Typically, a big dealer has around 12-15 showrooms while a small dealer will have under five.
By Pritish Raj
With sales of passenger vehicles (PVs) witnessing one of its worst slowdowns in the last 12 months and inventory rising to around six weeks, dealer showrooms have started shutting shop across the country, resulting in job losses.
According to estimates drawn up by Federation of Automobile Dealers Association (Fada), around 200 dealer showrooms of passenger vehicles have downed shutters in the last one year, leading to job losses of around 25,000 people.
Typically, a big dealer has around 12-15 showrooms while a small dealer will have under five. Typically one upper-sized showroom which sells around 700 vehicles a month employs around 150 people, while smaller showrooms selling 200-250 vehicles a month employ around 60 people.Though none of the PV manufacturers shared any numbers relating to closure of their dealership, industry executives said with bank funding drying up, closure of some of them was inevitable.
A dealership business runs on the following lines. Once a company appoints a dealer, the latter pays for the wholesale despatches every month to the manufacturer. Typically, if a dealer can sell 300 vehicles a month, it stocks 500 or more vehicles.
The manufacturer does not provide any credit to the dealer for taking the despatches and the capital for taking the vehicles from manufacturers is through bank or NBFC financing. These are short-term credit of around 180 days and so far sales are good the system works fine.
What has happened with a prolonged slowdown being witnessed now is that banks and NBFCs have stopped funding vehicle purchases by dealers as sales are not happening as per expectations and they are not able to repay the loans.
Fada president Ashish Kale said the shutdowns have been mostly in the metro cities with Mumbai and Delhi accounting for the higher share. “The rate of closure has been higher than the previous years as banks have become cautious on the inventory funding,” Kale told FE, adding since stocks were the only collateral with the banks, poor sales have made the banks ask for more security.
SBI chairman Rajnish Kumar, however, said the bank has not yet cut down on financing for auto dealers but will deal with the stress in the sector. “We are in touch with OEMs. We are keeping a watch and we will deal with whatever stress is developing,” Kumar said on the sidelines of an event in Mumbai.
Industry sources said some of the big manufacturers try to help some of the weak dealers by asking bigger ones to takeover them. This usually works well for bigger manufacturers and hence the number of their dealers shutting shop is lower than those of smaller manufacturers.
It is quite possible that some of the dealers who have shuttered showrooms are the ones who borrowed heavily to create infrastructure in anticipation of a future demand and sales but have got stuck. Fada director, international affairs, Nikunj Sanghi said inventory correction is the only way the situation can improve. “If the vehicles are not selling and the loan is not repaid in time, the loan becomes more unsecured. Majority of the dealers are still sitting on a very high inventory,” Sanghi said.
PV sales have suffered since the second half of FY19, due to the hike in insurance premium, increase in vehicle prices owing to safety features coupled with cash crunch in the system, following defaults by financial companies such as I&LFS and DHFL. Since the manufacturers did not control pushing stocks last year, a higher than normal inventory at dealers has increased their working capital.