The Indian automobile industry is a ₹8.2 lakh crore industry, and its turnover constitutes 6.4% of overall GDP, 20% of industrial GDP and 35% of manufacturing GDP.
Much anxiety has followed the announcement of Ford India’s ‘restructuring’ announcement on September 9 – ceasing production of its cars and SUVs, and selling vehicles till stocks last. This clearly hints at an exit strategy – something Ford has denied – leaving the future of about 170 Ford dealers, with a combined investment of about ₹2,000 crore, and jobs of about 40,000 employees in the air.
It is unfortunate that, so far, there has been no focus on the plight of the dealer in Ford’s external representations. Instead, the management has been insisting that dealers first sign a non-disclosure agreement (NDA) before any compensation package is worked out. Such coercive effort is the wrong approach. Up until five months ago, Ford was actually appointing new dealers in India.
Unfortunately, this situation is not unique to Ford. There have been multiple and abrupt exits by foreign automobile original equipment manufacturers (OEMs) over the last four years: General Motors (GM) in 2017, MAN Truck and Bus in 2018, United Motors Lohia in 2019 and Harley-Davidson in 2020. The bone of contention is not these companies’ decision to exit, but rather the manner of their exit – with little-to-no notice to dealers or customers, leaving both in the lurch.
The Indian automobile industry is a ₹8.2 lakh crore industry, and its turnover constitutes 6.4% of overall GDP, 20% of industrial GDP and 35% of manufacturing GDP. It also contributes 15% of total GDP collection, while providing employment, directly and indirectly, to about 3.7 crore individuals. Of this, automobile dealers employ about 45 lakh people, comprising the front-end of this sector.
Auto dealerships are capital-intensive businesses, and it takes 4-5 years for dealers to break even. But dealership agreements in India do not have a standardised term, and certain agreements have tenures as low as one year. Also, some OEMs operate only under letters of intent (LoI), which have no legal backing, leaving dealers without recourse in cases of dispute. Due to shorter-duration agreements and uncertain renewal processes, dealers are often unable to generate a decent return on investment, with their problems being further compounded by sudden company exits.
The primary enabler for such exits is the lack of balanced contractual arrangements between OEMs and dealers. Most dealerships in India are MSMEs, and their contractual arrangements with these large corporations have historically been tilted in the favour of the latter. What is surprising is that the same OEMs offer much better contracts to their dealers in many international jurisdictions such as the US, under which contracts can be terminated, with repurchase and indemnification obligations clearly spelt out.
Poor treatment of dealers is not limited to exits and termination. Indian dealers have little-to-no say in how sales plans are made and targets are set. Tata Motors was recently at the receiving end of the Competition Commission of India’s admonishment for sending drafts of stock orders to dealers with instructions to reproduce the order under the dealers’ letterheads.
Second, the lack of comprehensive repurchase obligations under Indian contracts, where repurchase is only a preferential right for OEMs, creates huge problems for dealers, as they are often stuck with extra stock when OEMs decide to exit the market. Third, dealers are often made party to consumer complaints even though the liability may lie with the OEM, due to lack of clarity in indemnity provisions.
Fourth, procurement and selling of accessories (spare parts, aesthetic additions, music systems, etc) and consumables (lubricants, paints, etc) are tightly controlled by OEMs in India, with dealers required to buy such items from either only the OEMs or only through a very short list of vendors. Such undue restrictions increase dealer costs by preventing them from seeking the best deals available in the market. The burden of these costs is ultimately borne by consumers.
Many fly-by-night OEMs in the growing electric vehicle (EV) market are exiting frequently, with no adequate legal protections for aggrieved dealers. While Ford’s announcement is only the latest manifestation of an old problem, it highlights the urgency to protect the interests of auto dealers and their investments. Steps must be taken towards safeguarding the interests of dealers.
GoI should consider the introduction of an automobile Dealers’ Protection Act, as suggested by the parliamentary committee on industry in its report, ‘Downturn in Automobile Sector: Its Impact and Measures for Revival’ Not only will this benefit dealers and consumers, but it will also be vital for the health of the sector at large.
Vinkesh Gulati is president, Federation of Automobile Dealers Associations (FADA)