Over the last few years, several automobile brands have left India, suddenly announcing their exits. This left their dealer partners and the workforce related to the ecosystem severely impacted. The automobile brands cannot take the Indian market for granted and enter-exit as and whenever they wish.
In order to understand the impact of brand exits to dealerships, it is first important to understand the entry of brands especially automobile brands in India.
It is not an easy or simple decision for any brand especially an automobile brand to decide to make its entry into India, It requires a huge amount of market research which itself is extremely expensive, to begin with. The introduction of an automobile brand entails an investment of billions of dollars, is normally long term and the investor is reasonably confident of its success.
The success of the brand depends on a multitude of factors like the manufacturing, product, design, positioning etc. However, one of the most critical success factors is its marketing and setting up a robust distribution network. Obviously, no chances can be taken in doing this.
It begins with a selection of the channel partners and dealerships in other words. This could be done internally or with the help of consultants who have a fair share of knowledge about the Indian market and how it operates.
The selection process is long and arduous. It is important to deep dive into the finances and more importantly the reputation of the prospective dealers. A process of due diligence to ensure the correctness of the claims made. Once short-listed the prospective suitors are invited to understand the business case of the dealership business and its success over a period of time and the likely returns of the business. The suitors are taken on a journey of the brand globally and the steps being undertaken to replicate its international success. The various models to be introduced, the numbers and the market share it would achieve.
Once selected the prospective dealers are given what is commonly known as a “Letter of Intent”. This includes a huge list of conditions to be fulfilled for the company to “consider” signing a “dealership agreement”. Obviously, the LOI must follow a strict timeline. The conditions include huge investment in infrastructure, corporate identity programs, tools, equipment & spares. Then there is manpower and working capital. bank limits and of course the onboarding of the dealer owner himself. Mind it, this is only the first trench of investment. It could be followed by many more even bigger than this as new models are rolled out.
Once the terms of the LOI are completed, a dealer agreement might be signed. “Might be” because many a time business is started even without signing an agreement and the signing is kept in limbo for any amount of time and sometimes years. If the dealership is lucky and the agreement is signed it is normally signed for a year to come up for renewal annually totally at the discretion of the manufacturer. It is important to understand that while the investment of the dealer is long-term, the certainty of the business continuity is short-term and uncertain.
Having very briefly understood how automobile brands come into India and the process adopted by them to set up a distribution network, let us now come to the focal point:
Exit of brands and impact on dealers
Before dwelling upon the impact brand exits have on dealers, let us first examine the impact it will have on the hapless consumers who buy these brands. They are taken in by the BIG GLOBAL BRANDS and the assurance they give both in terms of quality and the status attached to them. Obviously, the prices paid are high as compared to the local ones. They are also assured of global service quality and an unhindered supply of spares for unlimited life of the car but certainly 15 years which is “end of life” or lifetime road tax paid to the government.
Suddenly you see “Big Breaking News” about the big brand exiting the Indian domestic brands. That’s the end of your peace of mind for the future of your precious brand. Service and spares are all gone with the twitch of the fingers. Next follows the erosion of the resale price. Just collapses and there are no takers. The EMIs yet to be paid. Imagine the plight if you just bought the vehicle yesterday and still waiting for the HSRP to be fixed on it. Yes, there have been instances of customers who have bought the car just a day before, maybe weeks or a few months. Everything just collapses. All that the customer feels is the heavy sense of being let down or worse even cheated. Huge collateral damage, a dream car becomes an Albatross around the neck.
Let us now turn our focus on the much larger issues involving the dealerships.
As far as the suddenness of the exit announcement is concerned the dealerships are no better placed than the consumers. They are equally stunned by the screaming headlines both in the electronic media and the print media that “their” brand has decided to call it quits. This is when the dealership was planning the next phase of expansion mandated for the launch of a new brand or brand.
The launch would take the brand to the illusory market share. This was when the dealer had just finished the recruitment of a fresh set of manpower to handle the new launches. This is when the infrastructure has taken a completely fresh look with huge investment in the latest contemporary new “Corporate Identity Program.” !!!
If this was not enough, the reality dawns, on the customer who just took a ceremonial delivery of the vehicle just yesterday or probably a few days or weeks back. Then there was the friend he convinced of the virtues of this brand over the one he was so keen to buy. There were numerous others, relatives, business associates, bureaucrats, and politicians. The list can go on and on. Most of them because they trusted the dealer and therefore the choice.
There are other issues to be dealt with. The consumer cases are still pending in court for product failures for which the dealer had nothing to do. There are so many more which could now be filed.
The banks and the financial institutions cannot be wished away. The term loans and the working capital arrangements suddenly become repayable. The mortgages need to be foreclosed. These timelines were never calculated nor accounted for.
Nearer home, the team at the dealership, the employees. They were all assured of permanent jobs. In fact, some of them had left their jobs to join the dealership team. Dark clouds now surrounded their future. The terminal benefits which had now become payable and the severance packages to which they would be entitled.
The realisation that the huge investment in the corporate identity program, the brand elements had become worthless and not even worth the scrap value takes some time to sink. The special tools and workshop equipment are good only for the scrap market. Not to forget the spare parts inventory. Anybody in this business would validate that with the closure of this business the value depreciates to less than 30% 0f the purchase value. Finally, the unsold new car inventory needs to be liquidated at values much lower than the purchase value.
In the interest of brevity, I will confine myself to some of the most damaging impacts that brand exits have on the customers, dealers, and other stakeholders. A deeper discussion on the malice can possibly be done someplace else.
Loopholes to fix
The entry of the brands is fairly regulated. There are a plethora of processes and approvals that need to be followed to gain entry. However, the decision to exit seems to be much simpler, especially with respect to the customers, dealers and their employees who are the worst impacted. The decision to exit can be taken with no recourse to those impacted.
The single biggest evil to this entire process is the zero regulation of the terms of business being done by these brands with Indian consumers and Indian investors who are largely from the MSME sector. In my opinion, some of the steps where the government must step in are as follows.
- A fair settlement of the possible damages to the consumer, the investment made by dealers and just severance package for dealer employees.
- A codified model dealer agreement which is just, equitable and balanced for both the manufacturer and the dealer. the present ones are totally one-sided and should never have passed through judicial scrutiny.
- A continuing liability towards the consumers because of manufacturing defects for at least the stated life of the vehicle.
- Lastly, a dealer/franchisee protection law is on the lines of similar laws in some of the developed countries like the USA.
- An effective assurance of adequate supply of spares and service for the life of the vehicle.
To many, these solutions may sound too radical and opposed to the tenets of the “ease of doing business”, but trust me and my four decades of experience as an auto retailer, most of the exit decisions of brands exits have nothing to do with the business environment in India or flawed government policy. They have all their genesis in the decision making has gone wrong, failure to understand the Indian consumer or faulty decision making.
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(Nikunj Sanghi is the CEO of JS Fourwheel and former chairman of ASDC.)
(Disclaimer: The views expressed in the article above are those of the author’s and do not necessarily represent or reflect the views of Autofintechs.com. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.)