Founded in 1964, the Federation of Automobile Dealers Associations (FADA) is the apex national body representing automobile dealers of India. It protects and promotes the interests of the Indian retail automobile market. Today, it has 15,200 dealers who operate around 25,000 dealership outlets between them across two-wheeler, PV and CV segments. Ashish Harsharaj Kale, FADA President, spoke to Rajesh Rajgor about long-term sustainability of dealerships, OEMs’ contribution in growth projections, policies framed by the government, and various activities conducted by FADA that enhance dealerships across India
What according to you should be done to ensure long-term sustainability of the dealers across India given the current challenging times in the automotive industry? What role do web-based platforms play in enhancing sales?
The last 18 months have been very challenging for the Indian automotive industry and in particular for the automotive dealers and we have seen more than the usual number of dealerships shut down in this period. One of the key reasons amongst others has been financial viability. On the cost front, employee compensation, interest cost and rent are skyrocketing whereas sales and dealer margins have not matched the rise in expenses. Indian automotive dealers operate on the lowest margins possible when compared to peers globally. Dealership sizes will need to be pruned down drastically as real estate is not cheap and dealerships of large scale are becoming unviable day by day.
This is especially so with the increasing compliances as well as the ever-increasing cost of operations. The entire business model needs a relook as the earlier business model was of wealth creation with manifold increase in the value of the prime real estate on which dealerships were set up on, and would compensate for the low operational profitability. With real estate now not being the fast appreciating asset that it was, we have to move to a high operational profitability model if we have to sustain our businesses. FADA is advocating a 5% PBT on turnover to be a good profit level, which will allow dealers to strengthen themselves for the future, reinvest in businesses, and make it a sustainable business for the long term.
FADA will be working closely with the entire eco-system, especially our OEMs to ensure that the dealer community gets into our recommended profitability levels and help ensure a stronger dealer community, which in turn will be beneficial for the entire automotive eco-system. One extremely important issue where the OEMs have to contribute for dealer sustainability is in being judicious in their growth projections – of their own brands as well as the industry. What this slowdown has taught us is that growth in any business can be cyclical and continuous high percentile growth cannot be a given.
Due to over ambitious growth planning, over aggressive network expansion takes place and if growth does not happen, a strong existing dealer has to share his numbers with the new dealer, who in turn will be staring at losses as his viability numbers will not happen as planned. One strong dealer might convert into two weak dealers with wrong growth assumptions and many of our members have faced or are facing this problem, especially with growth turning into de-growth in the past few months. While this is what the OEMs need to correct, our community today needs to also upgrade themselves with changing times. This current slowdown has definitely taught us to remain frugal in our spending and keep our books in top-class conditions as also keep our finances very strong and if not strong, then take immediate steps towards making it strong.
In the future, with all other operational costs going up rapidly, interest cost will have to be reduced from the current levels to keep our businesses viable. We will also have to integrate newer technologies faster to keep pace with the fast-changing customer preferences. With regards to the web-based platforms, they definitely help the dealer in enhancing his reach through their platforms. For a dealer, what it does today is gives us many more leads than what he generates, and higher inquiries leads to higher sales. It also helps the consumer save time in deciding on his choice by giving him various comparisons between products and a host of information to help him funnel his choice.
What are the numbers of dealer outlets registered with the federation? Could you give us a break-up of the CV dealers and passenger cars dealers? Are they enough for India? If not, how many more does India need to meet its ambition to be the next big thing after Germany and China in automobiles?
There are 15,200 dealers who are connected with FADA. They have 25,000 dealership outlets. Of this, 5,000-5,500 are PV outlets and 2,200-2,400 are CV outlets. India today has a passenger vehicle penetration of 22 cars per 1,000 individuals. Comparing it to other global economies, New Zealand has 774, Australia has 740, Canada has 662, Japan has 591 and China has 164 vehicles per 1,000 individuals. The current number of outlets is enough for the current volumes and even for the next 2-3 years both in sales and service. In sales, where dealers require a showroom to display products, majority network expansion has happened in the past 3-4 years by all the OEMs and especially towards increasing rural reach.
The new-age customer, and I don’t mean only the millennial, but the digitally aware consumer is going more and more online for his initial research, which is what one of the prime objectives of the showroom is. Dealer showrooms are transitioning more into transactional workspaces and as such the current network is more than enough. What dealers will definitely need in sales would be to increase their digital presence and increase their digital network. On the service side, the existing network is more than sufficient to handle the current service load and the industry will need to focus on productivity rather than physical network expansion. Within the country you have OEMs varying from productivity per bay of 1.5 to up to 7 with the average across the industry below 2.5.
So, as you can see, there is enough capacity available today to cater to the next 2-3 years of service load. With vehicles going more and more electro-mechanical, we would definitely see more productivity in the future days. Body shop, on the other hand, is an area where dealers will need expansion as the customer becomes more and more aesthetically inclined, as is happening, and will not allow even the smallest scratch or dent to continue on their vehicle. With the growing vehicle population and as insurance products become more comprehensive and transferring at no cost to the customer, you would see the body shop business go up for our members and we can already see the trends.
If I look at the 5-6 years’ horizon, we would definitely be needing many more outlets and especially service outlets, as once the slowdown trend reverses, we would be looking at doubling of the vehicle industry, as envisaged in the Automotive Mission Plan 2026 and also if we have to reach Prime Minister Narendra Modi’s goal of a USD 5 trillion economy. In the longer horizon of 8-10 years, there is huge potential and especially if we look at where we stand in the world order with regards to vehicle penetration. Today we stand at a penetration level of 22 per thousand. Even if we have to reach the levels that China has achieved, India needs to add at least another 30,000-35,000 automotive dealer outlets or more in the next 8-10 years and this will result in requirement of additional workforce employed by the sector to the tune of 50 lakh-plus for this expansion.
It is observed that the automotive dealers’ segment is not recognised as MSME despite following all the required regulations. What benefits will the automotive dealers and workshops gain if given an industry status?
Today, the contribution of the service sector to India’s GDP is 53.9% while industry contributes only 29.1% of which manufacturing contributes 16.7%. It is therefore imperative that the service sector is the biggest contributor to India’s GDP and the rationale to only keep manufacturing under MSME should be re-looked at. Consequently, many companies that were out of the MSME bracket and missed the subsidies and incentives received under the MSME definition have come under its umbrella vide the above-mentioned memorandum. However, as per the amendment, wholesale and retail trade and repair of motor vehicles and motorcycles (automobile dealers’ workshops and service centres) has been kept out of its purview.
The automotive retail sector provides 25,00,000 direct employees and another 20,00,000 indirect employees. It contributes around Rs. 95,000 crores by way of GST (previously VAT, CST and Service Tax), Road Tax and other levies to the Central and State exchequers. Its spin-off on insurance, finance and oil sectors need no over-emphasis. The revenue generated, taxes collected, and the investments made in real estate are the largest in each State’s economy, thus the largest for India as a whole. The subsidies and incentives received under the MSME will provide much needed relief to automobile dealerships which provide 25 lakh direct employments to people near their homes without displacing them. It will also help the sector in getting loans with lowered interest rates, amongst other benefits, thus boosting the trade further.
The announcement of BS IV vehicles being operational for the entire registration period was an important announcement. What does this mean to the ailing industry? Will it facilitate pre-buying?
There was some confusion in the minds of customers whether BS IV vehicles will be able to live their entire life. The government has made it clear that there should be no doubt as BS IV vehicles will continue to live their full life even after implementation of BS VI. We have definitely witnessed good buying during festivals, but it was due to extraordinary discounts given by OEMs and dealers. Similarly, in the month of December, even though there were hefty discounts on offer, customers didn’t show any major interest for pre-buying. We hope the government now seriously comes up with steps which will work as a booster dose in generating demand which will help in reviving automotive sales or else with BS VI now knocking on our doors, vehicle prices will increase further, thereby leading to more dampening of demand.
Could you give us insights about the various activities conducted by FADA to update and enhance the dealers registered with it through workshops and seminars across India?
FADA has been gaining good traction since the past few years. We now actively engage with our members. Our flagship bi-annual event, Auto Summit, will be in its 11th edition and is running successfully since the past 22 years. Since many dealers are not able to visit this summit, we thought of visiting their States and undertake learning sessions in their State capitals. This has definitely made our bond much stronger with the dealers even at the remotest of places and at village levels. Under MORTH’S Road Safety Week, we earmark a day as FADA Road Safety Day and train people in our dealerships on promoting road safety. Apart from conferences mentioned above, we have been training our dealers on various subjects.
We have in fact done two rounds of GST workshops covering 17 destinations in the first round and 15 destinations in the second round. We have been very active in solving statutory and legal issues that our members face, most recently related to GST and CMVR. We are also engaging with our members on a daily basis with our digital news line which is a one-stop destination for automotive-related information. Our ‘FADA Journal’, a monthly magazine, is successfully running since the past 22+ years. We are now in the process of creating an app which will give all relevant information to our members instantly. All in all, there are a lot of activities which where are undertaking and thus keeping our members updated and informed at all times.