Siren song

Imagine for a moment, an industry whose market size has been halved within a span of a single year despite new models and new assemblers joining the ranks. Volumes shrinking by that much (55% in FY23) in the automotive industry has not come off as a shock. Ironically, what appears on the financial statements of the assemblers has been equally unsurprising. Just gleaning at the latest quarterly reports of the three listed assemblers would show assemblers’ revenues have grown dramatically—revenue per unit sold for Suzuki, Indus Motors and Honda is up 76 percent, 79 percent and 96 percent respectively (see graphic). Relentless increase in prices has facilitated such strong top-line performance.

Prices—on average—for models assembled by the three automakers rose 54 percent in Jun-23 versus last year. Given the revenue per unit sold average is much higher, that alone suggests companies have been able to sell more expensive cars over the year compared to cheaper models. This is despite mounting cost of borrowing with kibor close to 23 percent, and government restrictions on automobile financing that should have weakened demand, even for luxury vehicles. This is on top of the import restriction crisis that has thus far kept plants shut for weeks, if not cumulative months at end. CKD imports for cars during FY23 plunged 66 percent that almost entirely would explain the reduction in volumes. If demand is slowing down, it is not that apparent. Whatever cars are available in the market to sell, car buyers are buying them and they are buying them at ridiculously steep prices. The cheapest car in the market—Suzuki Bolan—costs close to Rs20 lakhs! The cheapest Alto model—the quintessential middle-class compact vehicle that gives a stellar fuel average—would make a Rs23 lakh-sized hole in the pockets. Toyota’s flagship Corolla is priced between Rs67 to 77 lakhs. Car buyers are purchasing these vehicles on cash because bank financing is out of reach.

Meanwhile, the share of LCVs and SUVs is growing and growing fast with new and old models performing against all odds. The share has grown from about 10 percent to 19 percent in FY23 (Unfortunately, Indus Motors has been publishing cumulative numbers for Fortuner and IMVs this year and a deeper numbers analysis cannot be done). Given supply restrictions, it would be unwise to associate the drop in volumetric sales to reduced demand, despite all signals indicating demand should drop. It seems car buyers still have cash to spend, and they will spend it on premium vehicles at whatever prices car assemblers will set. Crucially, this doesn’t say as much about cars, but the economic at large. More specifically, the economic divide and the income disparity that is staring brazenly at our blank imperceptive faces.