Even as India's new car sales
stutter, the country’s used car sales are still going strong.
India’s automotive sector is
going through one of its worst slowdowns in two decades. Though August sales were
up year-on-year, this was only compared with last August's strike at Maruti
Suzuki. The long downward trend is likely to continue for the rest of this year
at least. Yet there is one part of the market that is still booming: used
car sales.
According to the latest
available figures, from research firm Crisil, between fiscal years 2007 (FY,
ended March 2007) and FY2012, sales of used cars in India grew at a compounded
annual growth rate of 22%, from 1m units to 2.6m units worth Rs520bn. That
outpaced sales of new cars, which grew from 1.1m to 2m in the same period.
Crisil forecasts that the used-car market will grow at 22-24%, to 7.7m units
from FY12 through FY17, at which time sales of new cars will be 4.3m.
There are several reasons for
this growth. For consumers who are watching their wallets, used cars offer
value for money, at an average price of around Rp200,000 (US$3,155) per car,
against an average of Rp400,000 for a new car. Higher excise duties and rising
road taxes have made new cars more expensive, while high inflation has also
raised interest rates on automobile loans. This, coupled with economic
uncertainty, is prompting more car buyers to postpone a new-car purchase and
turn to used cars instead.
Demand is also being fuelled by
India’s smaller towns and cities, which house a growing population of
upwardly-mobile but budget-conscious customers. Meanwhile, the supply of used
cars has increased in recent years, as customers have begun upgrading to newer
cars more frequently than earlier. With the rise of two and even three-car
households, cars are better maintained, adding to the supply of good-quality
cars.
A market develops
A key factor in growing this
market is the rise of organized players. According to Crisil, until FY2007, the
used car market was dominated by direct customer-to-customer sales supplemented
by unorganised players. Organized players had a miniscule 4% market share in
that year. However, the share of organized players rose to 16% in FY2012 and is
forecast to grow to 25% by FY17, as companies recognize the potential in
this business.
Organised companies come in
several different flavours. The first is several auto makers who deal in
only their own brands, in the hope that this will provide a counter
cyclical revenue stream as well as boosting new car sales as customers upgrade.
Auto maker Maruti became the first major organised player to enter this market,
launching its used-car brand Maruti True Value in 2001. It now has over 454
outlets in 260 cities, selling around 250,000 used cars a year. Several others
auto companies have followed suit, notably Tata Motors, which sold 96,827 cars
under its assured pre-owned car programme last year.
Several luxury car makers,
including Audi and Mercedes-Benz, have also ventured into the used-car segment,
to cater for aspirational but still price-conscious buyers. India imposes 100%
customs duties on luxury cars, while a fast-depreciating currency is making
imported cars even more expensive. A quick turnover of new-car buyers, who tend
to change their cars every two years on average, also ensures a good supply. As
a result, used luxury cars cost almost half the price of their new
counterparts.
Audi India, which inaugurated
its pre-owned car programme in December 2012, expects to sell nearly 700 vehicles
by end-2013, and to increase its pre-owned centres from 3 to 10. Mercedes-Benz
India’s pre-owned cars programme sells close to 100 units a month, growing in
double digits both last year and this year, while BMW India now has 10
exclusive showrooms for its pre-owned cars across the country.
Meanwhile, several auto
companies have set up multi-brand used car operations. Mahindra First Choice
Wheels, part of automotive group Mahindra, says it will likely sell about
65,000 used cars during FY2013. It plans to increase its 255 dealerships to 355
this year and to 500 by 2017. Toyota Kirloskar Motor, the Indian subsidiary of
Japan’s Toyota Motors, also plans to expand its used-cars network, which deals
in both Toyota and non-Toyota cars, from 50 outlets to 65 outlets by end-2013.
Honda India sells only used Honda cars, but will accept non-Honda cars in
part-exchange. Honda expects to sell up to 1,000 used cars this fiscal year
through its certified programme, Honda Auto Terrace.
Rounding off these choices are several
independent used-car companies, from websites such as Carwale.com, to multi-brand
automobile sales and service chain Carnation Auto, which plans to have about 50
outlets by March 2014. ALD Automotive, the multi-brand vehicle leasing and
fleet management business of Société Générale Group projects a 38% rise in its
used-car sales by March 2014, to 2,500 vehicles.
Organized companies offer
several benefits. Before being sold, the used cars are often refurbished and
certified by in-house engineers. They also offer warranties of up to a year,
some free services, financing schemes clear documentation, credibility,
transparency and good retail networks. All of that in turn gives customers
confidence, reducing their fears of being cheated and creating a virtuous cycle
of higher demand.
In the long run these factors
should benefit the new car market too, providing potential buyers with funds
and a confidence boost by making it easier to sell their older vehicles.
Indeed, even before that, the decline in new car sales is likely to start
driving up prices in the used car market. That could dampen a market that is
currently still in overdrive.
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