Retail channel strategy in auto sector for the next decade

Abstract

While working with major manufacturers in the Auto industry, we found that finding a good dealer was a challenge for the manufacturers especially in a metro city. There is increased competition among manufacturers to attract the best of dealers into their fold. While the first movers like Maruti, Hyundai and Tata already have a well established network, newcomers like BMW, Volkswagen, Renault, etc are trying to entice good dealers with incentives like higher margins and better support. As this is a high investment and low return business, very few new players are attracted to this business. Under this situation, manufacturers are doing their best to retain their good performing dealers. A recent news article in Economic Times clearly shows the pressure on the manufacturers and more opportunities for the dealers. Better margins: Tata Motors' two top dealers move to rivals (22 Oct, 2010, 12.34PM IST, ET Bureau) This is not a one off news item. There have been many instances in the last couple of years when dealers have quit one manufacturer to join hands with other. This is a clear signal that retail channel is struggling to keep pace with the growing industry. In our report, we have tried to analyze the current channel structure and the challenges of the Auto retail along with measure to overcome them. Currently the auto retail in India happens predominantly through the authorized dealers and service centers. In the current structure, new vehicle sales contribute about 60% to the dealer revenues but less than 10% to dealer profits. The major dealer challenges are profitability, lack of new entrants, quality of manpower, unprofessional approach and little government support. The Indian Industry will continue to grow in the next decade and we have looked at three growth scenarios The Base case scenario, Bullish scenario and Bearish scenario. We have also anticipated the volumes under each of these scenarios. In this report we have tried to look at retail options under each of these scenarios. We have made our assumptions on the conditions under which these scenarios are likely to happen. We anticipated that under the base case scenario, India can expect the volumes to be 4.28 million units by 2015. This may reach 4.85 million units under the bullish scenario or drop down to 3.66 million units under a bearish scenario. We have also drawn comparison with the Auto retail channels in other major markets like US, Europe, China and Brazil. As US and Europe are mature and heavily regulated markets, the retail models in India are more likely to resemble that of China and Brazil. The average through put of the dealers in China is about 820 units per annum and that of Brazil is 720 units per annum. Dealer s throughput is likely to be in the same range for the dealers in India. The primary research for the report was conducted through qualitative survey of major manufacturers, dealers, SIAM and FADA. The SIAM representatives highlighted the importance of developing adequate manpower with relevant skills to sustain the growth. FADA emphasized the role of government to support the auto retail in this critical phase. Dealers also felt that the control of power, in the current structure, is with the manufacturers. They expect a more collaborative approach from the manufacturers. We have drawn our conclusions based on our research, existing trends in other markets and the current structure of retail in India. We feel that though the primary mode of retail in India will remain to be authorized dealers, other channels of retail will develop in the next decade. The dealers will have to compete with these channels to get their share of revenues. The dealers and manufacturers will have to find innovative ways do business and remain competitive. Manufacturers and dealers will have to work together to improve customer satisfaction from the brand and reduce costs in the retail chain. Dealers will have to focus separately on six different elements of the business new car sales, used car sales, service, parts and accessories, finance and insurance. These will be unbundled from each other in the coming years. The dealer-customer relation will have to be maintained along two different axes follow the customer and follow the car to extract the maximum value from both. Finally, the manufacturers will have to understand the customers better and respond to the changing expectations better in order to capture a larger share of the India auto market.