With deserted showrooms, no buyers and a shattered economy, auto dealers have to grapple with a new reality.
The month of April this year was noteworthy, at least for the country’s auto sector. It was the first month in the history of the Indian auto sector when it registered absolute zero sales. This highlights the magnitude of the blow the Covid-19 and the nationwide lockdown have brought to an already beleaguered sector.
The lockdown’s far reaching blow to the sector has been so drastic that the industry body SIAM estimates that the auto industry would lose Rs 2,300 crore turnover every day due to the lockdown. The lobby body has projected that the country will witness a massive drop in auto sales, which could be as high as 35% for some segments. This, it says, is over and above the 18% de-growth of FY20.
With locked showrooms for almost two months, auto dealers now stare at a stark future. Federation of Automobile Dealers Associations (FADA), the national body of automobile retailers in India, believes the epidemic had hit it at a time when it was preparing for recovery in sales growth after 15 months of a downturn.
In recent times, thanks to the virus’ fallout, more than 275 dealerships had to shut down, says FADA, whose President, Ashish Harsharaj Kale, believes the virus and the nationwide lockdown has hit the industry “at the worst possible time”.
Experts say auto sales are purely discretionary purchases and that is biggest Achilles heel. According to Kale, it’s in the government’s interest to take measures to revive the auto demand because the setor has a multiplier effect on the entire economy.
Acknowledging the need to get the economy moving, the government while introducing lockdown 3.0 brought in many relaxations, but most believe these did not result in any material change on the ground for the auto dealers.
“I don’t think anything will improve right now, because the big issue lies with the supply chain. With factories only resuming activities, I don’t see any major improvement unless things improve overall in the larger ecosystem,” says Chinmay Bafna, Managing Director of Mumbai-based Anzen Automotive. It is not just the supply chain that is a cause of worry. Many fear the high degree a ‘return of license raj’, red-tapism and widespread bureaucratic bottlenecks are other critical hindrances that are currently limiting the scope of any possible economic recovery of this segment.
According to Garima Misra, MD of the automobile dealership chain Landmark Group, there was a negligible difference the lockdown 3.0 had brought to the sector. “The relaxations did not help us. The MHA guidelines were all good on paper, but approvals were not really coming,” she says, adding every state did not follow the MHA guidelines to a tee.
Misra adds that with little or manpower in the showrooms, no manufacturers to provide the key supplies, opening a showroom and waiting for a customer to turn up made little sense. With lockdown 4.0 there is hope that the situation may change slowly.
Need for speed
The auto dealers segment employs over 40 lakh employees across the country, with 25 lakh direct employees and another 15 lakh indirectly dependent on dealerships for their livelihood, says FADA. Kale says the majority of the auto dealerships are family-run small scale businesses with each, at an average employing 70-150 people. The lobby body now fears as Covid’s toll surge, many in this section would be pushed out of business.
It is not just the present, which is difficult for these dealers, but the future also looks very uncertain. Selling cars online can become an accepted model and companies like Maruti Suzuki, Hyundai, Honda and a bunch of luxury car makers are already allowing customers that option. According to a survey done by the Capgemini Research Institute, 70% Indian car buyers may prefer to take a digital route over visiting a dealership. That is a cause of concern.
On the flip side, as social distancing norms become even more prevalent, many may consider buying their own car or two-wheeler, if they do not have one. Many do not consider it safe to avail ride hailing services like Ola and Uber and using public transport is also a cause of worry. There is also the hope that pent-up demand in the economy would help get sales up in the future. However, as the entire economy grapples with the economic shock, consumers may just not have enough money or the willingness to invest in a car.
Misra of Group Landmark goes on to highlight that auto dealers work on a nominal margin of 1.5- 2% Return on sales (ROS). “For auto dealers, the two biggest expenses are rent and wages. Salary and wages constitute close to 40% of our total operating cost. With absolutely zero sales, how could we bear those mammoth costs” wonders Misra, adding the segment does not sit on huge cash surplus, as may be the case with other sectors.
“Though we do high turnover business, we don’t possess accumulated profits like other sectors. The sector’s present situation is such if your interest rate goes up even a bit, you are immediately down in the dumps,” she remarks, adding the government’s 3-month loan moratorium on offer, is a deferment and not a waiver. Even if businesses avail the moratorium, it is also not that the dealership fraternity is expecting its sales number to magically raise manifold, post the 3-months.
For the country’s auto dealers, the issue of unsold BS-IV vehicle stock is another key concern. The industry fears that many dealers face closure if leftover with unsold BS-IV vehicles lasts with them. The issue has now turned so critical that FADA has once again approached the Supreme Court with a request for the permission of sale and registration of BS-IV vehicles till 31st May’20.
“All these piled up inventory has been taken on loans. Their [dealers] homes are attached, properties are attached, and the issue is none of their faults. There is no way they would be able to pay up in the current situation,” highlights Misra of Group Landmark.
Talks of turnaround
To help the auto dealers’ fraternity remain afloat in these unprecedented times, the industry body FADA wants a complete waiver of interest on all categories of loans from banks and NBFCs for the entire period of the lockdown. It also wants the government to extend 4% interest subvention/subsidy for working capital/loan requirements to companies for a period of 9 months post the lockdown. More importantly, the lobby body wants the salary of employees for the lockdown period to be paid through ESIC as it believes this is a health pandemic and, thus salary liabilities should be covered under the same by ESI.
The country’s tax regime is also an aspect where FADA believes few tweaks can significantly help the sector tide over the crisis. “The automotive sector is crippled by very high GST rates, whose net impact ranges from 29% to 50% depending on the category of the vehicle. Thus, a reduction in GST for a temporary period will lower the cost of acquisition and will be a good incentive towards stimulating demand,” says Kale . Alternatively, he also suggests a direct benefit to consumers of 3-4% interest rate reduction through banks and NBFCs to reduce the overall cost of owning a vehicle, besides asking the government to include auto Industry in priority sector lending so that both retail and wholesale financing can be made available easily.