Indian luxury car market shifts to top gear

High-end car sales in India hit a new record in 2023 on the back of the increasing number of millionaires and their growing appetite for luxury and exclusivity.

In 2024, the Indian luxury car market is set to cross the 50,000-unit sales mark for the first time, with key players gunning for a strong double-digit growth, even as the mainstream market is set to consolidate the gains from healthy gains since 2021. At over 20 percent, the luxury car market grew at more than double the pace of the mainstream car market in 2023, with volumes estimated to have hit a new peak of 46,000 to 47,000 units.

Mercedes-Benz India, the country's oldest and largest luxury carmaker, recorded its highest-ever annual sales in 2023, with over 17,400 units sold and registering a growth of 10 percent. Reflecting on the year gone by, Santosh Iyer, MD of Mercedes-Benz India, says the festive season of 2023 was strong and that momentum continued well into December, when the company witnessed healthy results. “And that gives us a very strong momentum for 2024. So we are continuing to aim for a double-digit growth even for 2024," he added. Mercedes-Benz's Munich-based rival, BMW India sales saw an 18 percent jump to 14,172 cars, whereas Audi India sales grew almost 90 percent on a low base to about 9,000 units, inching towards its previous peak.

Growing rank of millionaires

The booming market reflects an increasing appetite of Indian consumers for luxury and exclusivity. The growth in the number of high net worth individuals in the country and robust spending boded well for the segment.

According to reports, there are about 3.5 lakh millionaires in India and the number is growing at a rapid pace. A reflection of the same can be seen in the profile of buyers in the market — from big corporates to businessmen, luxury cars are being bought by working professionals and startups. Much like the average age of the Indian population, the buyers of luxury cars in India are also getting younger.

Around 40 percent of Mercedes-Benz India customers are first-time luxury car buyers, about 50 percent of buyers are repeat Merc buyers, and 10 percent come from rival brands. For the segment leader, the buyers for the top-of-the-line vehicles — the S-Class and GLS — which are priced above Rs 1.4 crore to 1.5 crore have come down to 38 years from 45 years about half a decade ago.

According to BMW Group India president Vikram Pawah, as the Indian economy grows, there is a rising number of top corporate professionals, including entrepreneurs from the start-up ecosystem, who are joining the workforce and they are offering heft to the segment, which witnessed a new peak in 2023. “We added over 50 new corporate clients, ranging from real estate, consulting, IT and healthcare, among other sectors, in CY23,” he added.

For the BMW Group, its 3 Series Gran Limousine, 2 Series Gran Coupe, 6 Series, iX and X1 were the top-selling BMW models through the corporate channel, which today accounts for 25 percent of its total sales. If the vehicle makers meet their double-digit growth target in 2024, the market will almost double in volumes three years from the base of 27,000 units at the end of 2021.

Maturing Indian car buyers

What is more, it is not just the growth in volumes, but the average selling price is also moving up. “I think that's a very different maturity of the luxury car market consumption that we see today,” Iyer said. There has been a "structural shift”, says the head of Mercedes-Benz India, for whom the average selling price of luxury cars has gone up from Rs 57 lakh to Rs 88 lakh over the last four years.

"That is a qualitative change for me and Mercedes-Benz. For us, over 25 percent of our total sales comes from the top-end vehicle segment, which is over Rs 1.5 crore. We are focused on core and top-end luxury,” Iyer added.

Audi India head Balbir Singh Dhillon tells us, “The pandemic was a time when people’s mindset changed. They want to indulge in luxury, they want to spend. I see a little bit of a change from saving to spending mindset. ”He noted that with good highways, people can move from one city to another in luxury cars, which is an experience that many want to acquire. For instance, the average ticket size of loans has gone up from Rs 40 lakh to Rs 60 lakh.

Iyer claims that consumers are taking more credit or more loans and are still ready to upgrade to higher-end cars. “There is a strong desirability, which is pushing the brand forward.” To be sure, the loan book size of Mercedes-Benz’s financial arm has swelled to USD 700 million.

In the top-end vehicle segment priced above Rs 1 crore-1.5 crore, BMW India registered a growth of 88 percent, whereas Audi India’s sales grew 40 percent in the segment. This segment includes models like the S-Class, GLS, Maybach and AMG from Mercedes-Benz’s stable, while BMW India sells the 7 Series, i7, X7 and XM, and Audi India sells the A8, Q8, RS5 and e-Tron.

“One in five cars that we sell belong to the high-end luxury segment within our portfolio, and the migration of the existing premium customer upwards is one of the key drivers of this growth,” Pawah told Autocar Professional.

Expansion of portfolio and network in mini metros

The new model launches have always excited the market and luxury carmakers lead from the front. Over 24-30 new models will be launched during 2024. Along with new models, luxury carmakers are adding new markets, and given the rising volumes, even the factories may see expansion.

Mercedes-Benz is on the verge of hitting full capacity of 20,000 units within a year or two and it may look at expansion. “We see a very strong business in India. We are doing the Rs 200 crore additional investment, taking the total investment up to Rs 3,000 crore now in our 30th year of operation. As we grow, we will need to invest, there is no doubt about it and we will continue to invest,” said Iyer.

The cumulative investment from Mercedes was about Rs 2,000 crore four to five years back, and it has gone up to Rs 3,000 crore in a short span of time. This year, Mercedes plans to add 20 new workshops in 10 new cities, including Jammu, Kanpur, Udaipur, Amritsar, Patna, Valsad, Agra, Kannur and Kottayam. The carmaker aims to have a service facility for every customer, with a drive time of less than 2 hours.

BMW Group India, too, apart from launching new models, is adding more touch points. The BMW and Mini touch points will move from the present 63 outlets in 35 cities to 80 outlets in 43 cities, by end-CY26, informed Pawah. Audi India, which restructured its product line-up and powertrains ahead of 2020, is back to a 15-model portfolio with the reintroduction of the Q3 SUV. It has helped the brand address a wider market and the company is inching back to its previous peak.

Challenges and disruptions

Given the intricacies of managing kits through global supply with significant parts being imported, luxury carmakers have often had to ride many disruptions. If it was the Covid in 2020-’21, chip supplies and the Russia-Ukraine war in 2022-’23, now it is the Red Sea crisis, which has impacted the supply chain.

In 2022, with supply constraints arising from the shortage of semiconductors, the automobile industry faced significant challenges, affecting production and delivery timelines. Though the supply chain constraints eased in 2023, the industry is not completely out of the woods. Especially the luxury car market, as high-end vehicles come with advanced technologies and features, which require more chips.

Volvo Car India’s MD Jyoti Malhotra believes sales could have been much better in 2023 if it wasn’t for the chip shortage. “Luxury carmakers faced semiconductor supply issues in the first half of 2023. It was only in the second half of the year, supply started to become better. But there are still constraints on that,” he said.

Mercedes-Benz India’s Iyer says that while the semiconductor crisis is more or less resolved, he is closely watching the conflict in the Red Sea. "We are in the middle of the VUCA [volatility, uncertainty, complexity, and ambiguity] world — supply chain disruption, chip supplies issues, geopolitical challenges — so things will never be stable. While the semiconductor challenges are behind us, there is a Red Sea challenge, which is so far not disturbing us. But as an organisation, we have been able to ride through this dynamic environment with flexible manufacturing," added Iyer.

Because of disruption in the Red Sea, Audi India is likely to witness an impact of 10-20 percent of its allocated production getting delayed.

Electric Vehicles — the new frontier

Unlike the mainstream market, with the EV segment, the luxury carmakers in India have a much higher penetration, due to over a dozen models for prospective buyers to choose from, higher range and an expanding number of fast charging stations. The penetration level of EVs ranges from 4-6 percent amongst the German carmakers and it is about 20 percent for Volvo Cars, while BMW Group is the segment leader with sales of over 1,000 EVs in 2023.

Iyer says the shift to EVs is imminent and his company is not chasing numbers. Mercedes-Benz India expects 25 percent of its total sales to come from EVs in the coming five years. "About 40-50 percent of customers walk into the showroom seeking an EV, but the majority are still looking for internal combustion engine vehicles, it is only after educating them and breaking some of their myths – they shift in favour of EVs. Shifting to EV is a marathon, it can't happen overnight and we will ride the wave," said Iyer.

On the potential challenge from Tesla, Iyer says they are "most welcome" and their imminent entry will further invigorate the EV sector and build awareness, which is the need of the hour.

FTA and exports

With the Indian luxury car maket likely to touch 1 lakh cars annually later in the decade, it is approaching levels that are triggering many companies to explore the possibility of exporting premium vehicles from India. Interestingly, Mercedes-Benz in 2023 exported a batch of SUVs back to Europe to cater to the global needs — underlining the quality of cars produced in India. And this is the second instance of the German carmaker doing so, giving enough cues that if the Indian market scales up, the plant here can take the global responsibility.

Iyer says these exports are done on a project-to-project basis, however, there are no concrete plans for exporting vehicles from the country. "What we have done was to cater to the demand and try to support global demand, where our capacities were not enough. However, one of the prerequisites is also free trade agreements. We always believe in global supply chain and global network, but at this stage, there is no active plan, I would say,” explained Iyer. 

Since the automotive business works on very tight margins, the logistics and other costs play a very important role in firming up the production base for exports, say experts.

Way ahead

On the one hand, the market reported a sustained double-digit growth year on year, on the other, there’s been a fundamental shift upward in the average selling prices, so these two combinations have created a big multiplier effect for vehicle makers. The penetration of the Indian luxury car market, however, continues to remain below 1.5 percent, even as some of the key developing countries in Southeast Asia and Latin America have a luxury car penetration of more than 5-7 percent.

High import duty continues to pose headwinds for penetration even as the market continues to grow. Even as India accelerates organically on the back of rising millionaires in the country, global automakers need to look at the best cost base beyond China post-Covid. With the majority of developed markets committing to a zero-emission future, the likes of Mercedes Benz, BMW, Audi, Volvo and JLR are moving to an all-electric future by 2030-’40. However, the path is too long to traverse and along the way, these marque players would need a manufacturing base to cater to the smaller internal combustion engine market – and in this, India becomes an obvious choice. 

The likes of Tesla, VinFast and BYD are already eyeing local manufacturing facilities here to export, the premium car makers too may eventually opt to capitalise on the low cost base – that also presents a unique opportunity for India to serve the global needs.

This feature was first published in Autocar Professional's January 15, 2024 issue.