OEMs should work on model mix at dealerships: FADA President

At the second banking and insurance summit held in Mumbai last month, the President of the Federation of the Automobile Dealers Associations of India (FADA) said that the rising higher interest cost from ballooning inventories due to demand slowdown and a poor model mix from OEMs is weighing down dealerships' profitability and ability to invest in scaling up their business.

Singhania highlighted that rising interest costs, stock inventories moving beyond 25 days at the entry level for passenger cars amid high discounts, and reduced insurance margins were making life for auto retailers complicated. On sharing the roadmap ahead with the banking and insurance fraternity gathered at the seminar he said, “OEMs and dealers both have to be cognisant about the changing consumer landscape, and the increased pendency of non-selling models which has doubled from 15-30 days to 45-60 days.

Singhania said that the biggest challenge for dealers is that OEMs can immediately help dealerships by reducing their interest cost from rising inventories, addressing the pending booking numbers, and delivering higher skew of in-demand models.

As a broad example, he indicated, that of the 100 vehicles that an OEM sends to its dealers, 30 to 40 are getting accumulated at the dealership. "My question to OEMs is, why do you want to produce more when you know the demand is tapering off? Instead of dispatching 30-40 percent low-selling models, it makes more sense to improve the model mix and send what's selling,” he stated.

There was a period when OEMs were building on capacity as demand was strong, but with the demand slowing down, "the industry doesn’t need the additional capacity as the market is back to low single-digit growth, and we are back to a supply-side market," Singhania added, discussing the market dynamics facing auto retailers.

A wide range of auto retailers at the insurance summit held in Mumbai last month said that with demand weakening, the community was facing severe challenges from all fronts. “OEMs should let go of their ‘fascination for numbers’ and instead ‘improve model mix at dealerships as it has a direct impact on channel profitability,” said a passenger car dealer from Delhi.

The FADA President added that dealers are seeing cancellations double to 30 to 40 percent even in premium models. "This has not impacted our sales, as we hand the booking to the next person waiting in line. But with cancellations rising, it's time OEMs did a rain check on their future projections,” he added.

As a way out for auto dealers, the FADA President stated that domestic auto retailers will have to diversify their operations to maintain their market position. He further stressed the importance of auto dealers looking at innovative strategies such as cross-selling.

Sharing his insights, he stressed the role of mergers and acquisitions in shaping the industry’s future needs, which could provide opportunities for consolidation, cost savings, and synergies, to build a more resilient industry.

Ramesh Iyer, Vice Chairman, and MD of Mahindra Finance suggested the industry 'needs to collaborate and not compete, to increase its consumer base.'

Iyer said that the working capital interest has to be super efficiently managed with inventory, and financers can act as co-lenders and provide guarantees for dealers to reduce their cost of borrowing, but such deals can only be made when dealers work transparently and maintain fiscal discipline.

Given this situation, should the auto industry aim for sub-5 percent growth? Singhania said the industry is guiding for a single-digit growth up to the onset of the festive season. "With a good monsoon, we can expect 8 to 9 percent growth and a poor monsoon could lead us to sub-5 percent growth."