Luxury Automakers Ramp Up India Investments On Anticipated Future Growth

DAI: DAIMLER AG logo
DAI
DAIMLER AG

India is the world’s seventh largest passenger vehicle market, and was previously estimated to topple Germany, Brazil and Russia to gain three places in the global rankings by 2015. [1] Germany struggled from the impacts of the double-dip recession and is slowly rebounding, the Russian economy is weaker this year due to ongoing geopolitical tensions with Ukraine, and Brazil is witnessing lower vehicle volumes due to higher interest rates, inflation and negative consumer sentiment. However, despite anticipated tepid volume-growths in these three countries, India might not be able to enter the top-four-passenger-vehicle-markets bracket in the next couple of years, due to lower than expected economic growth, causing only modest gains in the country’s automotive industry. In fact, after years of positive growth, passenger vehicle volumes in India fell 6% in fiscal 2014 ended March. [2] The industry returned to growth in the last four months, growing by 2.5% year-over-year. [3] But while the overall Indian automobile industry is forecasted to grow by only a low-single digit percent this fiscal year, luxury volumes have seen steady volume rises, even in tough economic conditions.

Luxury automakers, especially the German big 3 Volkswagen AG‘s (OTCMKTS:VLKAY) Audi, BMW, and Daimler AG‘s Mercedes-Benz are looking to gain from the untapped market potential in India, by expanding local assembling operations and distribution networks, and increasing marketing and advertising investments. Although India volumes will remain only a small portion of overall sales for luxury automakers in the near term, given the low current penetration levels, increasing disposal incomes of high income groups and lower vehicle prices on account of local production, premium volumes could significantly rise in the long term.

We have a $49.19 price estimate for Volkswagen AG, which is roughly 7% above the current market price.

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Audi, BMW and Mercedes-Benz Bank On Compact Sales In India

The global luxury automotive market leader BMW lost its India lead to Audi last year, selling 7,327 units in the country, lower than the latter’s 10,002 unit sales. [4] On the other hand, Mercedes held the second spot with 9,003 volume sales in India. Mercedes aims to become the highest-selling premium automaker in India going forward, on the back of higher sales for compact vehicles. A bulk of growth in India’s relatively nascent luxury car market is expected to come from the compact saloon segment. Emerging economies generally harbor relatively more price-sensitive customers, who might opt for a lower priced luxury car. German automakers, who form more than 95% of the Indian luxury car market at present, are looking to target millennial customers, who tend to prefer smaller and lesser expensive alternatives. According to Audi, the average age of a premium car buyer in India is around 35 years, lower than the global average of 43-45 years. [5] Compact saloons are expected to be the growth driver for the luxury segment going forward, as first-time buyers look to trade-in their non-luxury sedans for entry-level compacts.

In a bid to tap into the potential of the compact luxury segment, Audi and Mercedes are introducing new models in India at competitive pricing, on account of local assembly. In the past, foreign automakers imported completely-built-units, which carry 100% or more customs duty. However, automakers such as Audi, Mercedes, BMW and Jaguar Land Rover have accelerated local assembly of units in India, which attracts only 30% customs duty. Audi recently launched its compact sedan A3 in India, in a price range of 22.95-32.66 lakh rupees ($38,000-$54,000), placing it in competition with Mercedes A-, B-, CLA-Class and BMW 1-, 3-series in the sub-25 lakh category. Audi expects this model to contribute around 15% to its India volumes, which are expected to rise by a double-digit percent this year again, after increasing 11% in 2013. On the other hand, Mercedes reported a strong 25% year-on-year growth in the first half of 2014, selling 4717 units, after growing 32% in 2013. Mercedes is now looking to double its local production capacity from 10,000 units presently. Both Audi and Mercedes have emphasized focus on their compact models A3 and CLA AMG respectively, in terms of advertising as well, to attract higher sales in India.

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Indian Premium Vehicle Market Poised For Growth

Despite lower passenger vehicle sales in India, the luxury segment is expected to grow from around 32,000 units in 2013 to nearly 50,000 units this year, according to IHS Automotive. In fact, the combined India volumes for Audi, BMW, Mercedes and Jaguar Land Rover, which stood at 30,100 last year, are estimated to jump 168% by 2018. [6] Although this massive percentage rise in volumes in India might not significantly impact overall volumes for the German automakers in the near term, an early advantage in the country could be crucial, as seen for Audi in China. Audi entered China before its compatriots and now sells over 30% of its vehicles in the country. Key to the growth in India could be the increasing proportion of high net worth individuals, low current ownership rates and focus on compact vehicle sales.

  • Low Current Penetration Levels Provide Opportunity

Less than 2% of all passenger vehicle volumes are formed by luxury models in India presently. [7] In contrast, the luxury segment forms around 7% of the net vehicle volumes in China, and is a constant 10.5-11.5% of the net passenger volumes in the U.S. Low current levels of penetration provide potential growth opportunities for luxury automakers. Around 55% of Mercedes’ sales in India are from cities other than Delhi and Mumbai, where most of the high income consumers reside. The brand now operates 64 sales outlets across 36 cities, and is looking to penetrate deeper into the country in order to expand its consumer base.

  • Increasing Proportion Of High Income Groups Could Spur Sales

The population of high net-worth individuals (individuals with investable assets of $1 million or more) in India was over 200,000 in 2012, and is expected to grow sevenfold by 2020 to 1.5 million. [8] On the other hand, the number of ultra-high net-worth individuals (UHNIs), which increased by 16% last fiscal, is estimated to triple in the next three years in the country. [9] As higher income groups form the target base for luxury automakers, increase in their proportion as well as wealth could spur luxury automobile sales in India, going forward.

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Notes:
  1. Passenger vehicle sales []
  2. Passenger vehicle sales in India in fiscal 2014 []
  3. April-July passenger vehicle sales in India []
  4. BMW India loses crown to Audi []
  5. Luxury car owners in India-youngest in the world []
  6. India luxury car market accelerates despite downturn []
  7. Mercedes plans to get back the no.1 luxury brand position []
  8. HNIs will make India a top 3 luxury car market by 2020“, May 2013, automotiveworld.com []
  9. High net worth population in India []