SUVs: Compact, yet impactful

The automotive industry, which has been struggling in the last few months, witnessed seven months of consecutive decline in passenger car industry. SUV segment has performed better than the rest, attracting attention of global majors. Unlike the global auto industry where the demand is more for bigger SUVs, Indian consumers want compact, mid-size SUVs. With a slew of products ready for launch and many global players entering the market, one can expect fierce battle between the automakers to grab SUV market share, says Rakesh Rao.

Last month, MG Motor India Pvt Ltd, the Indian division of the iconic British carmaker Morris Garage (MG) now owned by China’s SAIC Motor Corp Ltd, launched its Hector SUV in India to take on the likes of Mahindra XUV500, Tata Harrier, Jeep Compass, Hyundai Creta, etc. Similarly, Kia Motors, which is a part of the Hyundai Motor Group, is gearing up to launch its first product - Seltos SUV – in India. The company, which has invested about $ 1.1 billion in its manufacturing facility in Anantpur (Andhra Pradesh), reportedly plans to launch more SUVs in future. These examples show that the next battle for dominance in Indian auto industry will be fought in SUV segment.

The Outliers

In the recent months, automotive industry has been in doldrums and is expected to close 2019 at its lowest ever passenger vehicle (PV) growth in last five years. Puneet Gupta, Associate Director, Automotive Sales Forecast India, IHS Markit, says, “We have seen seven months of consecutive decline in passenger car industry. The slow growth in India was due to the inventory correction, mounting ownership cost, pressure on the lending business, and deteriorating business sentiment. Economic growth has also slumped to five year low in last quarter.”

So why are these global players queuing up to foray into India and introduce their SUV models when the domestic auto market is witnessing one of the slowest growth period in the recent times? Answer is faster growth shown by SUV (compared to other segments) and the crowded small-sized car segment with entrenched players dominating the market.

SUV has been the fastest growing body-type category in passenger cars. In last decade, it has grown at a CAGR of 17 per cent and volumes have grown by five times. “This phenomenal growth was possible on account of introduction of SUV by most of the key players in the market. A decade back consumers had limited choices from Mahindra and Mahindra and Tata Motors. Now we have world class SUV in compact and mid-size segment which has been driver of growth in this segment. Also sub 4 meter SUV like Suzuki Vitara Brezza, Hyundai Venue, etc have also contributed to the phenomenal growth as they attract GST of small cars while consumers gets a product which is spacious, big and with a good ground clearance. SUV have emerged as a strong choice of consumers today. In next two years, we feel the segment will keep on growing at double digit and will cross 1 million mark volumes this year,” opines Gupta.

Subrata Ray, Senior Group Vice President - Corporate Sector Ratings, ICRA, adds, “Utility vehicle segment has consistently outperformed the other segment over last five year and the trend is likely to continue over the medium term. Moreover, the growth within UV segment is largely driven by compact UVs which are essentially monocoque vehicle with design language of compact SUV unlike ladder on chassis based rugged UVs. The demand shift towards UV is also evident across other automotive markets including likes of China, the US and Europe and hence we can say that it is a global phenomenon. In India, sub 4-meter vehicle attract concessional tax rate as compared to larger vehicles, and launch of sub 4-meter UVs by pricing it competitively against larger mid-size sedans have further expanded the target customer base.”

With some of the global brands entering the SUV market in India, both established as well as new entrants will have to fight to grab a larger pie of the growing market segment. “Launch of new vehicles by these OEMs will further expand UV segment base. However, such OEMs ability to gain and sustain meaningful market share over longer term remains to be seen,” observes Ray.

Consumers will get more choices from new brands like MG, Kia, Great Wall Motors, etc. This will become a strong reason for consumers to upgrade. Many of these new OEMs may bring some technologically, digitally advance products which itself will pull more consumers in this segment. Puneet Gupta says, “We feel the compact sedan and hatchback consumers which have grown substantially in last decade will upgrade to SUV going forward. That is why we feel this body type will cross 1 million units in 2019.”

As shown in Figure 2, by 2025 SUV segment is expected to account for 30 per cent share of the auto market - coming close to hatchbacks’ 32 per cent share - in India. Also, the concentration of SUV in highest selling vehicles is increasing – for example Suzuki Vitara Brezza is among Top 5 nameplates followed by SUV from other OEMs.

Diesel or petrol?

At present, SUV mostly run on diesel driven engine as diesel is still cheaper and delivers more kilometres per litre. However, conversion cost of diesel vehicles (especially for passenger vehicles) to comply with BS VI emission norms, which come into effect from April 1, 2020, is very high compared to petrol version. The cost of converting a small car diesel engine to BS VI compliant is estimated at about Rs 1.5 lakh compared to its petrol version, which would need less than Rs 30,000.

Subrata Ray elaborates, “While diesel continues to be dominant fuel choice in the vehicle, its share is gradually declining due to relatively stronger growth in compact UV segment where petrol also has sizeable share. With incremental pricing difference of over Rs 1 lakh post BS VI transition and focus on hybrid vehicles by OEMs, share of diesel UVs will decline going forward.”

In India, today there are two categories of SUV - compact and mid-size. In compact size SUV, there are products like Mahindra XUV 300, Hyundai Creta, Hyundai Venue, etc and in mid-size SUV there are products like Toyota Fortuner, Ford Endeavor etc. “In compact size segment, gasoline will sell in majority, but in mid-size category diesel will remain the favorite. This is as in mid-size consumers scout for power and mileage, which is only possible in diesel engine. Gasoline, however, will remain a strong choice in compact SUV,” opines Gupta.

No wonder, Maruti Suzuki India - India’s largest passenger car maker – recently announced its decision to discontinue diesel cars, which account for about 23 percent of its annual sales, from April 1, 2020. The high cost of upgrading diesel vehicles to meet BS VI norms will certainly render smaller capacity diesel vehicles unaffordable. However, experts believe that the price increase for diesel SUVs (especially above 4 m) will be acceptable for new car buyers.

Puneet Gupta informs, “Recently, Maruti Suzuki announced that they will be exiting diesel in 2020 after BS VI also reflects that cars around Rs 10 lakh may not have a diesel option after BS VI implementation in India. However, we do feel above Rs 10 lakh even players like Maruti Suzuki had to rethink and introduce diesel variants as Indian consumers are cost conscious and diesel will continue to remain a strong option especially in mid-size segment SUV.”

Electrification is an option?

The government is aiming to increase the share of electric vehicle (EV) in the country through number of policies. SUV makers will also be forced to look into the feasibility of electrification. For example, Kia Motors - which is already selling some products for hybrid, plug-in-hybrid, electric vehicle and fuel cell vehicles globally - is reportedly considering a low-cost EV for India in collaboration with Hyundai Motors. On the other hand, Hyundai is gearing up to launch its electric SUV Kona in India very soon.

Subrata Ray opines, “OEMs are exploring hybridisation and electrification in UV space, with some OEMs like M&M and Kia already announced their plans to bring electric UVs in India over next 2-3 years. Moreover, share of automatic transmission will increase substantially over next five years across all PV sub-segments including UVs.”

SUV makers are also looking at other options to increase fuel efficiency. Gupta observes, “We may see hybrid options going forward which means more mileage. Players like Maruti Suzuki, Toyota, Honda and many more OEMs may introduce hybrid petrol options. We may also have CNG options in compact SUV like Suzuki Vitara Brezza etc going forward. Also compact SUV consumer is very price conscious and companies may have to continuously reinvent themselves to make engine more efficient.”

Connected and bigger is the future

With rising incomes and aspiration levels, a lot of first time car buyers are skipping the entry car segment and moving to the next level vehicles like hatchback, SUV, etc. Auto makers are also responding to the young buyers’ demand to have more electronic gadgets in the vehicle for comfort. “This is the segment (SUV) where consumers are younger, aspirational, looking for convenience and want to be digitally connected with the world every moment they are driving the car. Recently, MG Motors launched Hector which has created a buzz in the Indian auto market due to adoption of connected car technology in its product. Going forward, we may see more premium features being added, thus making SUV an appealing proposition for customers,” says Puneet Gupta.

India is a unique market. Unlike the global automotive industry where the demand is more for bigger SUVs, Indian consumers prefer compact and mid-size SUVs. However, situation would change as compact SUV segment gets crowded and car makers look for bigger size vehicles with added features to differentiate themselves from the crowd.

“In future, we may see more 7-seater options, self-ordered customised version and automatic version in SUV. Mid size SUV segment will become very competitive as there will be numerous players fighting in this segment. We have already seen most of the big players in compact SUV segment with a sub 4 metre SUV and are looking to garner huge volumes going forward,” concludes Gupta.

This is the segment (SUV) where consumers are younger, aspirational, looking for convenience and want to be digitally connected with the world every moment they are driving the car. Going forward, we may see more premium features being added, thus making SUV an appealing proposition for customers.” Puneet Gupta, Associate Director, Automotive Sales Forecast India, IHS Markit

While diesel continues to be dominant fuel choice in the vehicle, its share is gradually declining due to relatively stronger growth in compact UV segment where petrol also has sizeable share.” Subrata Ray, Sr Group VP - Corporate Sector Ratings, ICRA