The COVID-19 pandemic has forced OEMs to get directly in touch with potential clients by offering online vehicle shopping experience, which means auto OEM dealerships would now have to be frugal and flexible than ever before, says Ashish Harsharaj Kale – President, FADA, in an exclusive interaction with Auto Tech Review
What role OEMs have taken for bailing out dealer partners during the ongoing pandemic?
A majority of OEMs immediately responded towards improving our cash flow by releasing funds owed by them to us during the routine course of business. A few OEMs have even come forward with advanced money assistance for Q1 on a pro rata basis, to be adjusted as per actuals once business resumes. In fact, some OEMs have announced actual financial support to the dealers. Some OEMs have announced their first round of support based on the first phase of lockdown like facility-wise fixed support for three months, partial interest support on stocks currently held and salary support to the service team by 50 % for the first phase of the lockdown. But these are very few OEMs and most OEMs are in the process of working out their support measures as the lockdown has extended into the fourth phase now and realisation of the corona crisis being much deeper and worrying for the auto industry.
What about the employees at the dealership level?
Dealerships have resources without which the return to normalcy in this war with coronavirus is not possible for the auto industry. We can’t afford to lose resources nurtured and trained over the years. Without OEM support for this lockdown period, it would not be possible for the dealer to retain them in full for a long time. All our principals realise the same and are engaged in discussions on how best can they extend support and we expect each and every OEM to come forward in supporting us. On the operating cost side, dealers have been in continuous expansion/upgradation mode of their infrastructure and manpower from the last 3-4 years based on the continuous YoY double-digit growth projections of their OEMs and in the process doubling operating costs in this short period. The 2019 slowdown has shown the entire industry that growth is not a given. With the corona crisis, it’s a double blow.
What has been FADA’s approach towards coping with this double blow?
We have urged SIAM and all OEMs to immediately upwardly revise the fixed dealer margin, which continues to be one of the lowest in the world ranging from 3-5 % as well as an immediate reduction in operating cost structures by a substantial percentage. Cost reduction on inventory, manpower rationalisation and infrastructure footprint can be immediately done, especially in a post-corona auto world. We believe that these measures will help many dealers survive this crisis and its economic aftermath of double digit de-growth who otherwise will have to shut shop and along with them shut employment opportunities for hundreds of thousands.
SIAM as an association has recommended this to their individual members to take a call and has never taken a joint call as an association on such topics. Looking at the unprecedented situation, FADA will be pursuing this issue strongly with SIAM to come together as one and take this call and in the process help many dealers and their teams survive. FADA will also be representing this on other platforms, if required, and put in all efforts to help its members tide over through this crisis.
What are your thoughts on dealership survival as OEMs also now opting for the online route towards vehicle sales?
Getting prospective customers through the online route is a growing trend over years now. In today’s world vehicle-buying experience involves various steps starting from an online generic search, followed by specific automobile website visits for views, review, product comparison, collecting information from the peers and users and further evaluating a brand & products in terms of quality, reliability & durability.
The dealers and dealerships have been the face of the brand from the time of their existence and I don’t see any immediate challenge or threat to the dealership business over OEMs exploring the online opportunity. However, with companies turning more aggressive and active on online platforms this will definitely help dealers in further enhancing their sales and service reach. Going forward we expect dealerships to explore the digital route and strengthen themselves on the online business platform. Dealerships have to be much more frugal & flexible than ever before. A lot has to be done in terms of re-scaling their employees, getting them on digital platforms, upskilling their digital capabilities, providing them training to managing customers and their requirements online.
FADA has put forth several action points in its recommendations to the Prime Minister- what are the measures initiated by the government you think can help reboot the auto retail industry?
The auto retail business is going through a difficult phase for over 15 months now and is facing an unexpected severe slowdown. During the period, more than 275 dealerships had to shut down and thousands of jobs were lost in the process (a report shared in August 2019). Auto sales always has a positive impact not just on the manufacturers and dealers, but also has a multiplier effect in the economy. Sale of vehicle benefits many such as banks, insurance companies, component sales, sale of oils, paints, glass, plastic and rubber and many more along with generating direct and indirect employment. The amount of GST collected for the centre and road taxes for the states needs no emphasis.
FADA India which represents over 15,000 automobile dealers having 25,000 dealerships, accounting for 90 % of automobile sales and service in India, employing over 40 lakh employees (25 lakh direct & 15 lakh indirectly), on behalf of the entire fraternity wrote to Prime Minister Narendra Modi requesting for urgent action. In our letter to PM, we had raised a few points for immediate support to revive the auto retail industry wherein we emphasised on three key issues - working capital support that will include the resetting the clock for the lockdown period for auto dealers on all working capital limits. Additionally, we have asked the government to extend 4 % interest subvention/subsidy for the working capital/loan requirements to companies for a period of nine months post the lockdown as well as allow 20 % additional overdraft on sanctioned credit limits for a period of six months post opening of support salary disbursements and other fixed expenses.
Secondly, salary of employees for the lockdown period should be paid through ESIC as this is a health pandemic and salary liabilities should be covered under the same by ESI. Thirdly, MSMEs must be granted extension to auto retail and have requested the government to include wholesale and retail trade and repair of motor vehicles and motorcycles in the MSME Act from April 1, enabling subsidies and incentives received under the MSME division that will provide much-needed relief to automobile dealerships which provide direct and indirect employment to lakhs.
Do you think these measures will be sustainable in the short to long term?
Such temporary support measures need urgent attention that will help us remain in business till demand comes back to normalcy, but over the long term the only thing that would save our industry is demand itself. Few demand boosters have been suggested, which if implemented, will attract auto demand up to a great extent. This involves GST reduction for a temporary period that will lower the cost of acquisition and will be a good incentive towards stimulating demand. The automotive sector is impacted by high GST rates and the net impact ranges from 29 % to 50 % depending on the vehicle category. Alternatively a direct benefit to consumers of 3-4 % interest rate reduction through banks and NBFCs will also reduce the overall cost of owning a vehicle and can also be an alternate or additional tool for demand generation.
Further, to boost vehicle demand, we have requested that the Corporate Depreciation Scheme which was valid till March 31, 2020 to be extended till FY 2021. Apart from this, we have also proposed that similar benefits be allowed to individuals for FY2021 at an effective rate of 25 % (WDV). This will not only help in increasing the number of individuals filing their IT- return, but will also help in spurring automobile demand from individuals; thus, this will up the government’s GST collection.
An attractive incentive-based scrappage policy should also be drafted and introduced immediately for all vehicles, which are running on road prior to 2010. The “Cash for Clunkers” programmes in USA and EU should be looked into as they were implemented successfully. Evidence shows that “Cash for Clunkers” saw its best response during economic downturn/recession and pre-poned vehicle purchases due to the incentives offered, thereby boosting demand engine. The “Cash for Clunkers” scheme was introduced for a short time period of 5-7 months. It has been used as a demand revival tool at different time points in the west. We have also called for a priority sector tag for the auto industry. The government should include the auto industry in priority sector lending as this will ensure easy availability of retail and wholesale financing. This will also help banks allot a certain portion of their funds for this sector for dealers as well as retail customers and ensure much-needed credit support to spur demand. The priority sector tag can be given to the auto sector for a period of 12 months till normalcy is restored.