‘The pre-owned car market will grow 2.5 to 3 times the new car market in a few years’

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Published: January 17, 2015 12:17:29 AM

Last week KPMG released its Global Automotive Executive Survey 2015 which, among other things...

Last week KPMG released its Global Automotive Executive Survey 2015 which, among other things, states that India will export more than a million vehicles in the next 3-5 years, there is going to be a huge growth in the second-hand car market, and the industry is likely to see major investments. Rajeev Singh, head of Automotive Sector, KPMG in India, in an interaction with FE’s Vikram Chaudhary, says that the pre-owned car market is expected to grow up to 2.5 to 3 times the new car market in a few years. He adds that with the excise sops gone, the auto sector will be impacted in the near-term, but the long-term outlook is favourable with the expected revival of economy and decline in fuel prices.

Auto companies have been raising vehicle prices, citing rising input costs. Why auto companies say that input costs have gone up when prices of most commodities seem to be coming down?

OEMs have been absorbing increasing input costs in the past years which have been eating into their profit margins. The consumption of steel, aluminium, rubber, glass and plastic is high in the automotive industry. Raw material costs are less volatile as they are acquired under long-term agreements. Over a period of years, the number of components in the vehicles has also increased, which has resulted in higher consumption of raw materials. Strict government norms on safety, emissions and constantly changing technology have a significant impact on the supply chain cost. Stagnant sales, halt of excise sops and increasing inputs cost has made OEMs transfer a percentage of this cost to the end-consumer.

Now the excise sops have gone. How will it affect car sales?

This will impact sales in the near-term. However, the industry is hopeful on getting support from the government in the upcoming Budget. Any reduction in interest rates will be a big boost to this sector as a large percentage of cars in India are financed.

Is the Indian car buyer ready to pay extra for safety features?

The new Indian New Car Assessment Programme is considering mandating basic safety features. Initial compliance would be voluntary and later mandated. It is a positive step by the government to enhance safety. However, addition of safety features will increase the cost of the car, which has been a cause of concern. Introducing features one at a time and creating safety awareness during the car-buying phase could change the situation.

According to your survey, 93% of Indian executives are confident of an increase in investments in the Indian auto sector. In which all areas are these investments expected to come in?

Most global OEMs are investing in India as an extension of their international production network. They are making India an investment hub to localise their production and increase exports to Asia-Pacific and African geographies. There will also be more investments in R&D.

So, can we expect more and more new vehicle development to take place in India?

Global companies started establishing R&D centres here since 2012 and are looking at increasing investments in R&D. Indian OEMs have also started to focus on their R&D spend as the presence of these global OEMs is building a pressure on them. Most MNCs have realised they need to adapt their global models to Indian requirements for success. This is best done through R&D centres in local geography.

It is expected that, by 2020, luxury car sales in India will constitute 4% of total car sales. It is also expected that, by 2020, Indian car market will be around 50 lakh units—and 4% means 2 lakh luxury cars selling annually in India. Isn’t this number overoptimistic?

The luxury car segment has been growing faster compared to the overall growth in the passenger car segment. Luxury brand OEMs have been setting up local production to reduce the price of luxury vehicles. According to various sources, Indian HNI population will grow seven-fold by 2020. This demographic has higher disposable income which makes India an attractive destination for luxury car makers. Car makers extending their production to India builds confidence in the industry to meet these numbers.

Some studies point to the fact that Indians are changing cars every 3-4 years. Some other studies state that enhanced vehicle lifespan is emerging as an important factor influencing the buying decision. If people are changing cars more often, how does the enhanced vehicle lifespan matter?

Changing cars means change of hands (ownership) whereas vehicle lifespan means the number of years it can be driven safely and economically. Reasons such as the need for a bigger vehicle, affordability, better fuel efficiency and technology could be attributed to changing cars every 3-4 years. As they change cars, these cars could be sold in the pre-owned market. When these cars get sold, this merely changes the ownership.

At what rate is the pre-owned car market expected to grow?

The pre-owned car market is currently 1.3 times bigger than the new car market. It is expected to grow up to 2.5 to 3 times by 2020, driven by cheaper prices and increasing presence of organised sale points. The presence of almost all OEMs in this segment is supporting this growth. The pre-owned car market is an additional source of revenue to OEMs when new car sales are sluggish.

What about hybrid cars?

The price of hybrid cars is the biggest drawback. India is considering a subsidy of $2.5 billion for hybrid and electric cars under the National Electric Mobility Mission. Once these subsidies are offered to car makers, it would trickle down to the end-consumers. Building a low-cost hybrid could open avenues for the segment.

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