March 17, 2021

How Car Dealerships Will Evolve in India?


Ridhish Talwar

Buying a car in India is a very big deal and for most Indians it is the most expensive asset they will ever own outside of their residence. Due to this, the journey from research to purchase is taken very serious by the vehicle buyer and the importance of the same can be gleaned by looking at religious ceremonies or pooja's that is often conducted for the car after purchase either at the car dealership itself or shortly after.

Globally, automotive OEM dealerships have historically played a pivotal role in the car buyers journey, but even more so in India where potential customers often visited the dealer 5 or 6 times before concluding a vehicle purchase. However, this central role of auto dealerships has been witnessing a slow erosion over time starting with initial buyer research shifting online. Now other value added areas of the dealership are also getting impacted by digital shifts like auto insurance renewal and other ancillary services. The Covid-19 pandemic and related lockdowns starting in March 2020 have only accelerated this shift.

We believe automotive dealership will see a significant disruption over the medium to long term driven by few critical factors; shifting customer preferences, digitisation across the automotive value chain and electrification of vehicles.

Pandemic has driven a higher expectation of hygiene & safety among customers and social distancing norms are leading to rapid change in customer preferences for discovery, decision making and even purchase

In India, around 90% of car purchase decisions are now influenced by digital means. Hence, we see the number of visits to an OEM dealership before a customer actually decide and purchases a car, has dropped to under 2 from 5-6 earlier. The pandemic has only accelerated this trend and Maruti Suzuki India recieved over 1.5 million digital enquiries so far this fiscal year, with October 2020 alone seeing close to 300,000 enquiries. India's largest carmaker reported 35% digital enquiries in H1 FY21, which was a 2.2x jump from previous year.

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Auto OEMs also want to be seen as digital first brands in the current pandemic induced safety first environment and hence, online sales and virtual showrooms are the new buzzwords in the auto industry. Compared to pre-covid times, Maruti Suzuki saw their online bookings being higher by about 10% and this trend is here to stay and will accelerate over time.

By their very nature, dealerships are a capital intensive business and many have been struggling of late with operating margins falling from high single digits to low single digits. This has led to 100s of dealerships closing down even pre-Covid. Legacy dealerships have high costs due to large payrolls and rented real estate, but this made sense because they had huge attached service stations that generated cashflows for the dealers.

A typical dealer generates about 50% of their profit their service workshops, about another quarter from services like finance and insurance, 10-15% from used car sales and only the remaining from new car sales (which have margins of 3-6% only).

Electric Vehicles due to their very nature have fewer moving parts and will require lesser service and maintenance.

Additionally, more and more cars being sold are connected vehicles and EVs by their very nature are more connected than ICE vehciles. In such vehicles, diagnostics, software and repair can be updated over the air and the opportunity to earn revenue from the servicing business are more limited.

Hence, the other major trend that will impact dealerships is the increase in % of electric cars sold in the auto ecosystem. Luckily for car dealerships, electrification in India will be lead by light electric vehicles like two-wheelers & three-wheelers and four-wheelers will see slower adoption due to larger batteries leading to higher cost differentials. By 2025, we expect low single digit penetration of EVs in new cars sales and around 30-40% market share by 2025. Therefore, car dealerships in India have a longer horizon to adjust their business models, unlike the west where adoption will be more rapid.

Nonetheless, given all of the above, the dealer model and physical dealerships will need to evolve along with the entire auto ecosystem. Auto OEM brands will also need to ensure tighter integration of the digital and physical spaces in their ecosystems.

We could see smaller, more compact outlets and signs of this are already visible with market leader Maruti Suzuki announcing these plans which could reduce the upfront cost burden for dealerships, make them more profitable, while allowing faster expansion to smaller towns and rural areas.

Dealership may evolve to be more like an experience centers with lesser display cars, inventory and manpower, integrated along with new age technologies like AR/VR allowing on the spot virtual customisation. Dealership locations may also change to high footfall locations like malls and prime high street spots to cater to the new formats and smaller real estate requirement. However, their importance to an end user from an emotional perspective will remain, as buying a new car in India is a journey, which ends with the car delivery at a dealership and the long drive home with your entire family in your new prized possession.