BMW, Mercedes hatches head to India after China flop
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MUMBAI (Bloomberg) -- Premium carmakers BMW, Mercedes-Benz and Audi have all produced small hatchback models that are popular in Europe, but haven't managed to capture the hearts of Chinese consumers. Now, the automakers plan to launch their compact vehicles in another developing market, India.
The German companies say they plan to sell small cars in India from this year, with Mercedes introducing the entry-level A class in mid-2013, followed by BMW with its 1 series. Audi may introduce the similar-sized A3 in 2014.
A growing middle class, chronic shortages of parking and road-space in India's teeming cities, together with an obsession for fuel efficiency should spell a windfall for makers of premium compact cars.
Failure to lure motorists in India, already the world's largest hatchback market, would consign the luxury marques to servicing only the wealthiest -- and offer dim prospects that a similar strategy will work in other emerging markets.
"If you have scale aspirations, then it's important to succeed with the right models at the right price points," said Neelesh Hundekari, Mumbai-based partner and head of the luxury and lifestyle practice at the consultancy A.T. Kearney. "India is a poor country but people still want a piece of luxury, and at the right price point they will buy a BMW or a Mercedes."
Finding those points is tricky in India, where a decade of record economic growth has created a growing middle class whose aspirations to luxury are tempered by an eye for value and constrained by the price tag. India's National Council of Applied Economic Research defines the middle class as those with annual incomes of 200,000 rupees to 1 million rupees -- or $3,700 to $18,500.
Affordable luxury
"Indians are looking for affordability, even in the luxury segment," said Deepesh Rathore, the New Delhi-based managing director in India for IHS Automotive. "Once a customer buys a BMW or Mercedes, he's not going to go back to a lower brand."
India's luxury auto market may quadruple from last year's level by 2020, compared with global growth of 40 percent, IHS estimates.
J.D. Power & Associates says it expects India's car market will be the world's third largest by that year.
It has a way to go: Audi this month said India sales soared 63 percent last year -- to 9,003 cars. The company sold 405,838 vehicles in China, a 30 percent gain on 2011. Auto sales in China, the world's No. 1 car market, reached 19.3 million last year; India deliveries were 2.77 million.
China plus
Finding the key to tap emerging markets outside China is increasingly important for BMW, Mercedes and Audi as demand in Europe heads for a sixth straight annual decline. Full-year regional sales fell 7.8 percent to 12.5 million cars in 2012, the lowest level in 19 years, according to data from the industry organization ACEA.
Despite this, premium brands did not fare as badly as mass-market vehicles in the region. Last year, BMW's brand sales remained static at 641,083, while Mercedes brand sales fell nearly 1 percent to 586,631. Audi managed to grow sales 3.7 percent to 704,219.
"You will not get growth from the matured markets so emerging markets such as India, Korea, Brazil, Russia and China are very important," said Philipp von Sahr, BMW's president for India.
BMW will introduce the 1-series hatchback at the end of this year, Sahr said, declining to reveal the price before the model goes on sale. Mercedes will sell the A class for less than the 2.1 million rupee tag on its B class, Eberhard Kern, managing director of the Indian unit, said in an e-mail, without specifying a figure. Audi didn't respond to e-mails seeking comment.
Hatchbacks unproven
Not everyone is convinced Indians who can afford cars from BMW, Mercedes and Audi will go for the small vehicles. "Hatchbacks are unproven in the premium segment," said Ashvin Chotai, managing director of Intelligence Automotive Asia in London. "People would prefer to buy a larger and more luxurious model."
In China, premium hatchbacks accounted for only 4.4 percent of the 1.2 million luxury cars sold there last year. By contrast, almost one in four of the 1.87 million luxury autos sold in Germany, France, Italy and the UK were hatchbacks.
Love affair
Hatchbacks have a head start in India. The country's affinity for small cars goes back nearly three decades, when the Maruti 800 hatchback was introduced in 1983. Tax breaks helped spur the popularity of the vehicles. Last year, 1.6 million hatchbacks were sold in India -- more than in any other country.
Like their Parisian and Roman counterparts, Mumbai's city-dwellers find their slim and nippy hatchbacks more suited to street conditions. Parking, too, is a growing issue in India's sprawling cities. Parking lots in Mumbai can cost as much as 10 million rupees in Mumbai, the Times of India reported in November.
Pump prices
Rising pump prices may also weigh in the hatchbacks' favor. The Indian government is freeing prices from government control to trim its subsidy bill for food, fuel and fertilizer to 1.9 trillion rupees, or 2 percent of gross domestic product. Gasoline prices have climbed 31 percent since June 2010, when rates were freed, according to Indian Oil Corp.'s Web site. Refiners were this month allowed to set diesel prices without government approval.
"People today want a car that's easy to park and is efficient, as fuel prices are only going to rise," said Nitin Dossa, chairman of the Western India Automobile Association in Mumbai. "It's a craze to have a hatchback."
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