Can used car market accelerate recovery for the Indian automotive sector?
Four wheelers were earlier a status symbol for the Indian families. But, mindsets have changed now as personal vehicles have become mobility solutions due to hygiene hazards. Hence, there is a sharp increase in the demand for used, pre-owned cars in comparison to brand new vehicles. Can this trend revive the entire automotive industry!
Anushruti Singh October 17, 2020
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Most of the automobile enthusiasts enjoy different cars at the same time. Families in India often buy used or pre-owned cars to learn driving first and then purchase a new vehicle. For some people pre-owned cars fit in their budget, while others do not want to invest a large portion on a new mode of transport. That is why they purchase old or used vehicles.
Buying of such vehicles largely depends on the deal they are getting, money saving, and on how they are going to use it. Overall, buying old or pre-owned vehicles is not a new thing in India. Earlier it was highly unorganised. But, the used car business has transformed into a full-fledged market over past few years and is gaining significant traction amid subdued economy.
In 2019, the used car market in India was valued at US$ 24.24 billion and is expected to grow at a CAGR of 15.12 per cent in the forecast period of 2020-2025. But, it is still behind many regions or countries globally.
Sanjeev Garg, Practice Leader—Automotive at Praxis Global Alliance, provided us some insights on the current market scenario. According to him, the used car or pre-owned car sales ratio is low in India at 1.18 compared to Brazil (4.07), England (3.43), and USA (2.40). This further highlights the potential of the used car market.
Garg says, “During FY16-20, the used car market in India grew at a robust CAGR of 6.2 per cent versus -0.2 per cent for the new car market in India. Also, the emergence of used car classifieds on online portals and the increase in the share of organised trade in the used car segment have fortified trust in minds of consumers.”
Old vehicle is a rising trend in new normal
Four-wheelers are a status symbol for Indian families. Earlier, buying new cars meant getting huge expenses incurred. But this outlook is taking a backseat now. Hence, a sharp increase has been witnessed lately in the demand for used or pre-owned cars.
A study conducted by CarDekho, a renowned website for new and old car selling reported that the used car segment recovered 99 per cent after the lockdown period. Also, only 77 per cent customers are back in search for new cars.
Another study by OLX in its 4th edition of Auto Note also reveals the steady recovery and growth of the pre-owned car market between April to July. According to it, the demand has spurred by ~25 per cent in July versus February. It further cites that 55 per cent of respondents plan to buy a personal vehicle in next six months, and non-metro cities are driving the demand.
PumPumPum, a car leasing startup also found in the survey that people are turning to used cars. At least 55 per cent first time buyers purchased used cars, followed with 41 per cent of those who have multiple cars in the family and only 4 per cent of them were replacement buyers. The research also states that the used car market is 40 per cent in metropolitan cities and 60 per cent in non-metros.
The new trend of used car leasing constitutes 90 per cent of consumers in metros and 10 per cent in non-metro cities. The gender-wise segregation reveals that 80 per cent used car buyers are male and 20 per cent are female. Geographically, North India has the largest population of used car buyers (36 per cent) followed by western India (27 per cent), southern India (26 per cent) and eastern part of the country (11 per cent).
On the other hand, the contribution of electric vehicles in the used car market is near to nil. The main factor is that electric vehicle infrastructure is still not strong in the country. Secondly, consumers are not so convinced in buying electric vehicles even when it’s new.
Monika Singh, Director at Exalta, Electric cycle maker talks to us. According to her, used EV market does not exist so far, “no used electric vehicles can sustain the Indian market. Infact, as per the government norms, one needs to take permission from RTO to make modifications in the EVs. If the vehicle is in good condition then obviously no one will modify it. Consumer will only do it in case it is not in good condition. Apart from the chassis, all other parts including the motor are very expensive, this also includes installation cost,” Exalta manufacturers cost-effective and environment friendly e-cycles and e-scooters.
India government aims to transform Indian mobility by strengthening EV market, but when it comes to used EVs, for now the Indian market does not have a strong scope. As per Monika Singh, individuals cannot do anything in EV industry without the government’s support. “Unless the government comes up with some concrete legal and specific plans for the used EV sector, it is not possible. Post-specific norms the products will be made in a cost-effective manner and will have a broader scope in the Indian market,”
Has COVID-19 boosted used automobile sales?
Automotive experts while speaking to SME Futures affirm this trend as hygiene is one of the most prominent factors followed by budget constraints. Aryaman Tandon, Director and Practice Leader-Automotive at Praxis Global Alliance claims that COVID-19 has increased the demand for personal mobility more than other use cases.
He says, “The pre-owned or used car sales have been rising continuously over the last few months with September 20 showing over 30 per cent year-on-year growth in the sales of new car. Personal mobility will be a long-term behavior change for consumers who would avoid using public or shared modes of conveyances and thereby prefer owning a new or used car.”
CMO at Quikr, Vineet Sehgal is also observing similar trends with QuikrCars. Sharing his views on this, he says, “The economic slowdown caused by the unprecedented pandemic has resulted in financial constraints which are the primary reason behind an upsurge in the interest for budget-friendly options like pre-owned cars.”
He adds further, “Additionally, with self-awareness on safety measures and given the hygiene concerns, many consumers are leaning towards the idea of owning their own vehicle over public transportation and pre-owned vehicles are easy on the pocket.” According to the stats company collected, the demand for QuikrCars and bikes exceeded the average after unlock 1.0 phase.
Tarun Lawadia, Founder of PumPumPum also feels that the situation is going to have a deep impact in the customer behaviour. He opines, “The importance of social-distancing has never been emphasized so vehemently as it has been now. The changes brought out by the current situation shall be the new normal for a very long time primarily because this global change is being driven by fear of virus or infection and not by any ordinary financial meltdown.”
COVID-19 has also dented budget of consumers to buy a car. In OLX’s 4th Edition of Auto note 72 per cent respondents agreed that pandemic has spoiled their plans. Across metro and non-metro cities, 50 per cent of consumers have a budget of lower than Rs 3 lakhs for a car. 55 per cent of respondents intend to commute in a personal car to avoid exposure with other passengers.
Sunny Kataria, VP Auto, OLX India in the report mentions, “While COVID-19 has been a black swan event for the automobile industry at large, we are starting to witness signs of improvement, especially in the pre-owned cars industry.”
“This spurt in demand is due to a mix of preferences for a personal mobility vehicle owing to increased hygiene concerns, lack of availability of public transportation, limited shared mobility alternatives, and a revival or resilience of the rural economy,” he adds further. This has majorly led to emergence of trends such as the concept of shared mobility.
Also, the massively hit automobile industry shall see a revival only through the pre-owned car space. Adding Lawadia says, “India is densely populated and most of the people are avoiding using public transport. The uncertainty looming on jobs, businesses and income is also driving purchase decisions.”
Used two-wheelers market also on rise
The pandemic has also changed the dynamics for the market of two-wheelers. The demand was almost zero in the first 45 days of the lockdown, but a slow upward curve in sales from mid-May was quickly transformed into a steep rise of demand. Sasidhar Nandigam, Co-founder and Chief Strategy Officer at CredR, a platform for used two-wheelers presents his views on this.
He tells that CredR registered a whopping 400 per cent surge in used two-wheeler demand since unlock phase started. He further elaborates, “Delhi-NCR, Bangalore, Pune, Hyderabad and Jaipur particularly have witnessed a spike in demand for used vehicles with safety concerns of public transportation still proving to be a hindrance for daily commuters. Hence, we saw a huge rise in demand in these cities.”
The massive spike in sales resulted in unprecedented growth of companies’ revenue. The firm’s sales returned to almost 70 per cent of sales in pre-COVID period. This was accomplished from only 40 per cent of their retail outlets which are open. Due to this huge response, they launched four new showrooms during pandemic as they were able to reach pre-COVID sales.
In the used two-wheeler market, lower and mid-range models for both bikes and scooters are in huge demand. Nandigam further tells, “The monetary and value aspects are really high for the consumer because people are viewing private mobility as necessity now rather than a luxury.”
Small cities powering demand for used cars
Interestingly, all studies point out that non-metropolitan cities are catalyzing both demand and supply of luxury cars and are leveling up with their metropolitan counterparts. According to the OLX data, non-metropolitan and metropolitan cities generated 45 per cent and 55 per cent of the demand respectively between January to June.
Survey further states that 70 per cent respondents from non-metro towns were keen to buy a car and they particularly prefer pre-owned cars. The narrative is contrary for metro cities, where 70 per cent of the respondents are more likely to opt for a new car.
Kataria of OLX India says, “Changing preferences, evolving customer needs and an entirely new set of rules for social interactions have given rise to demand of used cars in the non-metro cities. Non- metro cities now form a major chunk of buyers and sellers for our platform.” Considering these findings, the firm estimates that non-metro cities are expected to surpass metros in demand and supply for the entire year by the end of 2020.
Other car selling platforms also observe the parallel trend. Quikr has witnessed a similar sentiment for pre-owned cars while analysing cities such as Jaipur, Navi Mumbai, Vizag, Vijaywada and Coimbatore. In these cities, QuikrCars witnessed higher interest in July when compared to pre-COVID times in January.
Sehgal tells, “Indian consumers have been positively interested in buying pre-owned cars during this time and non-metros are no exception. We foresee this trend to continue largely because of lean value for money proposition during post-COVID phase. This will especially prosper with add-ons like warranty offered with pre-owned vehicles.”
Lawadia of PumPumPum says that consumers of aspirational Bharat are driving the used car leasing in India. “As of now we are witnessing maximum traction from metros, but soon non-metro will also start contributing to the demand considering the immense potential and success of this concept,” he opines.
Car leasing- An emerging business model
Though still in a nascent stage, other new business models are also luring customers towards the pre-owned and used cars. It is called car-leasing, subscription, or car-as-a-service (CaaS) model. These business models provide flexibility to consumers to use old and pre-owned cars. Industry expert Garg from Praxis tells us more about it.
He tells, “The old or pre-owned cars are being used in new ownership models like leasing or subscriptions. This reduces capital outflow at the onset and comes with an all-inclusive package that is attracting millennial buyers. This is due to higher flexibility apart from corporates which are leasing the vehicles.”
In future, we might see the emergence of subscription models for a shorter lock-in from the current one to three years across different models. Currently, the penetration of car subscriptions in the overall car market is less than one per cent as compared to over 30 per cent for the US, UK, Germany, and France.
However, car leasing startups such as PumPumPum are redefining the traditional approach of car ownership catering to such niche market. Such start-ups are providing IoT enabled pre-owned cars at an affordable and flexible subscription for short to long-term durations without any hassles of service and maintenance.
As compared to buying and maintaining a car for 24 months, a leased car for 24 months turns out to be extremely affordable and hassle-free. Issues related to lack of trust on dealers, low penetration of financing in used car space, risk of repairs in a used car, non-transparent pricing, low resale value of a used car owned by a third owner are some of the factors pushing the growth of used car leasing in India.
The founder of PumPumPum claims that the company is witnessing traction considering these factors. Lawadia further reveals that firm have signed up ten corporates and signed LOI with other 25 companies. He adds, “We are receiving 250+ enquiries per month, our current rejection is more than 50 per cent due to poor user credit. We are deploying cars as per debt access.”
Experts are of opinion that pre-owned car leasing will move from being a just lifestyle and aspirational product to a complete affordable mobility solution. Hence, corporates are now planning to incorporate this affordable model as an end-to-end employee mobility solution in the post lockdown situation.
“We are already seeing early signs that companies are willing to share partial car lease cost as part of employee safety program. Public-private partnership leasing product is uniquely positioned to cater to this critical focus area,” says Lawadia.
Used car business- The dealers’ perspective
The Indian automotive sector was dwindling with challenges even before the coronavirus outbreak. Dealers were dealing with challenges such as pent up inventories, changing government regulations such as BS-VI emission norms, less demand, and deep economic downturn. The outbreak of pandemic has only worsened their woes.
In such a dire time, renewed demand for used car is helping dealers to recuperate. With the evolution of various businesses on online platforms, dealers have migrated to online channels to liquidate their existing inventories. As per the OLX study, auto dealers currently have 60 per cent to 80 per cent of unsold inventory.
Online channels such as OLX, Quikr, CarDekho, Cars24, gaadi.com, PumPumPum are catering to the renewed interest by consumers. Majority of pre-owned car dealers are selling vehicles through these sites before customers decide to pay in-person visits for final closure. Larger dealerships are also offering AMCs and are providing home delivery of cars.
Garg at Praxis Global says that auto dealers have been certainly benefited from the recent rise in the activity. He opines, “Large scale digitalisation is happening across dealers of key OEMs. The used cars provide an important avenue for sales of new cars. Therefore, OEMs are focusing on having a used car division in dealerships that can cater to such customers which form 25-30 per cent of the overall demand.”
The pre-owned car dealers are hence currently focusing on liquidating inventories to meet their operational costs for business continuity. This also means that the automotive sector is undergoing a massive digital transformation at the same time.
Role of Scrappage policy in the market
The scrappage policy is an ecosystem for voluntary phasing out of unfit, old, or polluting vehicles. The government is aiming India to become an automotive manufacturing hub through this policy since scrapping of vehicles will generate raw material. In addition to it, it will also bring down the cost of automobile prices up to 20 to 30 per cent.
The policy once approved will be applicable to all vehicles. It will also boost the sales of used or pre-owned vehicles as a section of such vehicles will become ineligible to run on roads. Automobile expert, Aryaman Tandon of Praxis Global explains the impact of scrappage policy on the sale of old vehicles. According to him, used car sales will continue to see rising demand as substantiated by global peers.
“India’s used car market penetration is substantially low compared to its global peers. Scrappage policy will provide a better pricing mechanism and reduce uncertainties about the pricing of the used cars as the vehicle ownership periods will be well defined. The move is likely to benefit the overall car market and organised players in the used car market,” he tells.
Also, the vehicle owners which will scrap their vehicles are likely to buy new used cars rather than opting for new vehicles. Hence, the scrappage policy shouldn’t link scrapped vehicles with incentives on new vehicle sales as the seller in the scrappage markets are expected to be used car owners who may be the second or third owner of the vehicle.
Inevitable growth of used car business
Currently, pre-owned car channels in India are highly fragmented with four primary market segments. According to the market data, organised market has 12 per cent market share with average volume of 16 per month. Semi-organised segment has a 35 per cent market share with average volume of 9 per month.
Consumer-to-consumer market segment is 34 per cent and the unorganized sector has 19 per cent of the market share. With changed consumer preferences, new norms, and speedy digital transformation, it seems unorganised segment of this niche market will reinforce soon. This will create a completely new avenue for business, as personal vehicles now have become an end-to-end mobility solution more than just a status symbol.
In addition to it, being a made-in-India and for India business, experts are optimistic about the continued demand for pre-owned vehicles observing the positive trends ahead of the festive season this year. Therefore, used car market can prove to be a catalyst for the swift revival of the automotive sector in India.