Auto dealers seek better margins

With automotive sales dropping hugely in recent months due to the credit crunch and general downturn in economic activity, auto dealers are increasingly feeling the pain and asking for a better deal from manufacturers. There are a total of 6,500 auto dealers in India, of which 2,000 are car dealers.

According to S P Shah, president, Federation of Automobile Dealers Associations (FADA), “The automobile retailing business in India is in pretty bad shape at the moment and I do not think there is any chance of improvement for the next three to six months. This is particularly true for truck dealers, for whom sales will take almost nine months to revive.”

Another relatively badly hit segment is two-wheelers, since they are more dependent on the availability of finance to drive sales. The high cost and relative difficulty in getting finance has badly affected two-wheeler dealers.

The recent stimulus packages announced by the government to boost liquidity and drive sales are, according to Shah, likely to have a positive impact on car sales during the coming months. In fact FADA has been talking to leading vehicle financiers like ICICI Bank and HDFC Bank to step up their lending to the auto sector.

While demand for small and midsize cars should revive relatively quickly, executive and luxury cars sales might take longer. The outlook for truck sales is even bleaker, says Shah. “Since there is no movement of goods at the moment, truck sales will remain under pressure and unless industrial activity revives I don’t see any possibility of a revival in the truck business.”

FADA believes the recent government plan to revive commercial vehicle sales by giving higher depreciation allowances of 50 percent and special loans for bus operators will not make much of an impact on sales in the near term. “I don’t know anybody who will buy now, because people will not invest money, pay the interest charges and claim depreciation if they are not sure of their business prospects,” Shah clarifies.

Another key factor driving the demand revival is interest rates which are currently around 14 to 15 percent, which FADA believes are a major dampener. “We requested the government to increase the amount of funds available to banks so that they can step up financing to the auto sector and more importantly lower the interest rates. The rates are very high at the moment and we believe that they should drop to around 10 or 11 percent as they were earlier,” asserts Shah.

FADA believes that car buyers are currently waiting for more benefits from the government in terms of lower interest rates. “Buyers feel that there is no need to change their cars today and are prepared to wait for some time in order to get a better deal. So it’s a waiting game and people are also not sure what is going to happen to the economy. The real revival in demand will take place after June this year,” confirms Shah.

Falling margins

Talking about the current level of dealer margins, Shah says: “Margins are very bad at the moment. All manufacturers say we must have showrooms, facilities and equipment as per international standards but our margins simply do not support this. Currently the net dealer margin is just three percent, but if you factor in the 30-day payment period, then the margin drops to just one percent. So we are really squeezed. In this scenario, many dealers will simply have to close down as it’s just not possible to continue doing business at such low margins.”

He refutes manufacturer assertions that they can make up for this poor margin in workshop revenues.

“Manufacturers like Maruti, Mahindra and Hyundai have their own showrooms, workshops and spare parts facilities. So they are effectively competing with us. This has never happened anywhere in the world and is affecting our workshop revenue as well. I think a time has come that just like in the US market, not a single manufacturer should be allowed to open sales points,” adds Shah.

FADA has also asked manufacturers to open more regional sales offices and stockyards, so that dealers are not forced to buy and stock more vehicles with them than they need. “I have told our dealers that you should not carry more than 10 days’ stock. Why should they carry extra stock just to please the manufacturers? They should tell them, if you want to do business, you must make sure we make some money as well.”

Shah was complimentary about Toyota and Honda, who he says increased dealer margins to four percent recently along with their price hikes. He said manufacturers need to stop their policy of maximising production and dumping excess stocks on dealers, which causes massive problems for dealers, particularly when demand slows down.