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Sale of used cars in top gear in India amid coronavirus pandemic

Living in Bengaluru, IT engineer Prajith KP and his wife Shubha were doing okay with one car. Shubha was on a year’s break from work. In Bengaluru’s notorious traffic, shared cabs and the metro offered them good alternatives, too.The lockdown changed things. “My wife is now joining work after a year. I wanted her to travel in her own car. So, we decided to buy a new one,” says Prajith. Multiple factors led to a slight change in their plans and, in May, the couple brought home a pre-owned car instead of a brand-new one.The five-year-old Renault Kwid automatic, which has done around 10,000 km, cost them Rs 3.95 lakh.For Prajith, a great deal and a smooth transaction facilitated by a large company, Mahindra First Choice, tilted the balance in favour of the pre-owned car. Importantly, amid the lockdown and growing pandemic fears, everything happened from the comfort of their home — right from viewing the car and test-driving it to making a cashless payment and having it delivered at their doorstep. “It was a great deal. There was a difference of Rs 2 lakh (between buying a new car and an old one). It matters in these times. The car is in great condition, as good as new,” says Prajith. 77436990India’s Motown is in reverse gear.Passenger vehicle sales tumbled for the ninth straight quarter, slumping 78% to 1.53 lakh units in April-June 2020 as against 7.12 lakh units during the same period in 2019-20, according to the Society of Indian Automobile Manufacturers (SIAM).Because of Covid-triggered lockdown and economic distress, virtually every segment of the automobile industry is facing a sharp slide in sales. For the April-June quarter, sales of commercial vehicle dipped by 94%, three-wheelers by 92% and two-wheelers by 72%. 77437007Pandemic is only the latest blow; the headwinds have been gathering for the industry for a while. In 2019-20, passenger vehicles sales dipped by 18%, from 3.2 million in 2018-19 to touch 2.78 million. The future looks grim — in 2020-21, CRISIL forecasts that passenger vehicle sales will dip by 25% to touch 2.1 million.In this plethora of bad news, pre-owned or used car market is emerging as a silver lining. “Last year, as new car sales dipped by 18%, used car market grew by 10%,” says Shashank Srivastava, executive director (sales & marketing), Maruti Suzuki Ltd.The divergent fortunes of used and new cars somewhat continue in 2020-21 where new passenger vehicle sales are expected to dip by 25% even as used car sales couldfall by only 14% from 4.2 million in 2019-20 to 3.6 million in 2020-21. 77437018“In the long term, the used car market will grow faster than the new car market,” says Kaushik Madhavan, vice-president (mobility), Frost & Sullivan. Not surprisingly,virtually every OEM (original equipment manufacturer) is becoming active in the segment and building or expanding its used car business. Maruti True Value, which was focused on buying only Suzuki badged cars, began buying multi-brand cars six months back.Mixed SignalsOn the ground though, during the pandemic, used car sales are sending out mixed signals. “We see demand (enquiries) going up but actual sales aren’t. Car purchase decisions aren’t happening,” says Srivastava of Maruti, referring to used car sales.Agrees Ashutosh Pandey, CEO, Mahindra First Choice: “There is demand but actual transactions are fewer.” How does he know there is demand? He says enquirieshave doubled — 20% more than January levels. “Even the velocity of transactions has sharply improved. Earlier, we would close a deal in 30-45 days. Now we are doingit in 20 days,” he says. 77437028Rajasthan-based Nikunj Sanghi, former president of the Federation of Automobile Dealers Associations (FADA) and MD of JS FourWheels Motor Pvt Ltd, too has noticedsomething similar. Based on data analytics and customer feedback, he proffers a few reasons for enquiries not converting into sales. His potential customers are looking to buy under four-year-old cars, mostly entry-level hatchbacks priced below `3 lakh. For multiple reasons, there are supply-side constraints in the used car market.People on an average hold on to their cars for six-seven years before upgrading.“But now those who want to upgrade will hold on to their cars for a little longer. Exchange buying will be slower,” says Srivastava of Maruti Suzuki.Demand from first-time car buyers is rising as many people think private transportation will be safer in these pandemic times. “Demand is there. Stock is notthere. This is leading to a firming up of prices,” says Pandey.Skewed demand in specific segments, too, is creating challenges. For example, in the used car market, models like Swift Dzire, Wagon R, Honda City and Innova have been hot favourites but the supply is limited.There is another reason for constraint in supply. “Due to the moratorium announced by banks, repossession of vehicles by lenders and their auctioning won’t happen till August 31,” says Pandey. On an average, Mahindra First Choice auctions 10,000-plus repossessed vehicles every month. In June, it did just 7,500. For all these reasons, industry experts, from Sanghi to Pandey, believe the prices have already begun tofirm up in the used car market.Financing issues, too, are emerging as institutional lenders increasingly turn cautious. “Used car customers face financing issues,” says Sanghi. 77437047For new cars, financiers lend relatively more readily up to 85% of the value of the car, offer longer tenure (up to seven years) and at interest rates of 9.5-12.5%. Financiers see a higher risk in used car business. “All new cars are the same. But every used car is different,” says John Paul Kuttukaran, owner, Popular Vehicles & Services. To contain risk, lenders offer only up to 60% of the value of a used car which means a higher down payment for buyers, shorter tenures (at best four years) and 2-4% higher interest rates than for new cars. “These pose serious challenges for a used car buyer,” says Hetal Gandhi, director (research), CRISIL Ltd. Prajith felt it firsthand, a reason he preferred to take a personal loan rather than avail of car financing.“Personal loan offered me better terms,” he says.The preference for used cars is part of a larger trend of consumers downtrading brands, products and ticket size during economic distress. This is visible across many key categories, including mobile phones and TVs.In new cars, Maruti’s Nexa dealerships (at the higher end) are said to be under bigger pressure than the Arena dealerships (at the lower end). “Footfalls in Arena are twice those of Nexa,” says a dealer. 77437070“When a customer comes to our showroom, the first question is, ‘Which is your cheapest car?’ Our Glanza is in demand. Customers are also opting for cheaper variants,” says Naveen Soni, senior VP (sales & service), Toyota Kirloskar Motor India.Even in bikes, both the customer’s and company’s thrust is on mass commuter bikes like Splendor and HF Deluxe which see the highest sales.Similar sentiments are playing out in the used car market. “The budgets are down by 10-15%,” says Pandey.Interestingly, customers aren’t shifting vehicle segments. “They are simply going for an older car that might come cheaper,” says Pandey.It is true even in pre-owned luxury market. “The dynamics of the luxury car market have changed due to the current situation,” says Jatin Ahuja, founder and CEO, Big Boy Toyz. The consumer preference has seen a shift.Before Covid-19, supercars like Rolls-Royce’s super SUVs, Porsche Panamera Turbo and Maybach were in demand, while now cars like BMW X5 and Mercedes-Benz’s GLS, the new EClass and S-Class are preferred. “The car preference has shifted from super luxury to luxury utility SUVs. We are witnessing an increased focus and demand growth for utility vehicles,” says Ahuja. Even in this segment, car owners are holding on to their vehicles for a longer period. “Yes, procurement of cars has become tougher,” he says.Structural ShiftThis could just be the inflection that could reshape India’s used car business and align it with global trends in the future.In mature markets like the US, pre-owned cars are a huge, well-oiled business dominated by large, organised players. “In the US, it is already 2.2 times the new car business,” says Madhavan.In India, the pre-owned car business has been dominated by small car dealers, and most transactions are customer-to customer.Till around 2017-18, the used car business was about 1.2 times the new car market. “We expect it to become twice the size of the new car market by 2025 or even earlier, thanks to the pandemic,” says Madhavan. One of the biggest challenges it faces is financing. Players like Pandey hope that institutional lenders will smoothen the path for buyers.Organised players will have a big role in fuelling this growth. About six months back, Maruti Suzuki’s used car dealer True Value went beyond Suzuki to buy multibrand cars. “We need to expand our sourcing. Earlier, True Value was to support new car sales but now it’s a good standalone business for our dealers,” says Srivastava.Pandey, who claims Mahindra First Choice is the biggest player in the used car market, too, is pressing on the accelerator. “On June 30, we added 34 new stores. In the next 100 days, we will add 100 more,” says Pandey.By the end of the year, they expect their outlets to grow from 1,000 to 1,200.Car dealers across brands, feeling the pressure due to disruption in the industry like digital sales and the pandemic, are focusing on expanding the used car business. “Due to variability of prices, used car business offers better profitability and margin for dealers,” says Kaushik.Expect car buyers, in a bleak job market and with tight wallets, to play along as private mobility and car ownership come back in fashion.