Coronavirus impact | Auto dealers stare at uncertain times ahead

It’s been a month since more than 25,000 auto dealerships across the country’s downed shutters following a call for a lockdown made by Prime Minister Narendra Modi in the hope of arresting the spread of coronavirus.

Dealerships selling two-wheelers, cars and heavy trucks were barred from engaging in sales activities virtually overnight, bringing all physical activities such as buyer’s visit to the dealership or taking delivery of the vehicle, to a standstill.

This has resulted in a yet-unaccounted loss running into crores threatening the business viability even as vehicle makers scramble to bail out their dealer partners without whom the front-end risks’ a virtual collapse.

As per a report done by brokerage Anand Rathi, two in every five passenger vehicle bookings done in March have been cancelled citing budget constraints, job uncertainty and greater expense. Several dealers are reworking cost reductions, renegotiating rents, reducing staff, inventories, salaries and incentives to ensure continuity in operations.

Auto dealers' businesses range from Rs 10 crore to Rs 1,000 crores, but majority of the dealerships are family-run small scale businesses spread across every nook and corner of the country. Each dealership on an average employs 70-150 people, as per the Federation of Automobile Dealers Association (FADA).

Dealerships employ over four million people at dealerships and service centers provide direct employment to 2.5 million people, another 1.5 million are engaged indirectly, as per FADA.

"We hardly earn anything from sales (of vehicles). The margin range is less than 2.5 percent per vehicle. Our profits come from service centers which are closed and slowdown will make many car owners postpone the servicing," said a car dealer Maruti Suzuki from the south.

Recently several companies started opening mini showrooms especially in the hinterlands as a means to tap the interior parts of the country with minimal investments done by the dealers. These establishments which are either owned by small time investors or large entities based in cities, typically house 2-3 vehicles.

"Our margin on sales used to be 5 percent but now its negligible. It is not a viable business anymore with the entry of so many other dealerships and with the advent of online sales business it is bound to come to a standstill", said another dealer from Maharashtra choosing to remain anonymous.

Over the last few weeks vehicle manufacturers have come forward in easing some cost pressures for the dealers announcing some economic packages however the closure of more than 300 dealerships last year has become an indicator of the strain on the community. The added challenge of a complete shutdown will further test their financial viability.

Auto companies have announced a slew of measures to help their dealers. These include direct cash assistance, releasing interest cost on stock including vehicles in physical and transit stock, reimbursement of unutilised dealer funds lying with the company remitted back to dealer, service claims for warranty being credited to the dealers account to name a few. 

Y S Guleria, Director (sales and marketing), Honda Motorcycle and Scooter India said, “We have seen an unprecedented situation due to coronavirus and none of us have seen anything like this before. It is too early to say how many dealers will get impacted. It depends on individual automakers workout revival plans for their respective network.”

But the relief package put in effect by manufacturers will provide solace only for the immediate period. The after effects of the COVID-19 pandemic will last for several months fear dealers and manufacturers.

Findings from the Anand Rathi survey reveal that even after lockdown is lifted, passenger vehicle dealers are expecting losses for about 3-4 months that could lead to them being unable to pay staff salaries from May.

“Most commercial vehicle dealers faced huge losses in the previous fiscal due to the slowdown and given that the current situation we expect a few dealers to face a cash crunch from May/June if the lockdown is not lifted. However, the problem of weak retail sales would lead to continuous losses for nine months from the time the lockdown is lifted,” added the report.

Some automakers have resumed manufacturing activities after a few states granted them permission. But with a poor economic recovery lingering on the horizon demand generation poses a bigger challenge for the industry than restarting of production lines.