Automobile sales skid sharply as rural markets take COVID punch

In Alwar, Rajasthan, vehicle showrooms were allowed to operate the whole day from the beginning of this week, against till only 11 am earlier.  And a dealer of Mahindra & Mahindra (M&M) vehicles realised that at least every third booking was being cancelled. Two in three customers had either decided to postpone the purchase of a new vehicle or had scrapped their plans altogether.

“This time — in the second wave of the COVID pandemic — rural India was hit at least twice as hard as in the first wave,” said Shyam Verma (name changed), manager at a large vehicle showroom in the city. “M&M has a large rural customer base and it is no surprise that customers are coming in to cancel or postpone bookings made in April. This trend is likely to continue.”

India’s automobile industry makes a significant contribution to the economy, accounting for nearly 50% of the manufacturing GDP. But, due to a nationwide lockdown last year, and then again due to state-specific lockdowns from mid-April this year, the industry’s backbone has been broken. A fraction of factory capacity is being utilised, retail sales are plunging again and the industry stares at a long and tough road ahead.

According to the latest data from the Federation of Indian Automobile Dealers (FADA), total vehicles sold to customers in May were not even half the number sold in April 2021 and just about a third of the number sold in May 2019. FADA said it couldn’t compare May 2021 and 2020 on account of the nationwide lockdown last year.

Sales of cars and SUVs were down nearly 60% in a month, while those of two-wheelers were lower by 53%. Trucks sold only a third of the volume recorded in April.

Wholesale vs retail sales

The data for vehicle dispatches from factory gates of manufacturers (wholesale sales) and the number of new vehicle registrations (retail sales) showed a wide divergence in May.

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

So, while dispatch data would make it appear as if the country’s vehicle appetite had increased in May, the retail sales numbers show the true picture.

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In June, things have begun looking up as the unlocking process has started across most states. People who had booked vehicles before the lockdown are beginning to complete their purchase.

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

Stocking up, just in case

Dealers are evaluating the current situation in terms of inventory, too. Verma at the M&M dealership said the reluctance of some customers to purchase new vehicles had not stopped him from stocking up, unlike last time. His dealership now has an inventory of over 200 vehicles against less than 100 in the same month last year.

Verma said he wouldn’t like to be caught in the situation seen last summer, when there was a substantial post-lockdown demand surge but he did not have enough vehicles to sell. At that time, supply constraints had hit his earnings. This year, it is a combination of weak rural sentiment and overall economic impact of a deadly second wave of infections.

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

The inventory math

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

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

But Verma of Alwar and some others called it a chicken-and-egg situation. If demand spikes unexpectedly, then dealerships lose business because of lack of supply. But stocking up in anticipation of business could hike inventory costs.

Anyway, holding some inventory seems a sound plan as it also ensures sales continue even when there are supply glitches at the manufacturer end. And this is how the math works: gross margin on the sale of a new car is 4-5% versus inventory cost of just 1%. So, keeping an inventory is more gainful, at least for large dealers.

Some of the bigger manufacturers such as Maruti Suzuki India have, in the past, spoken of setting up large stockyards but these plans have remained on paper.

Two-wheeler sales

Nikunj Sanghi, Chairman of the Automotive Skill Development Council, said two-wheeler sales were the worst 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 salaried class, small business owners and farmers. And the incomes of these sections have been severely impacted by the pandemic.

“An even bigger challenge for pushing two-wheeler sales now is the impact of the second wave on rural buyers,” said Sanghi. “In any case, two-wheeler sales have been suffering from multiple other challenges as well: the transition to BS-VI emission norms last April, additional safety features, manufacturers passing on input cost hikes to customers, etc. All this has meant a nearly 20% price escalation in two-wheelers within one year.” Add to this the steep increase in cost of operation, thanks to an incessant increase in fuel prices.

Analysts at brokerage Emkay pointed out that weak domestic two-wheeler sales were partly compensated by robust exports. In the commercial vehicle segment, volumes remained under pressure due to lower freight availability, resulting in the postponement of purchase orders by transporters.