Inside the struggle to sell entry-level vehicles

Hero MotoCorp, which leads India’s entry-level motorcycle segment, is offering cash discounts and attractive financing offers for products like the HF Deluxe and HF100 to attract buyers in rural and semi-urban regions. Uttar Pradesh, Rajasthan and Madhya Pradesh are key markets for this segment.

“Affordability has become such a huge nightmare for entry-level customers that even though they want to and need to buy the vehicle, they find both the cost of acquisition and cost of operation beyond their means. Stocks of the cheapest entry-level motorcycle are not moving; it forms 50% of my current inventory," a Hero MotoCorp dealer in Uttar Pradesh said.

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“For people at the bottom of the pyramid, a two-wheeler is a method of moving from shared to personal mobility or from a bicycle to a motorcycle. These could be students, small businessmen, traders and employees who want a vehicle to commute to their place of work. Since food inflation has increased so much and it is an inelastic demand, they are forced to postpone their decision to buy a new vehicle and stick to the mobility solution they are currently using. These are buyers who aren’t coming to the market anymore", the dealer said on the condition of anonymity.

In September, Honda Motorcycles and Scooters India outsold Hero MotoCorp because the former has a larger play in scooters and the 125cc and above category, which attracts largely urban buyers. “We are seeing money, and financing is not a constraint in the 125cc and above category. Two-wheelers for urban customers have an aspirational value, and we are seeing many come and upgrade to products even though they may be outside their budget. Demand is entirely in the premium category," a Honda dealer in Mumbai said.

The trend is visible in mini and compact cars, which usually fall in the ₹5 lakh and under, and the ₹5-10 lakh category. The two segments shrank 44% and 9%, respectively, in Q2FY23, compared with FY19 volumes, according to the Society of Indian Automobile Manufacturers (Siam). Cars priced ₹5 lakh or below now only form a 7% share of India’s passenger vehicles market, a steep drop from 22% in 2019. Similarly, PVs priced at ₹10-15 lakh and ₹15-20 lakh have grown in share to form 21% and 11% of the market, respectively, up from 12% and 5%, respectively, in 2019.

The sharp contraction in sales of small cars can be attributed to manufacturers focusing on more profitable segments like SUVs, where packaging the cars with more features can attract a better price, said Ravi Bhatia, president and director of JATO Dynamics, an automotive business intelligence firm.

Even as passenger vehicle sales scale record levels on improving chip supplies and large pending orders, segments driven by the heart of the population—the rural buyer—are far behind their pre-pandemic heydays, as rising inflation takes new vehicle EMIs beyond their means.

Entry-level two-wheelers, or motorcycles within the 110cc engine and lower categories, saw a 35% drop in sales in the September quarter against its peak volumes in FY19, Siam data showed.

The price of an entry-level two-wheeler has gone up by 40% in four years, at a time food inflation is rising as well. This has prompted many potential buyers in tier-II and -III towns who are budget-driven and use a vehicle as a primary mobility solution to delay discretionary purchases. Most two-wheeler buyers in semi-urban and rural regions bank on financing for a new vehicle purchase, and more expensive monthly loan payments are also turning rural buyers away.

Showrooms, however, reported healthy footfall over the weekend for Dhanteras. “Two-wheelers saw much better sales in these two days, compared with the onset of the festive season. There is some respite, but no way will there be a major stock correction," Nikunj Sanghi, managing director of Rajasthan-based JS Fourwheel Motors, said.

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