Automobile makers stumped by used-car boom

Last month, Pune resident Chirag Patil was looking to buy his first car. With a modest budget of Rs 3 lakh, his search for a new car could not move beyond the usual suspects in the entry-level segment - Maruti Alto, Hyundai Eon and Renault Kwid. So, the 26-year-old information technology professional expanded his search to online sellers and was surprised to see the wider choices of used cars on offer. Patil is now the proud owner of a certified, spotless 2013 Maruti Suzuki WagonR, which he bought for Rs 20,000 less from a seller listed on one of the e-commerce websites.

Patil is one of the 4.2 million buyers who have fuelled demand for used cars, which hit a record-breaking high last year, according to research by CRISIL. On the back of growing consumer aspirations, manufacturer-backed offers and exponential growth in the e-commerce space, companies in the pre-owned car market are witnessing growth like never before. The ratio of new to used cars was 1:1.2 till a few years ago. This has now grown to 1:2.2, according to CRISIL. This means, for every 10 new cars sold, 22 used cars are finding buyers.

With a steady decline in the holding period of a vehicle from six years to three years, the supply of used cars has increased considerably, say market watchers. The new passenger vehicle market is set to close at 2.8 million units this year.

"Shorter holding periods, a rising mass of aspiring buyers, greater participation of organised original equipment manufacturers-backed players in the used-car market, accessibility of finance options, and availability of certified and refurbished cars with warranty are fuelling growth in the used-car space," says Ajay Srinivasan, director, CRISIL Research.

CRISIL has derived the data from its proprietary model for used car sales as well as inputs from various organised used car dealers. Mahindra First Choice, Maruti True Value, Hyundai H Promise, Carnation Auto are some of the used car players in the organised segment.

The rise in demand for used cars has stumped even organised players. "The average holding period has come down to three years, from five to six years earlier. With increasing per capita incomes, more and more people will explore the proposition of buying a used car, whether it is their first car or not. Till now, we believed that the used-car market was 1.2 times the new-car market, but latest statistics suggest this ratio might be much higher," says Rajeev Dubey, group president (human resources & corporate services) and chief executive officer (aftermarket sector) at Mahindra & Mahindra.

Seven out of every 10 such pre-owned cars sold are said to be compact hatchbacks, while the balance is a mix of sedans and luxury cars. Trusted for its reliability, ease of maintenance and high mileage, Maruti Suzuki is the top choice of used car buyers as well.

Generally, buyer preferences and requirements seen in the new-car market mirror the used-car buyer trends. However, a used-car buyer is found to be not as brand-conscious as a new car buyer and is ready for experiments. "Brands that are usually overlooked but are available at an attractive price with full features get instant attention from used car buyers," said a Mumbai-based analyst.

According to analysts, India's pre-owned car market is at a nascent stage with a lot of headroom for growth for the organised players. The organised sector accounts for just 17 per cent of the used-car market as most of the buying and selling happen through unorganised means.

"Used-car sales volumes have grown at a CAGR (compounded annual growth rate) of about 15 per cent over the past five years till 2014-15. Although the ratio of sales of used cars to new cars in India has risen over the years, it is still lower than the 3:1 norm that is typical of mature markets like the US and Europe, indicating potential for further growth," added CRISIL.