Mumbai: First-time car buyers, who have been driving India’s under-penetrated car market, are not rushing to auto showrooms any more.

Such buyers, who are most vulnerable to any increase in the cost of ownership, are either delaying the decision to buy or are settling for a second-hand car, industry executives say.

The trend has led to a steep decline in sales of small cars, which are typically bought by those who have never owned a car before. Close to 13 out of 1,000 people own a car in India, a ratio that compares poorly with mature markets like Europe and the US.

In the first half of fiscal 2014, small cars as a percentage of total sales almost halved to 33.08% from 59.24% in the corresponding period in fiscal 2010, according to Society of Indian Automobile Manufacturers (SIAM).

The industry association classifies small cars as hatchbacks that have engine displacement of up to 1 litre and length of up to 3,600mm. Tata Nano, Chevrolet Spark, Hyundai Santro and Eon, Maruti 800, A-Star, Alto and WagonR conform to this classification.

One out of three cars sold in India is small.

Market leader Maruti Suzuki India Ltd, which sells one of every two cars, has seen the first-time buyers as a percentage of total sales drop to 63% in the first half of the current fiscal year against 70% last year, according to Mayank Pareek, chief operating officer of marketing and sales.

“We didn’t expect the decline to be so sharp," said Pareek, attributing it to the high cost of petrol and diesel that has risen 50% and 33%, respectively, over the past three years.

India’s economy expanded 5% in 2012-13, the slowest in a decade, dampening buyer sentiment. Moreover, an increase in fuel prices and higher interest rates have escalated the cost of ownership, dissuading buyers. Car sales in India declined for eight straight months till July even as half yearly car sales in fiscal 2014 plunged to its lowest in a decade.

Hyundai Motor India Ltd, India’s second largest car maker by sales, has seen a similar trend.

The contribution of first-time buyers has dropped to 27% in the first half of the fiscal year from 45% a year ago, according to Rakesh Srivastav, senior vice-president (sales and marketing).

With the economy showing little signs of improvement, Pareek expects buyers to continue postponing buying decisions in the near term. However, he was quick to add that manufacturers would continue to stay focused on the small car segment in India as the fundamentals remain strong.

A lot of the first-time buyers have settled for a second-hand car, another reason for the small car base shrinking, said Kumar Kandaswami, senior director and country manufacturing industry leader at Deloitte Touche Tohmatsu India Pvt Ltd, a consultancy.

“A lot of motorcycle owners have graduated to pre-owned cars instead of a new small car," he said. “These buyers are most influenced by inflation."

The used car market has expanded 25% in the last couple of years, according to Kandaswami.

The wholesale price inflation in September rose to 6.46% from 6.1% in August and a recent low of 4.58% in May. Consumer price inflation, too, rose to 9.84% in September, sharply higher than 9.52% in August.

Incidentally, even as Maruti’s small car sales have declined, the company has seen the car exchange rate as a percentage to total sales go up. It expanded to 18% in the first half in fiscal 2014from 12% a year ago, Pareek said.

This was fuelled to a great extent by the attractive exchange offers the company launched. To spur sales, Maruti announced June as the exchange month. The scheme, launched by its second-hand outlet brand True Value, reached out to half a million customers across 112 cities. Among other things, it offered customers spot booking incentives and attractive monthly instalment schemes.

To be sure, the shrinking base of small cars in India has also been attributed to the migration of the first-time buyers into pricier segments.

“The Indian car buyer today is very comfortable buying a compact car or a sedan as his first car," said Banwari Lal Sharma, assistant vice-president at Automotive Exchange Pvt. Ltd, which runs the online car website CarWale.com.

CarWale speaks to around 90,000 new car buyers every month and close to 27% of the first-time car buyers showed an interest in choosing a vehicle from segments other than small cars, Sharma said.

Honda Cars India Ltd, which has been riding on the success of its Amaze sedan, corroborates it.

The company has seen the proportion of first-time buyers in total sales rise 28% in the first half of fiscal 2014 from 26% a year ago, said Jnaneswar Sen, senior vice-president (sales and marketing) at the local arm of the Japanese car maker, primarily driven by Amaze.

Pradeep Saxena, executive director at market researcher TNS Automotive Research, explains this shift by saying it all depends on how one defines a first-time buyer. For an individual, it might be her first car purchase, but that might not be true for the entire household.

“If the family has already experienced a small car, the son or daughter’s choice, when it comes to buying a vehicle for individual use, would be a car from a higher segment," Saxena said. The spurt in the two-wheeler sales in the recent past also suggests that people are opting for motorcycle and scooters over a car, he said.

Two-wheeler sales advanced 3.51% to 7.16 million units in the first half of the fiscal year, according to SIAM.

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