Falling retail sales and low capacity utilization amid lockdowns are leaving industry breathless

Sales of cars and SUVs fell nearly 60% in May, while sales of two-wheelers were down 53%.

In Alwar, Rajasthan, vehicle showrooms have been allowed to operate all day since the start of this week, up from just 11 hours earlier. And one Mahindra & Mahindra (M&M) vehicle dealership found that at least one in three reservations were canceled. Two out of three customers had decided to postpone the purchase of a new vehicle or had completely abandoned their plans.

“This time – in the second wave of the COVID pandemic – rural India has been hit at least twice as hard as in the first wave,” said Shyam Verma (name changed), director of a large city ​​vehicle showroom. “M&M has a large rural customer base and it’s no surprise that customers come to cancel or postpone reservations made in April. This trend is expected to continue. “

The Indian automotive industry makes a significant contribution to the economy, accounting for nearly 50% of manufacturing GDP. But, due to a nationwide lockdown last year and then again due to state-specific lockdowns from mid-April this year, the backbone of the industry has been broken. . A fraction of the plant’s capacity is used, retail sales fall again, and the industry faces a long and difficult road.

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According to the latest data from the Federation of Indian Automobile Dealers (FADA), the total number of vehicles sold to customers in May was not even half the number sold in April 2021 and roughly a third of the number sold in May 2019. FADA said it could not compare May 2021 and 2020 due to last year’s nationwide lockdown.

Sales of cars and SUVs fell nearly 60% in one month, while sales of two-wheelers fell 53%. Trucks only sold a third of the volume recorded in April.

Wholesale vs retail sales

Data on vehicle shipments from the factory gates of manufacturers (wholesale sales) and the number of new vehicle registrations (retail sales) showed wide divergence in May.

Major passenger vehicle manufacturers like Maruti Suzuki India, Hyundai Motor India and Tata Motors reported strong growth in shipments in May 2021 compared to May 2020, due to a weak base (nationwide lockdown last year, with very few vehicle shipments). However, there were very few takers in the retail outlets.

So while shipping data would make the country’s appetite for vehicles look like it increased in May, retail sales figures show the real picture.

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In June, things started to improve as the unlocking process began in most states. People who had reserved vehicles before the lockdown are starting to finalize their purchase.

“At this rate, June 2021 could result in almost equivalent sales compared to June 2020. But, overall, the recovery in demand will be slow as rural markets continue to struggle with post-COVID effects,” said FADA. The industry body It calls for a moratorium on loans for dealers and other measures to ease the repayment burden.

Refuel, just in case

Dealers are also assessing the current inventory situation. Verma, of the M&M dealership, said that the reluctance of some customers to buy new vehicles had not stopped him from stocking up, unlike last time. Its dealership now has an inventory of more than 200 vehicles compared to less than 100 the same month last year.

Verma said he wouldn’t like to be caught up in the situation last summer, when there had been a surge in demand after the lockdown, but didn’t have enough vehicles to to sell. At that time, supply constraints had weighed on his income. This year, it’s a combination of weak rural sentiment and the overall economic impact of a deadly second wave of infections.

SM Bafna, a major Tata Motors dealership in Mumbai, said there were many problems for vehicle dealers after the second wave of COVID. “Banks have practically stopped lending to first-time buyers. This section includes up to 40% of our customer base, so it will have a significant impact on retail sales, with sales of two-wheelers and entry-level cars being the most impacted, ”he said. .

Inventory calculation

Dealers have conflicting views on how much of the cost of inventory can be absorbed.

Bafna said automakers should set up stockyards – large areas where manufactured vehicles are kept before they are shipped to dealerships – and allow pickup based on demand. This would mean a significant saving on inventory costs for dealers, especially for those of small vehicles.

But Alwar’s Verma and a few others called it a chicken-and-egg situation. If demand unexpectedly increases, dealerships lose business due to lack of supply. But stocking up in anticipation of activity could increase inventory costs.

Either way, holding inventory seems like a good plan as it also ensures continued sales even if there are supply issues on the manufacturer’s side. And here’s how the math works: The gross margin on the sale of a new car is 4-5% against an inventory cost of just 1%. Thus, keeping an inventory is more profitable, at least for large resellers.

Some of the bigger manufacturers such as Maruti Suzuki India have in the past talked about creating large stockyards, but these plans have remained on paper.

Sale of two-wheelers

Nikunj Sanghi, chairman of the Automotive Skills Development Council, said two-wheeler sales were the most affected among all vehicle categories in the second wave of COVID.

He said nearly two-thirds of two-wheeler buyers are first-time buyers – students, the working class, small business owners and farmers. And the revenues of these sections have been severely impacted by the pandemic.

“An even bigger challenge in pushing two-wheeler sales now is the impact of the second wave on rural buyers,” Sanghi said. “Regardless, two-wheeler sales have also suffered from several other challenges: the switch to BS-VI emissions standards last April, additional safety features, manufacturers passing on the cost increases of inputs on customers, etc. nearly 20% increase in the price of two-wheelers in one year. Added to this is the sharp increase in operating costs, thanks to a relentless increase in fuel prices.

Analysts at brokerage Emkay pointed out that the weakness in domestic sales of two-wheelers was partly offset by robust exports. In the commercial vehicle segment, volumes remained under pressure due to lower freight availability, resulting in the deferral of carrier purchase orders.