You might have passed across an auto dealership in your locality on a weekend and seen employees sitting outside, chatting over a hot cup of tea. This is the scene at almost every other dealership in the country. Auto dealerships, be it Indian behemoths such as Tata Motors, Mahindra & Mahindra Ltd. and Maruti Suzuki or even Japanese giants such as Toyota and Honda, have been witnessing a much lower than usual footfall over the past few months.
The manufacturing sector that provides about half of the total manufacturing output in the country and close to 7% of the nation’s GDP has been continually experiencing a slump for the past 8 to 10 months and if preliminary data is to be believed, the fall in passenger sales in the month of July could be as much as 30%. There’s also a credible fear that employees in automotive companies and dealerships could start losing their jobs as the auto sector begins to cut its losses (the sector currently employs about 35 million personnel, in a direct or indirect manner).
So what exactly has caused this slump in sales in the automotive sector? Well, there are a number of factors that have contributed to the slump, including the demonetization drive held in 2016, higher tax rates under the new GST regime (the automotive sector has been put within the highest slab of 28%) and the spurt in the growth of ride-sharing companies such as Uber and Ola. However, the factor that seems to have affected the automotive sector the most, according to industry experts and dealership owners, is the deepening liquidity crunch being experienced by the NBFC (Non-Banking Finance Companies) sector in the country.
It all began when Infrastructure Leasing & Financial Services Ltd. (IL&FS), one of the largest NBFCs (or shadow banks) in the country got into financial trouble in mid-2018, amid defaults and allegations of fraud. This led to the creation of an atmosphere of distrust with the sector, causing funding to dry up and borrowing costs to increase considerably. How and why has this crunch affected sales in the automotive sector? Well, the sale of nearly two-thirds of two-wheelers, about 60% of commercial vehicles (including the used ones) and close to a third of passenger vehicles in the country has been majorly financed by the NBFC sector in recent years.
While there is pressure on the dealerships from the automotive companies to fill their inventories, there has been scarce demand from the consumer end, despite heavy discounts and other SOPs being offered. More than 250 dealerships across the country have had to close down in the past year and a half, given the decline in NBFC credit available and with the traditional banking sector facing its own problems, with about $150 billion in Non-Performing Assets (NPAs), the banks cannot be expected to bail the NBFCs out of this crunch either.
The slump in the sector has not only affected the dealerships, but snaked its way through the entire supply chain and everyone from vehicle to component manufacturers seem to bearing its brunt. There is, however, certain hope with the festive season being round the corner, although not many are optimistic regarding the expected slight surge in sales. There’s need for major structural change, both in the NBFC and the automotive sector, and as companies seek to share overhead costs in order to survive this financial crisis, we could very well see the growth of multi-brand automotive dealerships in the near future.