars to notch up quick market share gains, but came up short.

Cumulatively, sales of entry-level models including the Alto, Figo, Spark, Eon, Micra, Maruti 800 and Nano dropped from 570,294 units in calendar year 2012 to 366,550 units in 2014, according to IHS, an automotive consulting firm. Even the more recent launches such as Nissan’s Datsun Go have not lived up to sales expectations.

Competition in the Indian passenger car market essentially remains a two-horse race between Maruti Suzuki, which raised its market share to 50% in 2014 from 46% a year ago, and Hyundai that has a 21.24% share.

Car makers are now positioning their small cars in the premium segment of the compact car market, seeking to attract both first-time buyers and customers wanting to upgrade.

Brand and profitability rather than market share have become important. To be sure, given the poor road infrastructure and traffic congestion, the small car remains relevant in India.

Increasingly, however, the car buyer’s behaviour will be akin to that in other consumer segments such as mobile phones and consumer electronics, said Rajeev Singh, head of the automotive sector practice at KPMG India.

For instance, flat LCD and LED screen TVs and touchscreen smartphones are increasingly becoming the norm.

The average car buyer is no more looking for a cheap, functional car, but the one that offers “value for money", said Singh. The shift, he added, has put manufacturers in a bind. They have to offer features associated with high-end cars but, at the same time, keep costs in check and price the models competitively.

Growing aspirations among car buyers and an expanding used car market are fuelling the preference for higher-end models, said Puneet Gupta, principal analyst with IHS Automotive.

The used car market almost mirrors the one for new cars—for every new car sold, there’s also a second-hand one up for sale. Car makers in India face the additional challenge of poor customer loyalty, unlike in Japan or Germany where buyers typically upgrade to models from the same manufacturer, he said.

“More than anywhere else, the manufacturers here run the risk of getting typecast in a particular segment," Gupta added.

The Indian automobile industry is going through a transformation, said Guillaume Sicard, president of Nissan’s India operations. “For future success, it is important for us to think about profitability and building our brand so that our customers are ultimately benefited," he said.

The shift in buying behaviour and an economic downturn that dragged car sales in the country to the lowest in a decade in FY14 has spared none. Alto, the small car from the stable of Maruti Suzuki that’s touted as India’s best-selling model, reflects the changing buying behaviour among consumers.

Sure, sales remain brisk at about 21-22,000 units a month, but have been weakening in the last four years. From a peak of 346,840 units in FY11, Alto’s sales fell to 258,281 units in FY14, according to Siam.

Over the years, the changing sales mix has become a proxy for changing buyer behaviour.

Alto used to contribute as much as 28% of Maruti Suzuki’s overall sales in the top 20 cities in FY10; this has edged down to 20% in recent months. In the smaller towns, the model’s contribution to the car maker’s sales has increased from around 30% to 40% in the same period, a Maruti Suzuki spokesperson said in an email response, attributing the trend to the company’s growing network in smaller cities.

“The (entry-level small car) segment has clearly experienced the toughest time in the last four years," said R.S. Kalsi, executive director (sales and marketing) at Maruti Suzuki India, citing inflation and high interest rates that have deterred first-time buyers in recent years. “While there is an uptick now, recovery is mediocre." Unlike five years ago, the car market is being driven either by those looking at an additional car or the ones replacing an existing one, said Rakesh Srivastava, senior vice-president (sales and marketing) at Hyundai Motor India. “The last three years have been challenging," he added.

Maruti Suzuki’s Kalsi said that after a lull in the market for the last two years, the first-time buyers are slowly coming back—they accounted for 44% of the company’s total sales this year against 37% last year.

Only, their behaviour is more like Mhatre’s.

Which explains why companies aren’t scrambling to launch new entry-level offerings.

Hyundai, for instance, discontinued its flagship model Santro last year. The local arm of the Korean car maker has no plans to introduce a replacement. The company has instead chosen to position the Eon as its entry-level model.

Hyundai’s Srivastava said the company thought it through well in advance. “We launched the Eon, the Santro successor, well in advance. In fact, both models had parallel runs for couple of years before we phased out the Santro," he added.

In a bid to sustain car buyers’ interest in the entry-level models, manufacturers are adding a host of technology features, and bells and whistles to make them more attractive. Maruti Suzuki, for instance, launched the auto-gear shift on Alto K-10 last year.

Nissan launched the Micra with an automatic transmission. Sicard claims the variant is helping the cause of sales.

Such moves—sprucing up the existing models, launching new trims—may not necessarily warrant a long run, said KPMG’s Singh, who predicted that entry-level models will be relevant only in smaller towns and cities.

The new safety norms expected in 2017-18 that include advanced crash testing norms will add to costs for manufacturers. “They would rather launch new models instead of making the existing one conform to new standards," he said. The trend, Singh added, may mark the end of so-called budget cars.

The shift, analysts said, does not bode well for the market leader Maruti Suzuki, which has the highest number of models priced in that band.

But that’s another story.

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