M&M targets 1 lakh used cars by 2014

UV manufacturer has big plans to grow its pre-owned car business.

Mahindra & Mahindra plans to aggressively grow its pre-owned car and aftermarket business and expects to double its sales of used cars in the current year.

According to Rajeev Dubey, president – HR, Aftermarket and Corporate Services, “During the past year, Mahindra First Choice Wheels sold 10,000 cars and in the current year we want to double this to 20,000 cars. By 2014-15 we expect this number to increase to 100,000 cars. If things go according to our plan, this sector will have a turnover of Rs 6,500 crore by that time, from the current level of Rs 950 crore.”

Mahindra says it is the largest player in the organised pre-owned car segment and will play on its strengths by offering customers trust, reliability, quality and a better purchase experience.

The company created this new sector about a year ago to tap into the growing demand for pre-owned cars. It consists of three main parts — the sale of pre-owned cars, servicing and spares. Mahindra sells all brands of cars, not just Mahindra vehicles in order to maximise its growth.

“The idea was to create in the area of pre-owned cars a business eco system that mirrors the business eco-system of new cars,” explains Dubey. Hence Mahindra First Choice Wheels, that used to be called Automart India, is the company which buys and sells used cars, while Mahindra First Choice Services has the objective of setting up a chain of multi-brand service centres. “At the moment we only have five that are operational, but we hope to have at least 100 outlets by 2015,” says Dubey.

The sector also has a spares business which was focused on Mahindra spares. “This was a division that was servicing the requirements of our Auto Sector and Farm Equipment Sector. It is already doing about Rs 600 crore annually in terms of turnover and we are now looking at selling spares for other brands as well, but that is still in the early stages.” The company is also looking at the possibility of sourcing spares from overseas markets and even selling them in foreign markets.

Dubey adds, “In order to create a complete offering for car buyers, Mahindra also plans to offer them value-added services like financial products, warranties and insurance. In future, it could even look at creating platforms such as e-exchange of cars, or e-auction.”

A growing opportunity

As an economy develops, the ratio of new car sales to used car sales keeps on increasing. For instance, in the US it is 2.5:1 which means that for every new car sold there are over two pre-owned cars that are sold. In India, the ratio is still at 1:1, with around 1.1 to 1.2 million pre-owned cars being sold annually.

Hence, Mahindra believes that there is a huge potential for growth in this sector and believes that in the long term this market will grow at 15 percent annually as it moves from the unorganised to the organised sector. For its used car business, Mahindra already has about 60 outlets across the country, which is mix of its own stores and franchisees.

The company is also developing a ‘Super Store’ format within this business, which is located over a larger space and has at least 100 cars on display. “We already have one in Mumbai and another in Pune. This format is the one that is going to drive our business and this is where the business model gets established,” explains Dubey.

Talking about the difference between other such offerings in the market and the initiative from Mahindra, Dubey says, “We are different from Maruti True Value in that their basic purpose is to promote the sale of Maruti vehicles. Ours is not basically to promote the sale of Mahindra vehicles. We are aiming to satisfy the demand that exists for pre-owned cars of any brand, provided it is something that makes economic sense to us and to the purchaser and also to the seller.”

A resilient sector

Discussing the resilience of the pre-owned vehicle segment, Dubey comments: “In a downturn, this sector is much less prone to a sharp dip. In fact when there is a dip in new car sales, there could even be an upsurge in the pre-owned car market. So it is counter-cyclical to that extent, but this something that is still to be tested in India because we don’t yet have enough data. Of course, the one problem in such a scenario is that the supply of cars would get affected as people postpone their car purchases and hang on to their current vehicles.”

For A-segment cars, transaction values range from Rs 2.5 lakh to Rs 4 lakh, while in the B-segment they are slightly higher. Similarly, margins also increase with higher segments of the market. However, the bulk of sales would be in the A and B segments as they are for new cars.

“For any pre-owned car player, the mix of cars from different segments is very important. Also, procurement of cars needs to be very efficient to ensure the maximum spread between your buying and selling price. And you also need to turnaround your stock and refurbish your cars as quickly as possible. We do a 118-point check and offer a six-month warranty to our buyers to ensure peace of mind,” says Dubey.

In the future the company wants to develop a definitive guide to prices of second-hand cars along the lines of the Kelly Blue Book which is available in the US. However, Dubey acknowledges that “in the Indian context, something like this is still a few years away.”

Adequate financing is among the major challenges the company faces, given the liquidity crunch that the industry has gone through recently. Dubey says, “Financing has been under strain for the past eight to 10 months but the situation has improved considerably. Some big players who had exited the market are now lending again. Today, inventory funding for our dealers is a bigger challenge, more so than retail financing.”

He also sees major synergies with other Mahindra Group companies. “We help our colleagues in the auto sector to drive the exchange of older models for newer ones like the new Scorpio and Xylo using the Xmart scheme. Also, a lot of our dealers can also be dealers for our Farm Equipment sector. We also cooperate with Mahindra Finance and there is potential with Mahindra Logistics and Mahindra Insurance Brokers.”

Discussing his expectations from the upcoming Budget, Dubey says, “The government needs to rethink the Value Added Tax (VAT) system, because in some States like Uttar Pradesh and Rajasthan, the VAT laws make our business unviable. Also, the availability of funds and the price at which they are available is critical to the success of our business.”