BMW-Mercedes Hatchbacks Head for India After China Flop

Hatchbacks from BMW, Mercedes-Benz and Audi grew so popular in Europe that the luxury carmakers bet Chinese consumers would feel the same way. They didn’t. Next stop: India.

The German companies say they plan to sell small cars in India from this year, with Daimler AG (DAI)’s Mercedes-Benz introducing the entry-level A-Class in mid-2013, followed by Bayerische Motoren Werke AG (BMW) with its 1-Series. Volkswagen AG (VOW)’s 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 small 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 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 A.T. Kearney, a consultancy. “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 nascent 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, a research firm. “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, another research company, 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 at 2.77 million.

China Plus

Finding the key to tap emerging markets outside China is increasingly important for BMW, Mercedes-Benz and Audi as demand in Europe heads for a sixth straight annual decline. Full-year sales fell 7.8 percent to 12.5 million cars in 2012, the lowest in 19 years. Mercedes-Benz sales dropped 5.6 percent in December in Europe; Audi’s deliveries fell 18 percent.

“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 three e-mails seeking comment.

Daimler’s shares fell as much as 1.9 percent to 42.37 euros at 2:32 p.m. in Frankfurt. BMW’s stock declined 2.1 percent to 72.76 euros, while Audi-parent VW gained 0.3 percent to 176.95 euros.

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 U.K were hatchbacks.

“The Chinese are crazy about bigger cars,” said Abdul Majeed, head of the automotive sector for India at PricewaterhouseCoopers in Chennai. “Manufacturers are trying to increase their customer base with such models and I don’t see why these models won’t succeed.”

Love Affair

They may 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.

The scene at 7 p.m. in the Mumbai suburb of Juhu helps explain why. Eight lanes of traffic are squeezed into the five lanes painted on the road; motorbikes, auto rickshaws and trucks all jostle for any opening in the gridlock. Like their Parisian and Roman counterparts, city-dwellers in India’s commercial capital find their slim and nippy hatchbacks more suited to street conditions.

Parking, too, is a growing issue in India’s sprawling cities. Reliance Industries Ltd. (RIL)’s billionaire chairman, Mukesh Ambani, solved it with a 168-lot garage in his 27-story residence. For most, that’s not an option. Parking lots can cost as much as 10 million rupees in Mumbai, the Times of India reported in November.

Parking Disputes

Angst over spaces can boil over: two brothers were murdered last year in a brawl over parking, Mumbai police said. “There is no place to park a car in apartment buildings in Mumbai today so disputes do occur,” said Ambadas Pote, a deputy police commissioner in India’s financial center.

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 website. Refiners were this month allowed to set diesel prices without government approval.

Maruti Suzuki India Ltd. (MSIL), which sells most of the nation’s cars, recognized the Indian consumers’ fixation with fuel economy in a commercial aired last year. In it, a NASA scientist explains to a group of visitors the complexities of a rocket that can reach Jupiter. Turning to his audience for questions, an Indian man asks for the rocket’s gas mileage.

BMW’s diesel-powered 1-Series 120d hatchback uses 4.8 liters of fuel per 100 kilometers, while the 3-Series counterpart consumes 5.8 liters, according to the company’s website. For cost-conscious consumers in the newly emerging middle classes, such savings may matter.

“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.”

To contact the reporter on this story: Siddharth Philip in Mumbai at sphilip3@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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