Thomas White Global Investing
India
India Stamp
September 23, 2011
A Postcard from the Asia Pacific
India: Luxury car makers in the driver’s seat

An auto exposition in India

The luxury car segment in India is seeing encouraging growth, although overall passenger car sales in the country have been in a downtrend.

Until last year, the millionaires of Aurangabad, a small but rapidly developing city in western India, had a curious predicament. Many of them were wily, self-made businessmen, cautious with money and content to live a frugal, conservative life in crammed apartments and shabby houses. But all of them had one very strong craving — to own that “ultimate symbol of achievement” in small-town India, a Mercedes-Benz car. There was a problem though — dusty and unglamorous Aurangabad did not have a Mercedes-Benz showroom, and the luxury car’s dealer in the nearest metropolis refused to take their inquiry calls seriously.

The millionaires were fed up with this treatment. So, when one of their peers broached the idea of a group effort for greater purchasing heft, they rallied around him. Eventually, the now-famous “Aurangabad Group” created headlines by placing a single order for 148 Mercedes, a $15-million transaction that is now considered the biggest bulk purchase of Mercedes cars in the country.

The Aurangabad Group deal not only taught Mercedes-Benz a valuable lesson about India’s car market, but also turned on its head conventional wisdom about the relationship between sales and product prices in emerging markets like India. It is a widely held perception that the pricier a product is, the less it sells and vice versa in developing countries. However, recent trends in India’s automobile sector show that the market for high-end products has never been stronger.

Indeed, the sales of luxury cars, which are at least 30%-40% more expensive in India than even in the U.S. due to high import taxes, have been substantially better than the sales of cars in the affordable segments. For instance, the demand for luxury cars and SUVs has been so strong that the Indian unit of BMW has had to raise capacity at its factory for the fourth time this year. Similarly, sales of the high-end Jaguar Land Rover model owned by Tata Motors remain in an uptrend, according to the Financial Times. On the other hand, overall passenger car sales have been steadily falling month-on-month for some time now, dropping 16% in July compared to June, and sliding 10% in August from July, as the Society of Indian Automobile Manufacturers (SIAM) notes.

In fact, the world’s cheapest car, Nano, which Tata Motors launched with much publicity in early 2009 and which retails for about $3,000, has had a rather bumpy ride lately. It recorded a nearly 80% drop in sales between August 2010 and August 2011. India’s biggest car manufacturer by volume, Maruti Suzuki, has also seen the sales of its lower-priced brands falling, while the sales of its pricier, mid-size models have remained resilient. One of the reasons for the slump in overall passenger car sales is the rise in the cost of car loans due to the rate hikes India’s central bank has implemented to combat inflation. However, although the Nano is attractively priced and has received positive reviews about its performance, its sales have suffered perhaps because the diminutive car is considered cheap and lacking in snob appeal.

Notably, the Indian automobile industry has proved the established views about emerging markets wrong in other ways besides price points. Recent trends show that car makers are competing hard to woo Indian customers through sophisticated promotions and incentives, just as they would do in a developed market. Manufacturers, especially those that sell high-end models, have pushed the pedal harder on a promotional concept called non-selling showrooms, such as Mercedes-Benz’s star lounge at the New Delhi international airport and BMW’s studio. These specialized showrooms are designed to enhance brand visibility and give prospective customers an opportunity to experience products.

Meanwhile, after taking delivery of their Mercs, some members of the Aurangabad Group declared that they aggressively pursued a bulk purchase deal with Mercedes not just to acquire their dream cars but also to make it known that their city was small, but not poor. Given recent trends, India too seems to be making a statement — that it is poor, but has no dearth of consumers who will buy only the best, irrespective of the price. Perhaps it is no coincidence that the corporate tag line Mercedes launched last year is after all — The Best or Nothing.

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