Decoding India’s UV Onslaught

MAHINDRA AND MAHINDRA (M&M) made headlines in July 2022, when it announced 25,000 Scorpio N bookings within a minute of opening online applications. The number reached over 1,00,000 in 30 minutes with the rush even triggering a brief technical glitch in the payment gateway provider. This meant an unprecedented waiting period of up to 20 months. “In August, we manufactured around 6,000 units. We have released the waiting period for the first 25,000 units, but if you get 1,00,000 bookings for a car that you are able to make only 6,000 units in a month, the waiting period will be substantial,” says Rajesh Jejurikar, executive director, auto and farm sectors, M&M.

M&M’s struggles epitomise the mad rush for utility vehicles (UVs), predominantly sports utility vehicles (SUVs), in India’s passenger vehicle market. In FY22, about 14.89 lakh UVs, including SUVs and multi-purpose vehicles (MPVs), were sold in India compared with 14.67 lakh sedans and hatchbacks, according to data from Society of Indian Automobile Manufacturers. In FY19, 9.41 lakh UVs were sold compared to 22.18 lakh hatchbacks and sedans. This may be startling for the average joe who perceives India as a price and fuel efficiency-sensitive market which loves small cars, but a large number of carmakers saw the trend coming. Some struck when the iron was hot and have reaped benefits in the form of enhanced market share. “About a decade ago, market share of UVs was 15-18% (it is 55% now), and UVs were rugged, to be used on rough terrains,” says Jejurikar. Advent of crossovers, which are fuel-efficient and lighter, played a vital role in increasing their acceptance, he says. Globally, share of UVs was around 45% in 2021.

Pushan Sharma, director, CRISIL, traces the rise of UVs. “India’s UV story can be divided into three phases. The first was between 2000 and 2012, when UV market share was 13-17%. The biggest models were Scorpio, Bolero and Innova,” he says. By 2013, UVs started transitioning into a mass product with launch of models like Renault Duster, Mahindra XUV500, Maruti Suzuki Ertiga and Ford Ecosport. “It debunked the idea that SUVs must be rugged and priced on the higher side,” says Sharma. UV market share touched 15-21% between FY13 and FY16. The UV story saw its third inflection point with launch of disruptively packaged and positioned products such as Hyundai Creta and Maruti Suzuki Vitara Brezza, which pushed UV market share to 21-28% by FY17. “According to our estimates, share of UVs touched 48-49% in FY22,” he says. It was 55% in first nine months of FY23.

Creta’s success was also an epochal moment for Hyundai Motor India (HMIL). “Creta brought a paradigm shift in evolution of SUVs in India,” says Tarun Garg, chief operating officer, HMIL. In CY22, Creta registered its highest-ever annual sales of 1,40,895 units since the model’s debut in 2015. HMIL’s market share in the UV segment, 11.3% in 2015, increased to 22.7% in 2019 and 25.5% in 2020. “Today, one out of four SUVs on Indian roads is a Hyundai,” he says.

The trend of UV dominance is here to stay, say industry executives. One reason is competitive pricing vis-a-vis sedans and premium hatchbacks. The other is preference of the new aspirational consumer for vehicles which have more space and higher ground clearance for a smoother ride.

Rise of Aspirational Buyer

Most carmakers point at changing preferences of car buyers. “Car is seen as a harbinger of social status, prosperity and personality,” says Jejurikar. He says a lot of people want UVs for their additional space due to prevalence of joint families in India. “This is a category enabler.” Also, the height of the vehicle gives confidence to the driver. “You feel in command. An SUV gives feeling of space,” says Hardeep Singh Brar, vice president and head of marketing and sales, Kia India. Another plus is higher ground clearance. “In India, you have a lot of potholes, speed-breakers and waterlogged roads during monsoons. SUVs fare better in such conditions,” he says.

“Customers prefer SUVs for elevated driving position that gives drivers better control, in addition to space, comfort and convenience. SUVs have also moved from being just functional to more aspirational in technology and design,” says Rakesh Srivastava, managing director, Nissan Motor India.

Brar says India has seen a perceptible shift in use of passenger vehicles. “Two decades ago, Indian market was extremely cost-conscious. A decade ago, it became a value-conscious market where car buyers wanted features at a certain price. Now, people want a car which reflects their personality,” he says. The pandemic has catalysed the shift. “There is a perception among people that you live once. People are splurging more on cars, phones. It’s like revenge buying,” he adds.

“We were all slaved in for a year-and-a-half because of the pandemic. There is an increasing desire to get away (from routine) and get on the road. SUVs enable the spirit of exploration,” says Jejurikar. Improving road infrastructure has also played a role in increasing the popularity of UVs. “With government building good roads between major cities, for instance Delhi-Lucknow and Mumbai-Pune, people are choosing road travel. SUVs are preferred because you usually travel with your family for outings,” he adds.

New Players Tap Trend

Carmakers which didn’t anticipate the trend have suffered. General Motors and Ford Motor Company, two of the biggest Detroit-based carmakers, had to wind up India operations. However, two others, China’s Morris Garages (HMIL) and Kia, Hyundai’s sister brand, forayed into India with UVs. Their boldness has paid dividends. “Globally, we were seeing increase in demand for SUVs, and we anticipated a similar trend here, with a lag. It was clear that we needed to target the market,” says Rajeev Chaba, president and managing director, MG Motor India. Within UVs, the mid-size segment, where MG Hector is positioned, was the ideal choice. Hector, globally known as Baojun 530, is the north star of Shanghai Automotive Industry Corporation Motor Corporation, owner of the MG brand. The segment had a competitive gap, too. Three years later, MG’s sales are buoyed by Hector, with the carmaker selling 35,378 vehicles in FY22, capturing 1.30% of the Indian passenger vehicle market. “What resonated with customers was tall stance of Hector and its aggressive looks,” he adds. Changing lifestyle of car buyers also helped, says Chaba. “Hector is a practical choice for those who want to go on sorties with friends and family because of its higher ground clearance,” he says. The company also has a full-size UV, Gloster, apart from Astor, which falls in the segment below Hector. “We are seeing a lot of demand in lower segments,” he says. Astor, though, has been plagued by long waiting periods due to shortage of semiconductors. “Our supply has improved in last few months. There are still issues, but it’s better than last year, when we were really struggling for chips,” he says. Some variants of Astor and Hector are available off-the-shelf but most have waiting periods of two-four months.

MG has also localised procurement of chips from Bosch China to Bosch India. “Our team has also re-designed the shop floor. It has added more shops and created more space. Our capacity has increased to 1,20,000 units. By end of this year, we should be at 1,35,000-1,40,000 units,” he says. MG has been selling 4,500 units every month. Chaba says this should rise to 6,000 units, depending on availability of chips, in January-March quarter. “Once we launch another EV in next few months, we hope to take it to 7,500-8,000 units,” he says. Chaba says MG is eyeing 70-100% growth in sales to 80,000-1,00,000 units this year.

While both Kia India and MG India had started operations around the same time, in FY22, Kia was the fifth-largest carmaker in India — it sold 1,55,699 vehicles, cornering a market share of 5.71%. “We did extensive research over two years to understand needs of car buyers. The body-type buyers wanted the most was SUV,” says Brar.

Kia next focused on establishing itself as few Indians had heard about the brand. “We wanted to show what we have to offer. Seltos was a top-of-the-line product. Few cars were priced close to the ₹20 lakh bracket. The average price of most mass-market SUVs was ₹15 lakh,” he adds. Seltos has crossed the three-lakh milestone in less than three years of launch. “Our first product in India has played a pivotal role in charting our success story here. With Seltos, Kia India was able to establish itself as a disruptor and cement its position among country’s top five car manufacturers within just two months of commencement of sales,” says Myung-sik Sohn, chief sales officer, Kia India. Seltos accounts for 40% of company’s sales in the country; 1,24,167 units have been exported to more than 91 countries from Kia’s plant in Anantpur in Andhra Pradesh.

Kia then launched Sonet in segment below Seltos. Brar says demand for Sonet is on a par with Seltos. In December, which is generally a muted month for carmakers, Kia sold 5,995 units of Seltos and 5,772 units of Sonet. The company replicated this strategy in MPVs where it first launched the flagship, Carnival, which showcased what the company has to offer in the segment and followed it up with Carens. Kia sold 3,195 and 88 units of Carens and Carnival, respectively, in December.

MG and Kia are united in their decision to stick to UVs in near future. “Sticking to this segment will give a fillip to the brand as it is aspirational. As of now, we have no plan to foray into hatchback and sedan segments,” says Brar. MG also plans to focus on UVs for now, says Chaba. “Our hands are full. The need of the hour is to meet demand, both for our current portfolio and future launches, the new Hector and the sub ₹15-lakh EV,” he adds. However, Chaba says the new generation may not define body styles the way traditionalists do. “They will look for efficient mobility solutions, and those may not be as rigid in body styles as they are at present. However, venturing into a new body style is something we will look at in the second phase of our India strategy,” he says.

Compact UVs: Low-Hanging Fruit

While UVs are being offered in all sizes, the compact sub-segment is accounting for bulk of sales. It is also the most crowded. “The biggest advantage of compact UVs is competitive pricing. OEMs are launching vehicles with tall-boy looks at price of a small car,” says Sharma of CRISIL. He says an Indian looking to buy a premium hatchback can get more value in a compact UV. “For instance, Maruti Suzuki Swift starts at ₹7 lakh on-road. This price is comparable, if not identical, with a Renault Kiger or a Nissan Magnite,” he says. “Prices of vehicles have gone up. The price of a decent hatchback used to be ₹4-5 lakh six to seven years ago. Now, it is ₹7-7.5 lakh, which is why a lot of UV sales are coming from compact UVs.”

The compact sub-segment has given car makers many success stories. The most notable is Hyundai Venue that was launched in 2019. HMIL has sold over 3.42 lakh units of Venue in three years despite stiff competition. “Venue has always proved its mettle,” says Garg of HMIL. “Venue was India’s first connected SUV and the first car to have an intelligent manual transmission. We continue to see healthy demand for Venue,” he adds. Only 5% buyers preferred Bluelink technology when the model was launched in 2019, according to Hyundai’s internal survey. The number soared to 25% in 2022. Similarly, preference for automatic and iMT variants has risen from 14% in 2019 to 17% in 2022, says the survey. Even though Maruti Suzuki Brezza and Tata Nexon bettered Venue in sales in December, the latter’s demand continues to outstrip supply. Select variants of Hyundai Creta and Venue have a waiting period of up to six months. HMIL’s pending order book is estimated to be around 1.6 lakh units.

Small Cars: Bygone Era?

“The share of small cars in passenger vehicle market was 70% in FY10. In FY22, it was 45%,” says Sharma of CRISIL. Most small-car players have migrated to UVs. Maruti Suzuki India Ltd. (MSIL) now has a near-monopoly in the segment, with Renault India’s entry-level hatchback, Kwid, having a marginal share. Last fiscal, 11.5 lakh hatchbacks were sold; MSIL’s market share was 68%.

Stringent BS-VI emission norms and mandate of front airbags have driven up prices of entry-level cars and pushed people further towards UVs. Those looking to buy a mid-size hatchback often find the price comparable to a UV. “UVs already had features such as front airbags, so the mandate did not affect their prices much,” says Sharma.

Rise in commodity prices and premiumisation of vehicles with addition of features and technologies have also driven up prices. According to Shashank Srivastava, senior executive officer, marketing and sales, MSIL, this has put the hatchback segment under pressure in the near term. However, MSIL expects that the segment will bounce back as economy recovers. “Car penetration in India is extremely low. Our estimates show that only 30 people out of 1,000 own a car. The figure is close to 800 in developed economies like U.S. There is a palpable need for personal mobility, and as economy recovers, more people will turn to cars,” he says.

Srivastava says while UVs account for 40% of the passenger vehicle market, hatchbacks are at 38% (with premium hatchbacks accounting for 20% and entry-level hatchbacks 18%), making it an important segment for MSIL. However, small cars account for bulk of its sales. For instance, it sold 8,11,467 mini and compact vehicles in the April-December period, but only 2,60,172 UVs, where margins are higher. This dependence on affordable cars in an inflationary environment has put pressure on margins. According to MSIL’s annual report, net profit margin was 4.5% in FY22 compared to 6.4% in FY21. The numbers were 9.0% in FY19 and 9.9% in FY18.

Industry observers say the UV segment will continue to grow for at least the next two years. “In the near term, we see much more traction in UV models compared to sedans or hatchbacks,” says Sharma. “The market share of UVs has grown from 34% in FY20 to 48% in FY22, and will settle around 52-53% in next two years. However, interesting UV models can continue to increase market share,” he says.