Crisis hits Indian passenger car industry as unsold inventories reach record highs

The Indian passenger car industry is facing a serious crisis as inventories have reached record highs. Scattered around many stockyards throughout the country, new vehicles are stuck waiting for buyers, with automobile dealers desperately searching for ways to save their businesses.

As of August 2024, passenger vehicle inventory levels in India have skyrocketed to a staggering 70-75 days, far exceeding the ideal range of 30-35 days. This translates to approximately 7,80,000 unsold units valued at ₹77,800 crore (US $9.4 billion).

To put this into perspective, in July 2023, inventory levels stood at a more manageable 50-55 days, with a stock value of ₹49,833 crore. The total sales of passenger cars in 2023 were around 41,00,000 units (4.1 million).

The current crisis has resulted in over 250 car dealers across India shutting down their operations.

Several factors have contributed to this perfect storm of unsold inventory. Original Equipment Manufacturers (OEMs) have flooded dealerships with vehicles despite declining retail sales. In August 2024, wholesales rose to about 350,000-355,000 units, while retail sales fell by 4.53 per cent year-on-year. This mismatch between supply and demand has led to a significant accumulation of stock at dealerships, creating a bottleneck in the sales pipeline.

Compounding this issue is the overall weakening of consumer demand for passenger vehicles. Poor consumer sentiment, worsened by adverse weather conditions and economic uncertainties, has led to a reluctance among potential buyers to make big-ticket purchases. Heavy rainfall and flooding in various parts of the country have disrupted market activity, leading to delayed purchases and further stagnation of inventory.

The country's economic headwinds have also significantly contributed to this crisis. Rising interest rates have strained potential buyers' purchasing power, further dampening demand across various vehicle segments. This economic backdrop has created a challenging environment for manufacturers and dealers, making moving stock and maintaining healthy profit margins increasingly difficult.

The situation is reminiscent of 2018-19, when high stock levels led to the closure of 282 passenger vehicle dealerships. The cost of holding excess inventory, including interest expenses on inventory financing, is eating into dealers' profits. Some OEMs even encourage dealers to extend their inventory financing from 60 to 90 days, increasing their financial burden.

The Federation of Automobile Dealers Associations (FADA) has expressed grave concerns over the high inventory levels and their potential impact on dealer sustainability. FADA has urged Original Equipment Manufacturers (OEMs) to realign their production and dispatch strategies based on actual retail figures, aiming to reduce the gap between wholesale and retail sales by 50,000 to 70,000 units.

“The carmakers should realign their production around the retail figures. To achieve that, they should reduce their vehicle supplies to dealers. While the reduction cannot happen in a single month, the gap between (PV) retail and wholesale figures should be around 50,000 to 70,000 units," said Manish Raj Singhania, Federation of Automobile Dealers Association (FADA), President

The mismatch between supply and demand creates distortions in the market, potentially leading to aggressive discounting that could harm brand value and long-term pricing strategies. This race to the bottom in terms of pricing could impact the perceived value of various brands and models, making it harder for manufacturers to maintain profit margins even when market conditions improve.

The ongoing crisis also creates an atmosphere of uncertainty within the industry, potentially deterring investments and hindering long-term planning. This uncertainty could slow down innovation and development within the sector, impacting India's competitiveness in the global automotive market.

The inventory buildup has affected only some models equally. Some vehicles have been hit particularly hard, forcing manufacturers to offer substantial discounts to move stock. The Maruti Suzuki Ignis, for instance, has faced sluggish sales, making it difficult for dealerships to clear their lots. Tata Motors has been forced to implement significant price cuts on popular models like the Nexon, Harrier, and Safari, with reductions ranging from ₹80,000 to ₹1.80 lakh.

Mahindra's lineup, including the Bolero, Bolero Neo, Thar, and Scorpio series, is being offered with discounts of up to ₹1.55 lakh, particularly on the popular Thar model. Honda has not been spared either, with the City and Elevate models now available with discounts between ₹75,000 and ₹1.14 lakh. Volkswagen has also felt the pressure, with the Taigun and Virtus experiencing price reductions of around ₹1 lakh to ₹1.20 lakh.

“Ultimately, all OEMs should ensure that their dealers are (financially) healthy and do good business. At the association level, we believe all OEMs will take responsible action if dealers struggle with excessive inventory," said Vinod Aggarwal, President of the Society of Indian Automobile Manufacturers.

Even the burgeoning electric vehicle (EV) segment has yet to be immune to this crisis. Despite the general trend towards electrification, EV manufacturers are also grappling with inventory issues. Tata Motors, a leader in the Indian EV market, has announced price cuts of up to ₹3 lakh on the Nexon EV and around ₹1.2 lakh on the Punch EV. These substantial discounts in the EV segment underscore the severity of the inventory crisis across all vehicle types.

Financial support for dealers is also critical. FADA has urged banks and non-banking financial companies (NBFCs) to impose stricter checks on inventory funding for dealers with excessive stock. Additionally, OEMs should consider absorbing some of the additional interest costs incurred by dealerships due to extended holding periods. This shared burden approach could alleviate some immediate financial pressure on dealerships.

FADA has sought intervention from the Society of Indian Automobile Manufacturers (SIAM) to address the issue collectively. Industry-wide cooperation is essential to developing sustainable solutions that benefit all players in the automotive ecosystem.

Government intervention could help alleviate the crisis. Introducing measures to stimulate demand, such as temporary tax breaks or incentives for vehicle purchases, could help jumpstart sales and reduce inventory levels.

As the Indian passenger car industry grapples with this inventory crisis, several key factors will shape its trajectory in the coming months. The upcoming festive season will be crucial, traditionally a period of increased consumer spending.