“We want to do so, but import duties are the highest in the world by far of any large country!”
In just one tweet Elon Musk summed up why Tesla has been dragging its feet on India. And it’s not just the world’s most valuable carmaker. Musk, the 50-year-old founder and CEO of Tesla, echoed what a dozen other luxury carmakers such as Mercedes-Benz, BMW, Audi, Jaguar Land Rover (JLR) and Volvo have grumbled about for years.
India is the world’s fourth-largest auto market but isn’t even among the top 25 for luxury cars. And this despite the country boasting the third-largest number of billionaires in the world, according to Hurun’s Global Rich List 2021. In fact, only 21,400 luxury cars were sold in India last year, the lowest in over a decade and a 37% decline from 2019. While one can blame the slump on the pandemic, not so the absolute number. Luxury cars account for less than 1% of the overall auto market in India, in contrast to 13% in China and 10% in the U.S. Although growing, India is an extremely small market for global luxury players.
This dichotomy has its roots in the country’s tax regime, as Musk noted. Currently, India levies 100% tax on imported cars priced above $40,000 (about 30 lakh) and 60% on cars priced less than that. Moreover, luxury vehicles attract a goods and services tax (GST) of up to 50%, and another 15% in registration tax. This drives up prices, which drives down demand, making it unviable to manufacture locally and forcing automakers to import. It’s the classic chicken-and-egg conundrum: which comes first, higher demand or lower prices?
This is a frustrating situation for the likes of Lamborghini, which wants to bet bigger on an Indian growth story that stars a growing young and affluent populace with a taste for luxury and the means to afford it. “While we are seeing a consistent growth in the number of billionaires, the super-luxury segment is still in its infancy and does not reflect the true potential in the market,” says Sharad Agarwal, head, Lamborghini India.
Agarwal lists a couple of new trends that have emerged in the past few years. Earlier, he says, mostly third- or fourth-generation businessmen could afford luxury cars, but now more and more first-generation entrepreneurs can also do so. Moreover, there is demand in tier 2 cities as well. “We strongly believe that India represents an incredible opportunity, one in which we are performing very strongly,” says Agarwal.
But rather than wait for succour from the government, luxury car companies are finding workarounds to capitalise on this opportunity. One solution is to target first-time buyers with their lowest-priced cars. This is why Tesla chose to enter India with the Model 3, and Audi launched the Audi Q2 last year. “Our focus is to bring first-time buyers into luxury… by getting entry-level cars like Audi Q2 and Audi Q3, or A4 in times to come, where we try to get more customers for the first time,” says Balbir Singh Dhillon, head, Audi India.
While top-end luxury cars easily cost north of ₹1 crore, the entry-level small sedans or compact SUVs typically cost around ₹40 lakhs. For example, the Mercedes-Benz S-Class costs about ₹1.4 crore, whereas the entry-level GLE C is priced at around ₹40 lakh. This is comparable with the price of a Toyota Fortuner or a Ford Endeavour, and the pure aspirational value could tip the scales in favour of the luxury models, especially for the first-time buyer. In fact, about 20% of Mercedes-Benz’s India sales are of entry-level cars. This has helped drive enough volume to justify locally assembling these models and make Mercedes-Benz the top player in India’s luxury segment.
Another factor that could boost sales, although in the short term, is “revenge buying” after the Covid19-induced lockdown, a trend that auto experts say is especially relevant in the luxury segment. Moreover, high networth individuals (HNIs) were relatively unaffected by the pandemic. “With respect to demand, the luxury car market is likely to see a bounce back, while the overall car market may take a longer time,” says Rajeev Singh, partner and automotive leader, Deloitte India.
In fact, Lamborghini expects 2021 to be a record year in India. “After the first wave, which began in March 2020, we witnessed difficult times for the super-luxury segment, driven by challenges both on the demand and supply sides. In 2021, post the second wave, we are seeing a sharper V-shaped recovery and the demand rebounding back much faster,” says Agarwal.
The supply-side constraints he is referring to include currency deservices tax (GST) of up to 50%, and another 15% in registration tax. This drives up prices, which drives down demand, making it unviable to manufacture locally and forcing automakers to import. It’s the classic chicken-and-egg conundrum: which comes first, higher demand or lower prices? This is a frustrating situation for the likes of Lamborghini, which wants to bet bigger on an Indian growth story that stars a growing young and affluent populace with a taste for luxury and the means valuation and the global chip shortage that has hit many sectors, including carmakers. “In addition to that, the shipping industry is going through a difficult time and prices are going up. So, I think a combination of these factors is definitely putting pressure on us,” says Audi’s Dhillon. “So far we’re working fine because our planning cycles are 9-12 months. Whatever shortage is happening will have an impact on us going forward.”
That impact is likely to be even more pertinent as automakers bring their electric vehicles (EVs) into the country. EVs, experts say, are going to be an important factor in driving luxury car sales going forward, especially after Tesla’s long-awaited entry. “Companies like Tesla have been on the forefront of the EV market across leading countries. In India, electric mobility is a hot topic and has significant potential in the future, which makes India a lucrative market,” says Deloitte India’s Singh.
While Tesla is lobbying with the government to lower import duties, the likes of Mercedes-Benz, Volvo, Audi, and BMW have already unveiled their EV cars. Lamborghini plans to launch an EV in the second half of the decade, says Agarwal. “Electrification is one of the mega trends across segments and to move towards a sustainable future, the change has to be across segments,” he adds.
Moreover, EVs only add to the aspirational value for customers wary of their carbon footprint. However, luxury EVs don’t qualify for government subsidies in India, which are only for cars priced less than ₹15 lakh. The current crop of luxury EVs cost about ₹1 crore on average, an added hurdle to existing concerns such as range anxiety. Besides, EVs will be a small part of an already minuscule luxury segment, meaning it will be a while before they have any major impact on volumes. As Audi’s Dhillon puts it, “electrification is going to be a marathon. Not a sprint.
That means, for now, besides pushing their entry-level models, luxury carmakers have one other tactic to boost sales — pre-owned cars. India’s used car market is witnessing a boom, with sales even outpacing those of new cars. The demand for used luxury cars has been growing at about 35-40%, according to market research firm Mordor Intelligence. This is because owners usually sell off their cars after a year or two to upgrade, while high depreciation rates make pre-owned cars disproportionately cheaper. This is the most affordable way, especially for first-time buyers, to enter the luxury market. And “Once they’re into Audi’s fold, we try to keep them with us and build more loyalty,” adds Dhillon.
There are other levers—financing schemes, exchange offers, subscription options and service packages— to further drive sales, says Deloitte’s Singh. But the game-changer, he says, will be local manufacturing, or assembly. “Due to high import duties, localisation in luxury car manufacturing is critical for the players to grow sales in the country,” he says, adding India’s low-cost production is an added benefit.
For now, companies are taking solace in the luxury segment’s post-Covid recovery outpacing the rest of the industry. The demand is buoyed by resurging market sentiments and an overall positive economy, says Martin Schwenk, MD and CEO, Mercedes-Benz India. While the company’s sales of 4,857 cars in the first half of 2021 is less than H1 2019 sales of 5,500, they are well above the 2,948 units sold in H1 2020.
“There is a solid order bank on the back of new launches and it is satisfying to witness an all-round rise in demand for our products across the portfolio,” says Schwenk. For example, all the 50-plus units of the Mercedes-Maybach GLS 600—priced at ₹2.43 crore—allotted for India were booked even before its launch in June.
That bodes well for not just luxury brands, but also for super-luxury ones such as Lamborghini, Rolls-Royce, Bentley, which have recently launched the Urus, Cullian and Bentayga, respectively, in India. Maserati is gearing up to launch its first super sports car, the MC20, early next year.
Their target is clear—millennials. “Our customers are constantly looking at rewarding themselves when they’re able to manage their businesses better. Since people are not travelling, they’re compensating those expenses as well,” says Audi’s Dhillon. “And of course they’re of the YOLO (you only live once) culture. And that’s helping us sell more cars.”
In that case, Musk might have a case of FOMO (fear of missing out) the longer Tesla delays entering India.