Indian automobile sector witnessing ground-breaking trends

Overview

The Indian automobile sector Is on its way to recovery after facing severe hurdles due to the COVID-19 pandemic. Between April 2020 and June 2020, passenger vehicles sales in India dipped by 78%, suffering estimated losses of >Rs. 2,300 crore (US$ 315.09 million) every day during the lockdown.

To cope with this crisis, the auto industry set its foot towards digital innovations, leading to rise of ground-breaking trends in various facets of the automobile sector. While some trends were observed way before the pandemic, most were accelerated during the pandemic.

Trends in the Indian Automobile sector

Preference for personalised vehicles: A survey by PGA Labs revealed that 56% consumers preferred own vehicles over public transport since the onset of the pandemic. Mr. Rajesh Goel, Senior Vice President and Director Marketing & Sales, Honda Cars India, while speaking about the crisis, stated that consumer preference for personal vehicles is likely to boost the auto industry sales in the coming months.

Exploring growth potential of alternative powertrains: Alternative powertrains comprise a propulsion system that does not rely on the popular internal combustion engine. It consists of hybrid engines, electric battery, hydrogen fuel cells, compressed air, gasoline kits, and others. There has been a significant enthusiasm towards the adoption of electrical vehicles in India. In 2017-2020, sales of electric vehicles grew at 44%, with nearly one million units sold in FY20. A recent survey by PGA Labs revealed that consumer preference for alternative-engine vehicles has increased from 39% in 2019 to 49% in 2020. In addition, 35% buyers are willing to pay a premium of >Rs. 1 lakh (US$ 1,370) for an electrical vehicle. With favourable government policies such as fast adoption and manufacturing of hybrid and EV (FAME)-II, lowering GST rates and rising preference for electrical vehicles, alternative powertrain vehicles are gradually making their mark in the Indian automobile market.

Increasing vehicle connectivity: A connected car can communicate with other vehicles or systems through a single device. Consumers can access internet and share data with other devices, with other devices both inside and outside the connected vehicle. A study by Deloitte highlighted that 80% Indian buyers prefer vehicle connectivity; this number is significantly higher than consumers in Germany, wherein only 36% prefer vehicle connectivity, along with China, Japan and the US at 76%, 49% and 46%, respectively. In India, cars such as MG Hector, Kia Seltos and Hyundai Venue have impressive connectivity features. In the second half of 2019, MG Hector sold 15,930 units and Kia Seltos received >1 lakh bookings within five months of its launch. Hyundai Venue too sold more than 61,000 units since launch. This connected car trend is expected to accelerate with the number of connected cars estimated to reach 1.7 million in 2022, compared with 0.3 million in 2016.

Digital dealership: COVID-19 pandemic has pushed car dealers to adopt digital transformation. In lieu of the COVID-19 pandemic, to save/spare consumers from the hassle of coming to their stores, auto dealers are quickly adopting digital transformation. Mr. Shashank Srivastava, Executive Director at Maruti Suzuki India Ltd (MSIL), said that starting from enquiry to delivery, almost 21 out of 28 dealership touchpoints for consumers are digital now. With increased internet coverage, automobile digital dealership model will drive higher sales, as consumers now receive an in-depth and personalised engagement due to less constraints.

Rising trend of telematics: Telematics combines navigation, safety, security and communication into one device that fits in a vehicle’s dashboard. Car telematic devices help in road navigation, facilitate roadside assistance and collect important data. With emergence of telematic devices in automobiles, this sector is fast becoming a proliferating market, which increased at a CAGR of ~16% from 2016 to 2020 and is estimated to reach US$ 301.23 million by 2021.

Telematics also benefits auto dealers by efficiently managing and optimising their fleets, while providing additional avenues for monetisation to fleet owners and OEMs. Favourable factors such as rise in connected vehicles, government regulations such as Automotive Industry Standard 140 (AIS 140) motor vehicle order, insurance incentives and the need for optimising the commute are likely to boost this trend.

Upskilling workforce for digitisation: Digitisation in the automobile sector has created a need for upskilling the workforce to achieve the skills required in the industry. Auto manufacturers are now pouring capital to upskill its workforce to prepare them for new roles in fields such as data analytics, vehicle connectivity, autonomous drive train design, machine learning and artificial intelligence.

In December 2020, the Automotive Skills Development Council (ASDC) and the Federation of Automobile Dealers Associations (FADA) partnered with Google India to bridge the digital skill gap in the country’s auto dealerships. The programme aimed to empower dealers to adopt digital tools and train frontline sales and marketing executives through a series of vernacular executional videos. The programme will train 20,000 auto dealerships across the country and provide skill training to over 1 lakh auto dealers in marketing and sales divisions.

Growing market for used cars: Mahindra First Choice Wheels, India's largest organised used car seller, expects the Indian used car market to double to 7 million units by 2020. Currently, only a fraction of this is in the organised segment. As more and more millennials enter the workforce, they prefer to opt for budget-friendly used cars. This change in consumer behaviour has lowered the average ownership period to 3-5 years in 2019, as compared with 8-10 years in 2009. While new car sales have been sluggish, the used car segment in India has been increasing at a CAGR of 15% in the last five years.

Empowering the compact and midsize sport utility vehicles (SUVs) market: The rising demand for SUVs has encouraged many auto manufacturers to launch SUVs. On January 5, 2020, Fiat Chrysler Automobiles NV(FCA) announced that it will invest US$ 250 million to grow its presence in India, with the launch of four new SUVs under its Jeep brand over the next two years.

Mahindra & Mahindra and Ford Motor Company recently stated that they will continue to work jointly to produce C-segment SUVs for the Indian market. Mr. Anish Shah, the Deputy Managing Director & Group CFO at Mahindra Group, said that the company will focus on large SUVs and electric cars in the short and medium terms, respectively. The company is planning to develop more electric platforms for SUVs that will be sold in domestic and export markets.

SUVs have gained a significant share in the personal cars market in the last five fiscal years, as they are better aligned with expectations of the Indian consumers and road conditions. Moreover, midsize SUV sales recovered quickly post COVID-19, after its plunge in April 2020 at a 37% YoY rate, in September 2020.

Shift in profit base: Earlier, automakers would make profits only from car sales. However, there has been a gradual shift to other profit-making segments such as car subscriptions, car rentals, data monetisation, in-vehicle connectivity, long-term maintenance packages and shared mobility. This trend is observed mainly due to changes in consumer demand.

Launch of scrappage policy: The scrappage programme is a government programme to enable easy replacement of old vehicles with modern vehicles. Scrappage programmes generally have the dual aim of stimulating the automobile industry and removing inefficient, more polluting vehicles from the road. This policy, expected to be launched by 2021, will go a long way in post COVID-19 automobile sector recovery plan. Large automakers are on-boarding this policy by launching scrappage centres including CERO by Mahindra & Mahindra (2018) and Maruti Suzuki Toyotsu by Maruti Suzuki and Toyota (2019). This policy also supports India’s ‘Green India’ mission as it creates space for a cleaner fleet of vehicles.

The bottom line

2021 is expected to be a year of recovery, reorganising and expansion of the Indian automobile sector. Changing consumer preferences, digitisation, government reforms and new business models will create significant opportunities in the sector.

Sounding optimistic, Tata Motors, MD and CEO, Guenter Butschek, said that going forward, the company expects both sales and production to improve in 2021, on the back of overall economic recovery. The country's second-largest car maker, Hyundai Motor India Ltd. (HMIL), is also hopeful of some economic recovery taking place in 2021. Over a year into the pandemic, Toyota Kirloskar Motor Senior Vice President, Sales and Service, Naveen Soni, said that there have been significant learnings and the entire auto sector has emerged stronger with greater focus on localisation and digitalisation.

In addition, only 18 out of 1,000 Indians own a car, compared with 800 in the US and 500 in Europe, creating a huge space for demand. India has already displaced Germany as the world’s fourth-largest market for vehicle sales by volume in 2018, and now it is on its path to reach the next milestone.