Who Is This ‘Car Buyer In Retreat’ That’s Caused The Auto Slowdown?
In all the voluminous speculation and analysis of why auto sales have crashed, two things have been conspicuously absent. One is the voice of the customer. All we have is a lot of second-guessing about consumer behaviour without actually asking consumers.
The other is a candid discussion on whether supply-side conduct had something to do with the volatility in sales. This is important especially when it comes to cars because 50 percent of the market belongs to just one company which is three times larger than the next player, and also because auto sales numbers that are discussed are primary sales of company-to-dealer (usually no credit) and not retail sales of dealer-to-consumer.
The Consumer View Of The World
Supply-side analysis is limited to what (car models) sells or doesn’t and where (geography). It cannot throw as much light as consumer-side analysis can, on hotly debated topics—like ‘structural or cyclical’ to begin with. For just Rs 40 lakh on the outside, an all-India survey of the car-buying demographic can be done, asking a few simple questions which will tell us clearly and factually what the contribution is of each one of the speculated reasons for the sales crash:
- “consumer confidence in their future income is weak”,
- “consumers are waiting for clarity or what types of cars will be allowed,”
- “consumers have less money in a slow economy”,
- “GST, compulsory insurance, rising fuel prices have made vehicles unaffordable”,
- “a big chunk of buyers are Ola/Uber drivers and they are not increasing in number”, and
- the big idea that “we are now a post personal transport society, thanks to Uber and Ola and the coming of age of millennials.”
We may discover new and more weighty contributors, like the fall in second-hand vehicle prices on account of deep-discounting by new-car dealers leading to consumers having less money than they anticipated to upgrade their car; and also making used cars far more attractive to previously intending buyers of new cars. It could be intense parking pain of non-availability and steep charges or traffic pain, both of which are compounded by the unavailability and rising cost of drivers.
Cheap Jio and expensive drivers, high interest rates and falling second-hand car prices, and the government talking of new emission norms and electric vehicles can be an explosive cocktail. That’s what gives the Indian market its unexpected pleasant upsides too (remember how Indian rural markets bloomed just after 2008) and the nasty surprise downsides too.
Where are you, Nielsen and Kantar? Vox pop or anecdotal interviews that come in the media aren’t good enough, we need to test beautiful hypotheses with ugly facts got straight from the horse’s mouth.
But until we have that, we have to try and piece together an understanding of whether existing consumer-level data gives us any insights.
ICE 360 survey estimates, as depicted in the table below, based on household-survey data by fact tank and think tank People Research on India’s Consumer Economy, shows who owns cars.
Over 40 percent of those are in Rural India—it’s the rural rich who buy cars not the rural poor. This is the most fertile target group for car ownership. One out of every two such households already owns a car, this is a prime and well-penetrated but not saturated market, it houses repeat purchases as well as first-time buyers.
Below the rich folks is a less well-off group, the next richest 20 percent, who own another 25 percent of all cars owned, and, these are probably predominantly small cars. This market is low in penetration of cars. (below the natural income threshold for cars—in this income group, only 19 percent have cars as compared to 50 percent in the income group above them. This, however, is a developing market. Half of them already have two-wheelers.
Below the richest 40 percent of households, there’s the bottom 60 percent of households where cars are a rarity, probably NPA candidates on loans, probably second-hand car buyers so let’s leave them out.
So we know that 66 percent of car buyers are well off and 50 percent of car buyers are very well off. The stock market hasn’t crashed anybody’s pension like it did in the United States in 2008. Banks love lending to well-off borrowers, 60 percent of cars are financed. This group has money and their sales potential is safe. The remaining one-third of car buyers are ‘at-risk’ because they are ‘good times’ buyers, and as the economy slows down as does their income growth.
The two-wheeler story is the same, only more skewed to the lower-income groups, they will likely not buy at all. Car and two-wheeler ownership is highly-overlapped and at least 40 percent of two-wheelers come from the richest 20 percent of households. These volumes are safe. However, the heartland of more-expensive two-wheelers lies solidly in the middle- and lower-income groups and hence far more vulnerable.
Nothing in this market structure story supports the idea that people have virtually stopped buying because they have no money.
Everybody was rocking till FY18 and nothing so disastrous has happened to buyers’ incomes, especially the rich buyers’ incomes in the last year.
There are, however, signs of postponement to better times because most people in India are self-employed. So it is expected (and we should be resigned to it) that until the occupation structure changes and more regular jobs are created, uncertainty in the environment will be transmitted faster to purchase behavior than even reduction in interest rates. Even amongst car owners who are a better demographic than the average population, only 40 percent have a regular job with a monthly salary. In the case of two-wheelers, it is even lower.
In fact, if you look at penetration levels, the journey is yet to begin.
Car penetration increased with urbanisation. ICE 360 data and analysis show that the least-urbanised cluster of 32 districts of the country has a car penetration of 2 percent (one in 50 households own) and the most-urbanised has a car penetration of 40 percent—so there’s miles to go.
The case of two-wheelers is different—all India rich and poor, more than one in three households have a two-wheeler. Two-wheelers are also a ‘productivity tool’ to help people earn more, especially employed, especially rural. This market cannot evaporate either, though it can gradually slow down to just replacement demand, though there’s still some way to go on that and some innovation to better serve its purpose as an accompaniment to the car that can delay it.
Further, we know from consumers that when public transport in rural areas improves, so does the demand for private transport. Think of it progressing as... I had no way to go, I went nowhere; once I started going out due to public transport, I needed to go out at my own time and more often and more comfortably.
As for the post-car millennial world, a lot has already said about the improbability of that, especially by Maruti. So let’s leave it at that.
So it doesn’t seem to be the consumer alone who is responsible for such a severe tanking of the auto market—so let’s look further afield and see what suppliers did.
Supplier Conduct
Consider this possibility: FY17 and FY18 saw healthy sales growth despite a slowing economy. The sudden crash is way below the effect of the economy on the financial health of most of the car-buying population. This suggests that car companies, despite seeing signs of stress among consumers, probably pushed more stock to dealers than the market could absorb in FY17 and FY18, and posted sales increases.
Dealers, in turn, were funded by NBFCs to buy the stock. Meanwhile, given the abundance of money and encouragement from OEMs, more dealerships were opened than demand warranted and dealers were also made to invest more in their showrooms to make them more attractive to customers. The dominant logic seemed to be that more is better for sales—get vehicles to “within arm’s length of desire”, as the Coca-Cola line goes.
Then began the deep discounting which crashed second-hand car prices and ironically the market for new ones as well; consumers had less money of their own and had to borrow more to upgrade to a better vehicle.
This cycle of financing also got many more Ola and Uber wannabe drivers to buy, facilitated by comfort letters from the companies. This source of buyers slowed down when the two companies, their network effects having been achieved, started pulling back on driver incentives making post-EMI earnings not attractive at all, discouraging new entrants. Shades of this, though less pronounced, probably also happened with two-wheeler companies.
Mass-market consumers who represent a higher risk-segment —especially when the economy is slow and work is hard to find—were previously financed in large numbers by NBFCs and banks who started pulling back to less risky income groups. Remember, this happened to two-wheelers in 2004-05, causing the sales crash of 2006-07.
So everyone was happy until the economy-driven poor sentiment stayed bad for longer than expected.
Lenders started discovering dealer frauds and saw the risk potential of retail NPAs and tightened up, making the whole ecosystem—which was, in part, fueling ‘ponzi’ demand—unravel.
Inventories piled—over-leveraged dealers shut shop.
Auto companies left someone else carrying the parcel when the music stopped (as several dealers have spoken out) and turned to the government for handouts.
This, despite retained earnings over the past years that came, in part, from borrowing from future sales as well as achieving unrealistic sales numbers.
We forget the past experience with tractors when market share rivalries resulted in huge stocks in the pipeline, leading to a crash in 1998-99 which lasted all the way through to 2002-03 on the back of super-healthy growth, 1994-95 till 1997-98.
Prognosis
As the richer end of ‘Consumer India’ is well-penetrated, and producing fewer young adults per household, sales of that end will slow in numbers, replacement demand will be its mainstay and companies will have to work hard for that.
As the buying action shifts to the first-time less well-heeled buyer, there will be uncertainty, and more economic environment sensitivity and everybody has to get used to the new normal or drop prices or get banks to drop interest rates drastically. Till the dealership ecosystem heals and liquidates inventory, do not look at primary sales as an indicator of health—just an indicator of whether the hangover is getting better or not.
The new normal will also be defined by many things, including parking availability and cost, driver availability and cost, the intensity of traffic, fines paid for transgressions and professionalisation and a profusion of second-hand car dealerships, and the future of fuel.
So yes, it is a structural change story long-term, in terms of what the attractiveness of own transport is going to be. But for now, let’s just wait for the hangover to recede.
Rama Bijapurkar is an independent management consultant and author of ‘A never-before world: tracking the evolution of consumer India’.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.