Used cars – the dark horse of the Indian automotive industry

The automotive OEMs had a dream run from 2011 until about 2018 with consistent increase in sales. With BS-6 transition beginning thereafter, the sales plummeted on the expected lines until 2020 and that was because the prices of the cars had increased by a range of 5%-10% due to the additional costs incurred by the OEMs and the suppliers, needing re-alignment of the design and the production set-up. Still, in the medium term, the demand for BS-6 cars was expected to bounce back, helping in an increased OEMs’ capacity utilization and, therefore, reduced prices. Then came the pandemic!

While till about FY19, the used car: new car sales ratio was steady at 1.2:1, the ratio zoomed to 1.5:1 in FY21. As per a study by Autocar, the used car industry would see a whopping sales increase to 8.2 Million units by FY25 while the new car sales would have grown only to 3.9 Million units by then – a ratio of 2.1:1.

This article would further analyze the key demand drivers, the challenges and the way forward for the industry.

Demand Drivers

As per a 2021 study conducted by PEW Research Center, the number of people in 2020 who lived on $10.01 – $20 a day (middle income) was estimated to be 66 Million and, on $20.01 – $50 a day (upper middle income), was estimated to be 16 Million. The pre-pandemic numbers were estimated to be 99 Million and 22 Million respectively. This reshuffling of the middle class along with a reduction in the income levels meant that the propensity to buy a new car had drastically reduced.

  • Need for personal mobility

Social distancing norms during the Covid times meant that the need for personal mobility and avoiding public transportation got reinforced in the minds of the car buyers. A survey conducted by OLX from March – June (2020) showed that 56% of the respondents planned to buy a car in the next 3 to 6 months, out of which, 54% of them wanted to explore a used car option. Also, its website registered a 25% increase in demand for used cars in the month of July, 2020 compared to the demand levels seen in February, 2020. With prices of new cars inching high and affordability becoming a challenge, “value for money” along with “health and wellness first” became the mantras for the car buyers.

As laid out by IRDAI, a newly bought car’s value depreciates to about 50% through 5 years of its life. Also, a used car’s insurance charge is less than the one for new car as the IDV of a used car is a fraction of the new car. These monetary factors in the aftermath of the pandemic’s first blow helped a low disposable income holder but a health conscious one to look for alternatives to buying a new car.

Challenges

  • Trends shifting towards EVs: Government of India has unveiled ambitious aims to electrify 40% of India’s new vehicle sales by 2030. Although the target is aggressive, with economy gradually expected to rise above pre-pandemic levels, central government’s industry-friendly EV policy, incentives to the prospective EV buyers (waiving off Registration Charges, for example) and popular opinion shifting towards protecting the environment, will make EVs alongside BS-6 vehicles attractive options to the car buyers.
  • Presence of unorganized players: In the used car industry, as of 2021, only 20% of the sales come through organized players – OEM owned used car dealerships and online used car retailers. C2C sales had a share of 32% and the rest driven through semi-organized players – multi-brand used car dealerships and online classifieds. In such a highly unorganized market, customers are wary of fraudulent practices. Customers’ trust in the dominant selling mediums is the biggest challenge for the used car industry.
  • Vehicle age-limiting regulations: Recently, Delhi Transport Department issued a directive mentioning that diesel vehicles older than 10 years and petrol vehicles older than 15 years would be banned for use in Delhi. It is very much likely that other state governments would come up with similar regulations soon thereby reducing the supply of used cars in the market, as many Indian cities fall among the top-20 polluted cities, globally.

Add to these, the lengthy documentation and paperwork, due to which the ownership transfer is completely ignored, having legal and cost implications.

Way Forward

The huge scale of unorganized set-up of the used car industry gives an opportunity for the organized players to increase their penetration in the country. The industry must look for formalization and its strategies are as follows:

  • Deepen the presence in the existing regions: OEM-branded used car dealerships and online used car retailers can penetrate more into the existing regions by establishing franchises/own hubs and explore conversion of semi-organized local dealerships into their own branded franchises/hubs. This would not only increase their penetration but also invoke a sense of trust among the prospective used car buyers.
  • Explore collaborations: A collaboration between strong online retailers and offline dealerships, would ensure that customers have a variety of options and more location options to buy used cars of a particular brand. The increased possibility of selling the car leads to a win-win situation for both parties and enhances the customer experience.
  • Focused Marketing: While it is understandable that offline marketing campaigns for the used cars can cannibalize the sales of new cars for the OEMs, targeted digital and social media marketing campaigns can help reduce that risk. With used car sales primarily driven by millennials and with the search process beginning over the internet, it would be apt for OEMs to bolster their online marketing campaigns for used cars, tuned to the target audience.

Overall, the used car industry is poised to grow strongly in the medium term alongside the formalization, meaning a sense of optimism for the overall automotive industry!



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Disclaimer

Views expressed above are the author’s own.



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