The auto dealers are a key part of the entire automobile industry ecosystem. They were also the first to adapt operations in the industry to remain successful and resilient during the pandemic. What could make their business profitable? What to do and what not to do?
Auto dealers have been facing a lot of headwinds for last more than a year, due to the economic meltdown, finance crunch and later due to the Covid-19 crisis. Several auto dealers across the country have already shut their businesses due to that. In this tough time, they should practice financial discipline and management principles in their business, advices Vinod Aggarwal, MD and CEO, Volvo Eicher Commercial Vehicles (VECV).
During a virtual event on the auto dealership ecosystem, he also emphasizes on curbing fund diversion to other channels in order to streamline the financial operations and overall business operations as well. In recent times, there has been financial indiscipline, where dealer principles utilized their inventory funding to renovate and expand their dealerships.
Several other industry experts too have emphasized on the same subject, echoing the same tone. According to industry experts, one thing is clear. In the last 8-9 months, there has been a lot of learning for both OEMs and dealerships. While the OEMs are learning on low stocks, auto dealerships are learning financial discipline.
The automobile OEMs now have their systems and check on funds taken from financiers and on the stocks as well. The banks are now ready to finance any amount as long as it is purely for vehicles. On the other hand, prudent dealers have kept their books clean and have rebounded with greater strength, as the experts believe.
These lessons would help the automobile industry in future for sustainable growth. Also, according to the experts, 2021 looks much better as the economy is recovering, and this would result in negligible stress on the auto dealerships. This means it is a good time for the finance ecosystem, as there is nothing alarming on the financing side.
As VECV MD also said, auto dealers usually take loans from banks to meet their working capital requirements and inventory management needs. If this fund is diverted to other channels instead of retail networking, it will not only put the financial health of the dealer at risk but also impact the whole industry adversely. OEMs too should help the auto dealerships to be afloat during tough times besides assisting financially and providing special incentives.
When it comes to the trucking industry, the first 3-4 months of the FY21 has been a near washout for the auto dealers and the auto industry at large as well. Earnings from workshops, a major revenue generator for the auto dealerships slumped to zero, as the workshops were closed due to the nationwide two-month-long lockdown, as they feared about losing workforce and competent technicians because of the contamination. The situation was similar to the other segments of the auto industry as well.
In the last few years, the auto industry has spent a huge amount of money on training the technicians on BS-VI technology that kicked off from 1st April 2020. Losing this workforce will be detrimental to the auto industry.
What’s ahead for CV segment?
The commercial vehicle segment that has been severely impacted due to the pandemic, has reported sequential growth in the last two months. However, the overall growth in this segment in this financial year will remain low due to the spare capacities created in the ecosystem and reduced fleet utilization as well.
According to VECV MD & CEO, the commercial vehicle industry would witness a drop by another 35-40% in FY21 on top of the 40% drop in the previous years. In terms of volume sales, there would be a drop to 2-2.5 lakh units in the current fiscal.
Demand from the replacement market, the government’s focus on infrastructure development would act as a cushion to absorb the lack of demand in the CV segment. Incidentally, the government has already earmarked more than Rs 100 lakh crores for infrastructure investments over the next 2-3 years, which would result in increased demand for construction trucks.
Covid-19 pandemic: A fund management lesson
Despite being the most challenging period of recent times for the Indian auto industry at large, the Covid-19 pandemic has also given new opportunities to learn important lessons to manage finances and restructure overall dealer business, claims the industry experts.
Talking about the pandemic and its after effect, Tarun Garg, Director – Sales and Marketing, Hyundai Motor India, said, despite the zero sales in the first quarter of FY21, the Indian auto industry bounced back across segments, especially passenger vehicles and two-wheelers. Also, another interesting trend in the aftermath of lockdown has been the growing demand for premium vehicles like SUVs.
Echoing the same tone, Devashish Handa, Vice President – Sales, Marketing and Aftersales, Suzuki Motorcycle India, said, recovery in two-wheelers has been led by commuter motorcycles sales largely in Tier-III and Tier-IV cities. He also said that finance penetration in these areas has gone up, which resulted in the growth in sales.
According to the experts, during this pandemic period, on the one hand, sales of the industry have been recovering sequentially, while on the other hand, operational cost at dealerships are going down as the dealer has taken several measures; such as – renegotiated rentals, removal of the unproductive workforce, no increase in wages. The inventory too is at an all-time low.
All of these are making the dealerships a profitable business in the long run. According to experts, dealers who were financially prudent have emerged stronger, but the diversion of funds in many cases for long term expansion over the short-term goals is bringing back money to the system.
Transparent communication is important
The auto OEMs in India unanimously emphasised at the event on the importance of a strong dealer relationship. According to them, the transparent communication process between the ecosystem stakeholders not only boost productivity but enhances profitability as well.
The auto dealers, in particular, have been resilient through the unprecedented times that the industry has faced in last one year. They were the first among the auto industry stakeholders, to adapt operations to remain successful in the pandemic and learnt that even further adaptation will be necessary post-pandemic to maintain the business’ success.
As the industry leaders said, in the recent past OEMs took decisions only based on data and without enough consultation with auto dealers. But, in such cases, the dealer’s viewpoint has to be brought in. There should be a mechanism of feedback, which will maintain communication transparency, and build trust.
The experts also emphasised that auto OEMs should not only be focusing on margins while talking with their channel partners but also explore ways to increase the revenue, as the growth of auto dealers is also the responsibility of OEMs. Hence, the manufacturers must ensure that auto dealers have a good revenue stream not just by selling vehicles but from other sources like service, aftermarket, extended warranty, accessories, finance, insurance etc.
In all, the panelists unanimously focused on the need of the well-communicated dealer network that can bring unique business advantages to the auto manufacturers. The improvement on communication with the channel partners will not only help in improving the OEM-dealer relationship but also their bottom line as well.
Auto dealers’ budget expectation
With the Budget 2021 nearing, the Federation of Auto Dealers Associations (FADA) has urged the Finance Minister Nirmala Sitharaman to introduce benefits of claiming depreciation on vehicles for income tax-paying individuals and extend the depreciation period for corporate, which would energise the sector. FADA also requested the FM that auto dealers should be kept out of annual TDS (tax deducted at source) of 0.1%, as it leads to a huge financial burden on the automobile retail industry.
The auto industry in the country has been one of the sectors that churn out a huge amount of revenue for the government and it also provides jobs to around 45 lakh people. Hence, the budget should be focused on helping the ailing industry to revive. “The upcoming 2021 Union Budget should be focused on measures to revive the Indian economy from the pandemic slowdown and boost consumption-led demand. The Indian automobile industry is a barometer of the Indian economy and its revival will, in turn, pull up the economy,” said FADA President Vinkesh Gulati.
Also Read: Paperless Budget 2021: What to expect?