Months before it goes for a reboot of its India operations with the launch of new generation cars, German auto giant Volkswagen hopes that the government will re-look the definition of small cars and pave the way for a level playing field for all automakers.
Till then, it will take a road less traveled, when it comes to the Indian car industry.
Introduced more than a decade ago as a measure to reduce traffic jams - since bigger cars occupy more space - the Sub 4-metre regulation has been the biggest influencer of product strategy for car makers.
But Volkswagen is readying a bouquet of models for India, two of which, Taigun and Tiguan, will be large SUVs compared to the small hatchbacks.
Speaking to Moneycontrol, Gurpratap Boparai, managing director, Skoda Auto Volkswagen India, said, “Hatchback should not be confined to ‘being small’. Unfortunately, the difference in taxation just forces everyone to be small. In Europe hatchbacks continue to be a very popular body style. In fact they are more space efficient than sedans are.”
In India cars that are smaller than 4 metres in length, having petrol engines less than 1.2 litre and diesel engines less than 1.5 litre, are taxed at 29 percent and 31 percent, respectively.
All other cars are taxed between 45 percent to 50 percent. These are a mix of GST and cess. Electric vehicles are taxed the least at five percent made of only GST.
This rule has made India the largest small car producer in the world. According to the Society of Indian Automobile Manufacturers (SIAM), the apex national body representing the Indian automobile industry, 73 percent of the 2.33 million passenger vehicles (PV) sold in India during April – February period were less than 4 metres in length this year. When compared to data of six years ago, the share of sub 4-meter PVs stood at 71 percent.
Some key volume generating models that benefited from the small car rule were M800, Alto, Alto K10, Omni, Ritz, Zen Estilo for Maruti Suzuki and Nano for Tata Motors.
However, all of these models have been discontinued partly because they could not meet the crash test norms mandated by the regulators. Car market leader Maruti Suzuki controls 54 percent of all PVs measuring less than 4 metres, according to SIAM data.
“We will not compromise on quality and on safety just to benefit from the lower duty structure. It is difficult to meet crash test norms and such a car will not deserve to wear our badge”, said a senior executive of a multinational car company.
While many hatchbacks were removed from the showrooms, they were replaced by mini and compact SUVs but at a higher price point. Hyundai Venue, Kia Seltos, Maruti Suzuki Brezza, Tata Nexon, Ford EcoSport, Mahindra XUV300 and Toyota Urban Cruiser are some of the SUVs, which measure just less than four metres.
Over the years, Honda, Toyota, Nissan, Fiat, Mahindra and Skoda got out of the budget hatchback segment following poor demand. New comers like MG Motor, Citroen and Kia Motors do not have any immediate plans to launch hatchbacks in India.
While sales of individual models are not disclosed, the industry trend is clearly in favour of SUVs, which at present have a share of 39 percent of the overall passenger car market. In this, the smaller SUVs outsell their bigger cousins by a mile. While about 26,000 big SUVs are sold every month, the compact ones clock around 54,000-55,000 units.
Volkswagen sells the Polo hatchback in India but its future is uncertain. The European market has received the new Polo, which is based on Volkswagen’s latest platform called MQB A0. This platform is longer than four meters and therefore won’t qualify for the special duty structure in India.
“If this sub 4-meter rule goes away, we will definitely look at hatchbacks again”, Boparai added.
At present, the company sells Polo, Vento and Tiguan Allspace in India. The combined market share of VW and Skoda, as of February-end, stood at 1.22 percent (VW's 0.78 percent) and it is targeting a three percent share in the near future.