Automobiles: Is the middle-class squeezed out?

People are still buying motorcycles. In fact, among the different automobile segments, two and three-wheelers have really persevered—declining by only 10 percent in 8MFY20 year on year. Most of these sales belong to Atlas Honda. Passenger cars on the other hand are down 43 percent, commercial vehicles and tractors by 40 percent and jeeps by 47 percent in the eight month period of this fiscal against the corresponding period last year.

Cumulatively for the three car makers, Suzuki sales are down 35 percent, Toyota by 49 percent and Honda by 61 percent. Breaking down the numbers further though, it is clear that without Alto—which is nearly half of the total volumes Suzuki has sold during the period—Suzuki which popularly provides options for the middle-class has seen volumes plummet by 67 percent. What is driving this intriguing trend? Relatively expensive cars –say Toyota Corolla—has seen a smaller drop in sales than Wagon-R whose sales have dropped 73 percent in 8MFY20 year on year. For that matter, even the combined volumetric sales for Honda City and Civic have had a smaller decline than Wagon-R.

Would it be fair to say that the high-end (1300cc cars+ jeeps) and low-end (motorcycles) of the passenger vehicle segments are performing better than the middle-income segment (1000cc and below cars)? It would be difficult to come to that conclusion for a number of reasons.

One, in Pakistan, research shows that folks are less sensitive to price changes, and more sensitive to income changes. When incomes decline, they buy less cars overall. Because of the expensive borrowing, most new customers have thought twice before buying a bank leased car. This has led to the substantial declines across the three car makers. Second, it seems Suzuki buyers have simply shifted from Mehran to Alto. Last year during the period, Suzuki sold some 23,000 units of Mehran. Alto sales during the current period stood at 27,000 units. It’s not a far cry to make the assumption that Alto being the newly minted car, and an upgrade from Mehran, customers have just shifted from the now-discontinued variant.

In fact, removing Alto and Mehran both from the tally, Suzuki sales have dropped 58 percent, in line with Toyota (49%), Honda (61%). Removing commercial pickups Suzuki Ravi and Hilux, Toyota sales are down 51 percent, while Suzuki’s are down 58 percent. Third, the only substantial decline that has come into play is Suzuki Wagon-R. But the car has been on a high the past few years since its launch. The decline in demand is from a higher base last year. It is also possible that some of the prospective Wagon-R buyers are drawn to the fresh Alto.

Lastly, as for motorcycles, they are available at zero markup (typically upto 6 months, and often more) on easy installments. A Honda CD70 costs about~ Rs75,000 and customers can lease upto 36 months—without mark-up, this motorcycle costs Rs2000 and change per month. This can go upto Rs5,000 given a lower tenor of the lease and mark-up. The burden is simply incomparable to passenger cars. The poor are likely not buying them anyway. In a shrinking economy, only those people will buy a vehicle who really need it, and perhaps may be incurring a higher cost on other modes of travel. If they are poorer, they will be foregoing other—in many cases essential—consumption goods. It has been known to happen (for more insight, read Banerjee and Duflo’s, Economic Lives of Poor-2006). 

Toyota and Honda have both been giving promotional offers to customers which may see some activity improve. Analysts have been arguing that the passenger vehicle segment will recover soon and they bottomed out in Dec-19. That may be true, in part, if cost of borrowing goes down, and the latest Corona scare does not become a massive outbreak that factories stop manufacturing all together. For business-as usual, new models, good promotional offers, lower interest rate, will all help.