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No V-shape recovery expected after second wave unlock, says FADA President – ET Auto


Vinkesh Gulati, President, FADA

Q. What’s your thought on the ranking released by ETAuto, what does it say about the industry?

The ETAuto ranking gives a birds-eye view of how Auto OEMs are performing on various parameters in a very simplified manner. It is actually an eye-opener for the industry. There has been regular discussion on Over-Dealerisation, investments in the name of reach, etc. But nobody dared to bell the cat by reporting that the average volume per outlet is as low as 20. Such a low average per outlet and the dismal margins have forced lots of dealers to shut shop. The exodus of dealerships in the past has also been due to such reasons along with viability issues.

This also builds a strong case of why it is high time for the Indian auto industry to migrate from wholesale base market share to retail-based market share. The ranking report also builds a strong case for reduced inventory at dealers’ end. This will not only help the dealers in protecting the margins but also save them from sinking.

The report also stresses how it is high time for OEMs to make a smart shift from Taj Mahal-size dealerships to smart and lean ones which can save costs. New ways of reaching out to customers need to be thought of to lower the cost of the entire operation.

Q. What kind of a shift the companies are planning to make in their retailing strategy after a prolonged pandemic impact?

Companies up and down the value chain are feeling the pressure of supply and demand disruptions, and the public concern for health and financial well-being has slowed global economies. Even as some states are doing the groundwork to fully reopen, questions remain around the steps the automotive companies should take to prepare themselves for the realities of a heavily disrupted supply chain.

Cost-cutting and operational fitness programmes that began well before the pandemic remain important for the survival of the dealerships.

Auto OEMs are looking at digital shifts as much as possible to make the dealership outlets lean and fit.Vinkesh Gulati, President, FADA

I think most of the auto OEMs are looking at digital shifts as much as possible to make the dealership outlets lean and fit. This will mean that the entire selection of vehicles and even bookings can be done online. With this, the customer needs to come to showrooms only for the final touch and feel of the vehicle and to do the mandatory paperwork required for the purchase of a vehicle. Many companies are now tying up with digital platforms to attract customers who are otherwise hesitant to move out of their homes. They are also making different sizes of dealerships which include large, small, and digital formats covering all sorts of markets and as per the need of the specific region.

Q. How do you see the agency model recently announced by Mercedes-Benz India?

The agency model introduced by Mercedes-Benz India will be out-of-the-box thinking by the company. Even though the model has tested waters internationally, India is a unique market where customer preference is very different as they change dealers and even brands on any additional discount.

Even though on the face of it, this model looks beneficial to the dealer community dealing in premium brands with low volume, we need to see if this model can work with mass-market brands so that every dealer can benefit from it.

Q. What has come to the rescue of dealers in these troubled times?

While we have written to the government and the OEMs for financial help, I must say that the auto dealers are generally abandoned during the 2nd wave of Covid. Unlike last time, when both the OEMs and the government announced survival packages, this time only a handful of OEMs has announced an ‘actual’ financial package for their first customers. To name a few HMSI, DICV, Renault and Tata Motors CV have come forward to support the dealers. Hand-holding by OEMs at such a juncture is of utmost importance and also necessary as, without this, dealers will not be able to bear the financial burden due to the lockdown imposed by the States to break the spread of the virus.

On the other hand, RBI has announced a moratorium for SMEs whose exposure to all financial institutions do not exceed INR 25 crore and had not taken the moratorium benefits during the previous wave of Covid. This will however benefit only a handful of small auto dealers.

Q. What kind of impact the second wave has made and what have been the key takeaways and what kind of support would you seek from the various stakeholders?

The 2nd wave of Coronavirus is creating havoc in everybody’s life in some way or the other and has proved to be more fatal. However, unlike during the first wave, this time even the rural areas, which helped us survive last time, have also been impacted.

The second wave of Covid has created a big dent on retail which has resulted in zero revenue for almost all dealers. Auto dealer inventory funding which was taken before the beginning of the lockdown is now due for repayment. Since almost all dealerships had no sales, they are not in a position to repay this loan tranche. Most of the dealers have also incurred fixed costs, which has resulted in erosion of working capital.

Expectation from the government

1. Auto retail trade is a unique business where auto manufacturers bill the vehicles to auto dealers, and banks / NBFCs finance the same to help the dealers in terms of inventory funding for a period of 30-45 days. The loan tranche amount is paid back to the bank/ NBFCs once the vehicles are sold by the dealers or within the stipulated time

Since the current lockdown has already been over 30-45 days, 55+ days in some cases, revenue for most of the auto dealers is nil as there had been zero sales. The loan tranche is due for payment, but the dealers are not able to pay for no fault of theirs and are becoming defaulters.

In the absence of any guideline so far, an extension of the tranche is considered as restructuring of the loan. This has a negative impact on the credit score of the auto dealers as their CIBIL rating will go down.

We have hence requested the Finance Ministry and Reserve Bank of India that instead of restructuring, banks should allow a moratorium of 90 days and this is only possible when RBI instructs banks to do so by releasing guidelines/ circulars without any turnover or amount limit.

On the face of it, this model looks beneficial for the dealer community dealing in premium brands with low volume. But we need to see if this model can work with mass-market brands.Vinkesh Gulati, President, FADA

2. The INR 25 crore limit has to be raised for our sector, due to higher turnover, for restructuring of loans especially for commercial vehicle and passenger vehicle dealers.

3. Three months of lockdown interest should be charged in the next 12 months post-opening of the lockdown.

4. PF & ESIC contribution of employer and employee should be borne by the government for 6 months.

Expectation from OEMs

A financial sustainability package from all the OEMs similar to what they had announced last time during the Covid wave 1.

Q. How do you expect the rural and urban markets to be impacted by the second wave?

During phase-1 of Covid, urban demand was an issue while the rural was doing great in terms of sales and inquiries. This was because agricultural income due to good monsoon coupled with better price realization from crop selling resulted in good disposable income for a rural customer.

This time the rural areas also are badly impacted. Most of the people there are not getting good treatment either due to lack of medical infrastructure or people are hesitating to go to hospitals for treatment. Almost every family has witnessed the impact of Covid.

Even though monsoons are expected to be normal, because of the Covid impact in rural markets, sentiments are low. Hence we may not see a V-shaped recovery, unlike last time, which definitely means that auto demand and sales will be low at least until the festivities kick in.

I pray that I am wrong and we can see demand coming back. As of now, wherever unlocking is happening, initial discussions with co-dealers suggest that inquiry levels are quite low and demand is also bleak though a better clarity will be coming after another 15 days or unlocking in all the states when customers will be back to their normal life.

Q. Can you share the trend in terms of the digital showrooms in the last two years (FY20 and FY21)?

There is nothing called digital showrooms though we now have a Phygital setup where the digital part gives us leads and bookings and the physical part gives the customer the actual experience coupled with all the routine paperwork necessary to make the purchase. The vehicle buying process in India is a complex task. While OEMs have tried to make the buying process online, customers can only select the model and make initial bookings. For all the other activities like financing, insurance etc, customers visit the showrooms.

We also need to understand that vehicle is an aspirational purchase in India as it generally ranks 2nd after purchasing a property. The buying decision is largely a family decision and not an individual decision as the entire family comes to showrooms to smell the vehicle, touch and feel it live.

Walk-in inquiries have reduced significantly and the customer today is more informed.Vinkesh Gulati, President, FADA

Also, while buying accessories, customers want to see it live and not on screen. Apart from all this and as mentioned earlier, the paperwork including financing and insurance is a lengthy process and needs customers’ physical presence.

OEMs are now thinking of smaller and leaner showrooms so that operations cost can be reduced. This will definitely help dealerships in making their balance sheet robust in some sense.

Q. Do you think asset-light or lean and smaller sales outlets become more common; what kind of mix do you expect in the next few years?

Smaller showrooms are the way to go as walk-in inquiries have reduced significantly and the customer today is more informed. With smaller ones, one can control space, rental and manpower costs. A new generation of buyers is scouting showrooms only to select their vehicle as 85% of the customers know what they are buying. They only look at variants of the model or are at best confused over specifications and colour and only enter the showrooms to get the best deals.

The entire time spent on vehicle detailing has not moved online. The big setup now no longer woos the urban customers. Customers can now get test drives or the vehicle delivered to them at their home so there’s no need for huge investments.

OEMs are now realizing the cost pressures which the dealerships are going through while the margins are at rock bottom. Small setups reduce the cost base for dealers as rentals are high in tier 1 cities.

I expect that lean showrooms of ~1000 sqft, compared to 2,000 sqft in PV, and 500 sqft for 2w will be ideal for customer experience in future. These showrooms when tech-enabled will provide the customers with a similar experience which they used to get in the good old days. Some OEMs have already started work on this, but the focus is only on metros and tier 1 towns.

Q. How do you see the re-opening of the market?

We are currently seeing that states in the north are opening up in a phased manner while states in the south are still under lockdown. It has only been a few days as of now. Wherever unlocking is happening, initial discussions with co-dealers suggest that inquiry levels are quite low and demand is also bleak. Things should be clear after 15 days and people begin to return to normal life.

As of now, the only saving grace is the expectations of a normal monsoon as this will revive rural demand and boost auto sales.

I see a recovery to be slow and some traction may come once the festival season begins with Onam, followed by Ganesh Chaturthi, Navaratri, and Diwali.Vinkesh Gulati, President, FADA

Q. How do you see recovery after the second wave?

Unlike the first wave of Covid, where rural markets were untouched, this time, even rural areas are not spared. V-shaped recovery was led by rural markets then. This time it looks very unlikely for history to repeat itself.

I see any recovery to be slow and some traction will come only after the festival season begins with Onam followed by Ganesh Chaturthi, Navratri, and Diwali. Full recovery, from the lows of FY21 to the highs of FY19, will be possible only by FY23. But we should consider that there is the threat of a third wave, which may derail the recovery.





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