Maharashtra has the highest number of automobile dealerships that have downed their shutters in the past year. According to the Federation of Automobile Dealers Association (FADA), the State has seen 84 closures, 30 of these in the Mumbai-Pune region itself. The FADA says the passenger car segment is the worst hit. The commercial and two-wheeler segments have managed to stay afloat largely because of the demand in rural districts and Tier II and III cities.
Anand Desai, who has been running a dealership in pre-owned cars for a decade, said that when auto companies appoint more than four or five dealers in a city, the competition is tough. Adding to this problem is that the margins in car sales are negligible. The earnings come mainly from servicing. Dealerships once offered a prestigious and sound business opportunity, but now many rue the day they got into the vehicle business, he said. That Mumbai is an expensive city with high operational costs does not help.
Desai pointed out that no other industry in India had the kind of capital infusion that the automobile industry did. It saw high growth and generated employment and, notwithstanding a few dips, remained on an upward curve for a long time. “We call it super demand. Now a correction is taking place for various reasons,” Desai said.
A dealer of a Korean company producing small passenger cars explained the factors compounding the misery of car dealers. The dealerships cut prices in their eagerness to win in a highly competitive market. But the discounts did not match their costs and cut into their profits and sometimes led to losses. Banks have, of late, started strictly monitoring the loans disbursed. “In the early days, they would disburse the money but rarely check the books. We now have lenders calling every month to ask about the inventory,” he said. Dealers often used loans taken from banks to diversify, which did not always pay off. For instance, some of them bought real estate, which also went into a slump. Automobile manufacturers ensure their control over dealerships by setting up many dealers in a city so that one dealer can never get bigger than the others. “In fact, manufacturers extract more than their pound of flesh. They do not give anything that allows dealers a sensible margin of profit,” he said.
Anita Sakle, who owns a two-wheeler dealership in Mumbai, said dealerships had a good run until demonetisation in 2016. “Our market is 60 per cent urban and 40 per cent rural. For years, customers would make a large part of the payment in cash. When demonetisation took place and the cash dried up, we began to struggle, especially in the rural belt because cash played a big factor there. Even during the election or the festival period, when there is surge of sales, there has been little growth in the past two years,” she said.
“After the NBFC crisis surfaced about a year ago, dealers have faced tight economic conditions. The banks are not lending and the liquidity crunch in the NBFC sector has not helped. Banks and NBFCs have become particular about paperwork. This makes selling hard. It used to be easy to sell a vehicle. Customers do not want to run around so much,” Anita Sakle said. She added that though sales do shrink every seven to eight years, the drop in sales this year has been drastic because of the banking crisis. Additionally, the introduction of a 28 per cent goods and services tax (GST) on cars sent the dealership industry into a complete tailspin. Customers are also postponing purchases because of the hype around electric cars. “Manufacturers haven’t even got an assembly line in place. It will take a few years for that to happen,” she said.
Curiously, at a time when dealerships are shutting down, two international car majors MG and Kia have recently launched new products. Both have started dealerships across the country. “There is still a market, particularly among the salaried. For that section, getting loans is not hard,” said an industry analyst. Dealerships generate a fair amount of white- and blue-collared employment and therefore incentives have to be created. One way forward is to open multi-brand showrooms, the analyst said. It has been on the cards for sometime but it remains to be seen whether automobile makers will agree to this radical solution.
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