MUMBAI: It’s not car sales alone that are slowing in India: on average, two vehicle dealerships have shut every week over the past two years.
With the Indian automotive retail sector incurring losses of at least Rs 2,000 crore in this period, over 205 dealers have wound up operations and shut 300 outlets as their business turned unviable and an estimated 3,000 people have lost their jobs.
Experts reckon the losses are much higher and are apprehensive about loans given to dealerships turning into non-performing assets for banks. Dealers in India are surviving on margins ranging between 2.5% and 5%, compared with 8-12% globally.
Here’s what’s hurting the dealers: doubling of rentals and employee costs in the major cities, falling margins from insurance and finance companies and a liquidity crunch after the introduction of the goods and services tax. Also in the mix: an expanding network of dealerships even as car and two-wheeler makers failed to meet lofty sales targets.
Ashish Kale, president of the Federation of Automobile Dealers Associations, cited financial crunch or mismanagement and a proliferation of dealerships in the cities in a slowing market for the unviability of retailing.
“The pace at which the dealerships are closing has never been seen before. While goods and services tax had an impact on the working capital, the higher inventory cost, coupled with tight liquidity has added to our woes,” said Kale.
Growth Not as Predicted
Before GST came into force in July 2017, dealers had a couple of months as breathing space to pay sales tax and VAT on cars. Under the GST regime, they have to pay tax upfront and this has affected their working capital.
Passenger vehicle sales are estimated to have declined by over 10% in April after growing at 8% in FY18 and 2.5% in FY19.
One in every two dealers in a major metro and in the urban or top 20-30 markets has been suffering losses in recent years. While dealers in the hinterland are better off, falling sales growth is prolonging their return on investment period.
In 2017-2018, Nissan Motor Co and Hyundai Motor India had the most number of dealers shutting shop, at 38 and 23, respectively. Maruti Suzuki, Tata Motors, Mahindra & Mahindra and Honda Cars India had about 9-12 dealers each winding up operations.
Maharashtra and Bihar had 56 and 26 shutdowns, respectively, while about 19 dealers stopped operations in Kerala and Rajasthan.
Experts said the biggest reason for dealerships struggling is the failure of the market to grow as predicted by vehicle makers. Against expectations of double-digit growth in cars and two-wheelers, passenger vehicle sales increased at a compounded annual growth rate of 4% between FY13 and FY18, while it was only 5% for twowheelers.
According to Amit Kaushik, MD at consultancy firm UrbanScience, the inability of automobile manufacturers to assess market potential and the appointment of excessive dealerships are the two major factors that have adversely affected the retailing side.
“Invariably, automotive companies have failed to read the demand environment and in a bid to attain unrealistic sales targets, companies have fallen into the trap of adding more dealers, which, instead of adding sales, cannibalised existing dealers,” said Kaushik.
Vehicle makers said the churn in automotive retailing is not uncommon. Many who enter the segment for the glamour quotient give up when they realise how tough it is to wade through the industry’s cyclicality.
The dealers, however, question the viability of introducing more dealers, especially in the major metros, when sales volumes are declining.
While the market has grown by 5-7%, vehicle makers have expanded the dealer network by 15-20%, adding to already-squeezed business potential of the existing dealers.
FADA president Kale said it’s time to implement the principle of capping the number of dealers in India, in line with the practice followed by international car makers, which add dealerships based on the prospective car market globally. Otherwise, he said, the number of dealers folding in India will only rise in the years ahead.
Vikas Jain, national sales head at Hyundai, agreed that dealerships are under pressure due to the slowing market and lower margins from finance and insurance but asserts that the business should evolve in line with the changing market and once the cycle revives, they will bounce back.
Jain said the automotive retailing itself is changing and so should the dealer partners. He said selling cars is no longer only an art and it’s time for dealers to consider the emerging science of data analytics and connectivity to get the best out of the market.
“Auto retail should not be viewed as just car sales or service. A customer should be able to get a bouquet of services like used cars and accessories along with sales and services, which eventually adds to the business of dealers,” said Jain.
According to industry experts, about 15,000 authorised dealer principals manage over 25,000 sales points across the country, of which only 30% are profitable. Even among the 30%, the earnings range from 1% to 2%.