Car dealers now in reverse gear as inventory up 40%

Siam data show sales of passenger vehicles declined 5.3% during April-August, compared with the same period last year

The slowdown in the automobile industry seems to be deeper than the Society of Automobile Manufacturers (Siam) figures indicate. Compared with last year, dealers' inventories have risen by about 40 per cent.

Gulshan Ahuja, secretary general, Federation of Automobile Dealers Associations (Fada) says: "The average inventory at the dealers' end is more than two months. Given that there are 2,800-3,000 passenger car dealers in the country, if one considers an average of Rs 1 crore worth of inventory per dealer, it means dealers are sitting on an inventory worth around Rs 3,000 crore."

The average per-dealer inventory had stood at around Rs 60 lakh last year (Rs 1,800 crore nationally), say dealer sources. The average inventory for dealers, then, was around three-four weeks. The number is significant because when car companies sell automobiles to dealers, these reflect as 'sold' on their books.

LOSING STEAM

• 67%: The average inventory with dealers has risen from Rs 60 lakh worth to Rs 1 crore
• Build-up: Dealers are sitting on inventories of two months - up from three-four weeks. Inventories in Tier-I cities have seen a higher churn than the Tier-II ones
• 10-20%: Decline in showroom footfalls on a year-on-year basis for most dealers
• Festive demand: Dealers feel it will be tough to match last year's festive-season demand
• Discounts & freebies: The biggest influencing factor for consumers; discounts are likely to be much higher during this festive season
• 5-10%: Fall in profitability for dealers on a year-on-year basis

Siam data show that sales of passenger vehicles declined 5.3 per cent during April-August 2013, compared with the same period last year. Within the passenger vehicles segment, sales of passenger cars, utility vehicles and vans dropped 5.80 per cent, 3.11 per cent and 6.24 per cent, respectively. Add the inventory at the dealers' end to that and things begin to look much grimmer.

From selling an average 400 cars per month last year, an Ahmedabad-based car dealer who operates showrooms of multiple passenger car brands, is down to selling an average 270 cars per month this year. "Since March this year, sales are down by around 35 per cent at the dealers' end. In good times, the inventory turnaround time is 24-30 days. A dealer always maintains a month's inventory. But, due to slow offtake, the inventory level has gone up to around two months," the dealer claims.

Siam, too, had recently said that compared with last financial year, the industry could be staring at lower sales this year. "If we have to match last year's 2.7 million units, we need to be selling over 200,000 units each month. But in the past three months, we have sold less than that," Siam Deputy Director-General Sugato Sen had said in September.

Broking house Indiainfoline recently conducted an auto dealer survey in Tier-I and -II cities (51 dealers across 23 cities covering eight original equipment manufacturers (OEMs), including Maruti, Tata Motors, Hyundai, Mahindra and Nissan).

It found that discounts, followed by freebies like insurance and exchange offers, had been the most influencing factors for consumers. Also, all respondents felt matching last year's festival-season demand would be tough and discount levels would be higher this time. "Profitability of dealers is down 5-10 per cent year-on-year," said the report.

Obviously, dealers now want better margins from OEMs to stay afloat in tough times. Ahuja says the average dealer margins in India ranged between 2.5 per cent and 3.5 per cent. For luxury cars, it was slightly higher, at 5 per cent.

Fada says, with rising overhead costs and a general sales slowdown, car dealers should be offered higher margins. Ahuja claims, in most developed countries, dealer margins are higher - in the range of 5-10 per cent.

A P Thakker, owner of a Mahindra & Mahindra dealership in the city claims: "Dealer margins should be at least around 5 per cent."

In its meetings with OEMs, the association has already started raising the issue. "Some OEMs have also come forward to help the dealers. But I cannot disclose their names yet," Ahuja says.

Dealers in other major cities like Mumbai, Kolkata and Delhi have also rooted for higher margins against the current backdrop of falling sales. A Delhi-based dealer claims, though the business is seeing tough times, not many dealerships are closing down. "While taking a dealership, one has already invested close to Rs 4-5 crore, besides infrastructure expenses.

He also holds inventory of cars. Closing down the dealership would mean a businessman would lose a lot of money. Therefore, people will continue with their dealerships, hoping the market will pick up, eventually," he says.