Pre-owned vehicles market is witnessing growth in organised segment due to demonetisation and GST, says to IBB report.
The Indian new car market expected to grow at 12-13% annually and will be among the top 5 global markets by 2020. The pre-owned car market will be an important enabler for new car industry growth; as 25-28% of all new car transactions are accompanied by a trade-in. Pre-owned car market size in India is 1.2x that of the new car market, well below 2.5x which is typically found in mature markets.
Pre-owned car channels are highly fragmented and can be divided into four primary segments:
- Organised with 15% market share and average volume per dealer at 17 per month
- Semi-organised with 36% market share and average volume per dealer at 9 per month
- Unorganised with 17% market share and average volume per dealer at 4 per month
- Consumer to consumer with 32% market share
In 2016, the 3.6 million pre-owned car market grew at 9%. However, demonetisation reduced market size by 200,000 units, roughly 6% of the overall market. The market has however recovered since then to normal size and growth rates.
“Over the past year, the pre-owned vehicles market has been hit by significant ‘jolts’ in the form of three major market reforms – demonetisation in November 2016, BSIII/BSIV in March 2017 and Goods and Services Tax (GST) in July 2017,” according to a new IndianBlueBook (IBB) report, which analysis the impact of the recent disruptions on the overall market.
Pre-owned car ownership
The IBB report found that the age profile of customers in metros is younger when compared to those in the non-metros. Smaller towns are more amenable to buy older vehicles when compared with the metros. Around 70% of pre-owned cars sold were under Rs 4 lakh.
A greater share of organised transactions in the metros are finance-driven in comparison to those in the non-metros. Residents in smaller towns have a preference for diesel vehicles and a strong liking for utility vehicles or small cars.
Organised market
Some of the auto manufacturers already have flourishing businesses under their own brands – for example Maruti Suzuki’s True Value, Mahindra’s First Choice and Tata Motors’ Assured. Demonetisation and GST, which came into force from July 1, 2017, are helping in shifting the predominantly unorganised used car market towards a more consolidated and organised framework.
“While these reforms have no doubt disrupted the status quo, they have necessitated that all stakeholders change with the times and become ‘more organised’. Not withstanding the short term hiccups, we strongly believe these market reforms are good for the organised industry in the long term,” said Dr Nagendra Palle, Managing Director & CEO, Mahindra First Choice Wheels Ltd.
IBB report expects the pre-owned car market to organise rapidly. While organised and semi-organised segments grew by 36% and 12% by volume, Consumer to consumer (C2C) and unorganised segments have remained flat. Organised segment in metros grew faster than in the non-metros. On the other hand, unorganised segment shrunk overall, declining the most in the non-metros.
Dealer count across India has essentially remained flat at 29,530 dealers. Here again, organised dealers are growing fastest at 23% year-on-year (YoY), a trend expected to continue over the next few years. Dealers also became more efficient since last year. Dealers’ productivity has improved by 18% YoY, a sign of a maturing industry, selling 7 units per month per dealer.
Share of non-metros of overall number of pre-owned cars financed was at 45%, up from 42%. Approximately, 190,000 new cars and 36,500 pre-owned cars are financed monthly. The projected growth (through FY20) for the new and pre-owned loan markets are 18% and 20% respectively.
At 70-80% finance penetration, the numbers are not too far off mature markets. However, the pre-owned segment lags significantly compared to matured markets.
Impact of market reforms
GST regime, as it exists today, imposes a significantly higher burden on the dealer – on a pan-India basis – roughly twice the rate that was otherwise being incurred. In 70% of states, dealers will have to pay higher taxes post-GST, compared to the old tax regime. Current GST structure is expected to give a fillip to C2C transactions or encourage the dealer to go in for a ‘park and sell’ arrangement. In the long-term, with transaction transparency increasing, including expected RTO reforms, IBB expects prices to adjust to accommodate the new tax structure.
The cash crunch induced by demonetisation led to customers postponing their decision to buy pre-owned cars; leading to a fall in volume in November 2016. On account of demonetisation, the organised segment of the pre-owned car market has grown faster and at the expense of the semi-organised and unorganised segments. Finance cases have gone up by 20% post demonetisation.
Consider TCO while buying pre-owned car
The primary focus of many car buyers is the price, but there are multiple costs which have an influence on the overall cost of ownership of a vehicle. Some of the key expenses to consider are:
- Depreciation: Largest expense of motor vehicles. Not all vehicles age at the same rate, however. On average, the value of the vehicle comes down by 10% as soon as you drive it out of the showroom and by about 30-40% in the first year of owning it
- Fuel costs: In India, fuel prices vary. Depending on how you use your car – your fuel price can be extremely high
- Interest: The EMI not only includes the principal payment of the loan amount but it also includes the interest amount. The interest can vary anywhere from 6-14%
- Scheduled maintenance: Due to road conditions in India and the traffic, the car needs to be serviced at least twice in a year. The cost of servicing can vary depending on the model and make of the vehicle
- Insurance: An inevitable and mandatory cost of car ownership
- Repair costs: Damage due to accidents, natural calamities is expensive to repair. Though modern cars are competent and dependable, some accidents are unavoidable
- Accessorising: Accessories can swell the overall cost. Normalizing for differences in features allows for a more accurate TCO comparison when comparing vehicles
The scenario of buying a one-or two-year old vehicle is perfect for shopping in the certified pre-owned (CPO) car market. Car owners can save on the initial depreciation loss through engaging in
a pre-owned car transaction; it is however, vital to total cost of ownership (TCO) across vehicles when making a purchase decision.
Diesel hatchbacks command higher residuals in comparison with their petrol counterparts. “Not all vehicles age at the same rate, as represented by their residual values. Localised activities and dense dealer networks are key for superior residuals in the luxury segment in India. Self-driven rentals command lower residuals when compared with white and yellow-board vehicles,” said the IBB report.
While GST, and before it demonetisation, has caused disruption in the market, it is likely to take the second-hand car industry in the organised domain – definitely a good sign for a developing country like India.
While these reforms have no doubt disrupted the status quo, they have necessitated that all stakeholders change with the times and become ‘more organised’. Not withstanding the short term hiccups, we strongly believe these market reforms are good for the organised industry in the long term.
– Dr Nagendra Palle,
MD & CEO, Mahindra First Choice Wheels Ltd
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