As the automobile industry in India grows, the dealership business is set to evolve significantly in the coming years. In an exclusive interview, Ashish H Kale, the newly appointed president of Federation of Automobile Dealers Associations (FADA), tells Sumantra B Barooah about how the road ahead will look like.
You have taken up this position at a time when there are disruptions happening aplenty in the automotive industry. At the same time, the automobile dealership business is also witnessing new challenges. How do you see the dynamics changing in the automotive dealership?
One of the key challenges is the shift in the entire business model. If you look at the past 3-4 years, our dealership costs have gone up between 100-250 percent. The main cost that has increased is manpower – by 60-120 percent depending on the region.
Two things have happened. One is that new job avenues, like e-commerce, have opened up for people and therefore it is difficult for us to get talent within our industry. It is very difficult to get manpower at a reasonable cost which we were able to get three years ago. Secondly, overall wages have risen as prescribed by the government.
The other cost that has affected us is interest (on inventory cost). Basically, if you calculate the market share on the basis of the billing, the stock is shifting from the OEM to the dealership. It is not sales. It is just shifting of the stock from one portion of the ecosystem to another portion. It is not going to the customer. The world over, market share is calculated at retail because that is actual sales. I think if that happens, then the overall stocking level at dealerships will also go down.
Costs are going up also because of the rapid changes in technology. We have to continuously upgrade our infrastructure, equipment, machinery and also the talent of our people through training. So these three key factors are what have doubled the cost of dealership compared to what it used to be 3-5 years ago and therefore this argument of the overall dealership viability model which we need to work on.
Is the era of big-size dealerships over?
I don’t think so. In fact, if you look at the future, you will see dealerships either consolidating or single owner-driven dealerships. That is the only model. The middle tier of dealerships will be the one which will face challenges. So either you do it at a minimal cost or you build up such a size where the dealership is professionally managed and is able to absorb all the costs.
I think, going forward, you will see higher consolidation of dealerships, larger dealerships, buyouts of dealerships, or you would have dealers at the rural level where there are entrepreneurs running it as a low-cost model. In the next 3-5 years, it is clearly going to graduate upwards or remain at a lower level.
Even now if you look at the metros, you can see that the dealerships are under stress, they are all exploring ways of how they can collaborate together and if possible even merge. If you look at the dealership model abroad or say in the US, there are dealerships which are running 180, 140 and 130 outlets and all of them professionally managed. There are already a few dealers in India operating at that level, like Popular, Landmark, Sai Service and TVS.
The way the economy is going up in the future I also foresee dealership groups from abroad coming in and becoming partners in the Indian automotive dealership business because growth is saturating today in some overseas markets. You might see the possibility of buyouts happening in India in the next 3-5 years.
Are there any examples of negotiations in this regard?
Right now the policy in this regard is not very clear. FADA will carry out more research on this policy. Then, going forward, we will look at if we can adopt this for our country where we are able to devise a model where foreign investment can come in into the dealerships also. I think there is just a one-off case where private equity from abroad has come in. Landmark is probably the only dealer.
But I think the way globalisation is happening, the day is not far off when you might see international dealership group coming into India and vice-versa. There are dealers (in India) today who have anywhere between Rs 1,500-5,000 crore turnover. So, why not?
Talking about the growth within the country, it is coming from Tier 2, Tier 3 markets and not so much from the metros. Is it becoming a must to be present in smaller cities?
It is not necessary that every metro dealer can shift outside. Most of the challenges that the dealership community is facing, are being faced by the dealers in the metros. The cost level in Tier 2 and 3 cities is still lower and the market is still much better. What is also happening is that all the innovations happening in the mobility space, whether it is shared mobility or electric vehicles, in public transport, all this is being experimented in the metros and that is where the need is. So, metro markets are actually shrinking. Thus, for the business model of metro dealers, it is a challenge that is immediately on their head.
Is FADA making any preparation for business in an era of electric mobility or is it still too early?
Electric mobility is definitely the future for a country like India. There is no doubt that if you have to be self-reliant in terms of our own energy needs, electric is one of the solutions. But I think it is in the distant future. If you look at the immediate phase of 8-10 years, the top electric markets in the world, whether it is China or the US, the percentage of electric vehicles is not more than 10 percent of the overall auto sales.
Electric is the future, but I also see biofuels and hybrid vehicles as a stop gap till we reach mass scale electric mobility and that will require IC engines. And if IC engines are there, dealers are secured! So I don’t see the dealership communities facing any threat from the EVs or in the immediate future but yes in the longer term we have to see how it plays out.
Also, how much is overall dealership network expansion by OEMs affecting dealers? Is FADA going to make any kind of presentation to the OEs to find a middle way there?
As I mentioned earlier, the dealership viability business is under challenge. A key point is over dealerisation. Yes, there is over-dealerisation happening in certain areas for certain OEMs and this is something which we need to work with the OEMs.
I think it is a realisation which will come and we have to educate them by advocating the challenges that we are facing as a dealership community. Over-dealerisation, if it happens, is not going to help the OEMs also because you are making one strong dealer into one weak dealer and appointing another dealer who will always remain weak and not grow stronger. So in fact in the longer run, I don’t think it is a profitable strategy even for the manufacturers. From our side, we will engage with them, we will give them examples, where over-dealerisation has led to the loss of sales for them also and the loss of dealerships.
What are the top three goals that you have in your mind as FADA's new president?
The first goal would be to get all the dealership community in it. There are 15,000 dealers in India and not all of them are connected on a regular basis with FADA. I think as we go regional and as we go towards the towns and cities where FADA has not reached, my role is to make sure that each and every dealer is connected to FADA and FADA is connected to them so that we are able to understand each and every dealer’s issues, what are the challenges and place any suggestions that they want to give.
The second goal is for FADA to be recognised for the size that it is. The dealership community today is 15,000 members, 25,000 dealerships, we employ 25 lakh people directly and we indirectly employ 15 lakh people. We are one of the highest tax collectors for the government and tax payers for the government. We also work on behalf of the government in implementing rules.
Considering the multiple roles that we play and the sheer size of auto dealerships across India, I feel we have not got our due as a community as it should have been. Partly, it is our fault that we did not highlight how large our community is. My role would be to make sure that the policy holders understand that auto dealers are a very huge community which is providing employment to people in their cities and towns and villages and we are not displacing people.
The third goal would be that with the changing environment of business that has been there for the past two years dealership viability is under stress, our overall business profitability model is under stress and we feel that going forward, this model has to be changed, upgraded and looked at.
So my third key role would be to ensure that all the key players in the auto retail sphere understand the challenges that dealers are facing today. There is huge opportunity for auto dealers in the next 2-5 years as we grow to be the third largest market in the world. For these opportunities and for existing dealers to encash these opportunities, we need to be financially strong. For that to happen, the dealership model has to be a financially viable model which currently is under huge stress. So, my third goal and the most important responsibilities would be to build up consensus on the fact that the dealership viability model is a challenge today and therefore the entire ecosystem has to put its brains together and make sure that we arrive at a profitable dealership business model.
Also read: Ashish Kale succeeds John Paul as President of FADA