Business Today

Second Life

The used car market in India is growing faster than the new car market and a clutch of companies is gearing up to take advantage of it.

Kushan Mitra | Print Edition: September 19, 2010

Last year, over one-and-half million brand new passenger cars were sold in India, a record year for car sales. During the same period, close to two million passenger cars were sold on used car lots. Even as industry executives expect the new car market to double in sales to three million units by 2015, they are wagering that used car sales will grow to between six and eight million vehicles.

And it's not just about the volumes. The market for used cars is worth between Rs 8,000 crore and Rs 14,000 crore, says Vikas Bajaj, Partner, Booz and Company, a research and consultancy firm. Yet, the large spread of the number belies the biggest problem facing the used car industry - it is a largely unorganised sector. Estimates by companies operating in the sector point out that the organised segment accounts for only around 15 per cent of the market.

Rajeev Dubey, President, HR and After-Market at Mahindra and Mahindra (M&M) says that close to two-thirds of the used car market is consumer-to-consumer (C2C) sales, which operate mainly through word of mouth or classified advertising in newspapers The rest of the used car sales comes from the "broker" network - usually roadside car mechanics and specialised small used car operations.

Even as the market for new cars has grown, there are clear trends of more and more used car sales getting pushed into the organised sector. The first, explains Mayank Pareek, Executive Director of Sales and Marketing at Maruti Suzuki India Ltd (MSIL), is security. "Changing the ownership paperwork for the car is not an easy process. The seller is liable if the car is used in criminal activity until the ownership papers get transferred.

And the buyer is not sure of the car's antecedents. Is the car stolen? Has the loan been paid off," asks Pareek. The other factor that will propel the growth of the used car market is elucidated by Pareek's old boss Jagdish Khattar, who has now started Carnation, a multipurpose chain of car sales and service outlets.

"Every month, finance companies repossess between 500 and 600 cars across India. Add leasing companies and the number increases to close to 1,000 vehicles of various makes. They need an organised system to dispose of these vehicles," says Khattar, MD of Carnation.

 Why used car sales are growing

  • The number of vehicles on Indian roads is increasing, making more cars available to used car buyers
  • The replacement cycle for cars will fall; from five years currently to about 3.5-4 years by 2015
  • The organised sector eases uncertainties in the minds of buyers and sellers
  • Used car buyers are able to buy a bigger, better car for the price of a smaller new car
Also, used car outlets help manufacturers do two things, argues Khattar: One, sell more new cars as part of a trade-in or exchange, and, two, determine the price of the used car segment. MSIL operates Maruti True Value, a network of used car outlets which retails used Maruti cars. According to Pareek, the chain sold over 163,000 vehicles in 2009-10, which would have made it India's fourth-largest automotive retailer in its own right. The chain has 345 outlets across the country, a hundred fewer than Maruti's new car sales points. But with the number of cars on the road increasing, Pareek expects that the number of True Value outlets will soon exceed Maruti's new car outlets by a substantial margin.

Maruti is not the only car manufacturer sniffing an opportunity in the space. Hyundai Motor India Ltd (HMIL), the country's second-largest passenger car manufacturer, started Hyundai Assured in 2005. Last year it sold 3,000 cars, which, like Maruti, were certified by the company. The process of certification, according to an HMIL spokesperson, gives the car buyer "peace of mind".

Maruti and Hyundai also give the car a limited warranty to assure buyers. But importantly, Hyundai also has an exchange scheme where car owners can come with any brand of car and trade it in for a Hyundai product - 14,000 such exchanges happened last year.

Maruti uses its exchange scheme successfully as well. Pareek says that cars as little as a year old are often brought into True Value outlets, and he describes these sellers as "winback" customers. But these cars are not certified, and are usually disposed of in the used car market through brokers or auctions.

This is where Dubey and Khattar feel they will fit in. M&M already runs a chain of 127 multibrand used car outlets under the First Choice brand and Dubey says that they sold over 18,000 vehicles last year. He expects to sell over 100,000 cars through 350 First Choice outlets by 2013-14. "The pre-owned ecosystem will develop and people will want a proper customer experience when they sell or buy a used car," says Dubey.

Khattar has opened five Carnation outlets in the past six months, which deal in used cars. He expects to roll out used car sales points at most outlets over the next few years as the chain, which also deals in sales and service, expands. Both First Choice and Carnation will sell users "certified" used cars (see How the 'Certified'...) like manufacturer-supported used car outlets.

Booz & Co's Bajaj argues that the Indian used car market has still a long way to go. He points out that in most mature automotive markets, used car sales are often 2-3 times of new car sales. "The massive used car markets in developed countries are supported by manufacturers. Indian car companies are so focused on new car sales that they have not, with the exception of Maruti, been able to devote resources to the used car market," adds Bajaj.

Yet, as Pareek points out, it is not easy for a manufacturer to enter the segment. "Selling used cars is a very complex business because no two used cars are the same, and we are buying the car as well as selling it. If the buyer or the seller of the car has a bad experience, it impacts the mother brand because a True Value customer is a Maruti customer," explains Pareek.

The used car market can have a major impact on new car sales as well, argues Bajaj. In India, Bajaj feels that the ready availability of three-four-year-old Maruti Alto, Hyundai Santro and Tata Indica cars has been a reason for the tepid response the Tata Nano has received. "Consumers are choosing to buy a bigger and better car instead for the same price, because the Nano has not managed to stick to its intended price point. The Nano has not failed, but it certainly is not doing as well as the hype would have led people to believe and that is thanks to the used car market," says Bajaj.

As Dubey points out, over 65 per cent of the used car market is for B and C market cars (small cars and entry-level sedans), and the market for smaller cars such as the Maruti 800 is fairly limited. That has not deterred luxury car manufacturers like BMW from eyeing this segment. BMW India is on the verge of launching its branded used car business, BMW Premium Selection, later this year.

However, Andreas Schaaf, President of BMW India, shares Pareek's concerns about entering the business. "The used car business, if handled badly, can damage the BMW brand, which is why we have to take it slowly, " says Schaaf. Yet, he sees a massive opportunity for BMW in the space. "It will help retain customers as well as introduce BMW to a whole new class of customers, who might not be able to buy a new BMW, but would readily buy a used one that has been certified and guaranteed by us," adds Schaaf. Moreover, the used car business is an additional source of revenue for dealerships.

But the used car business has its share of pitfalls. The first is problematic interstate transportation of used cars due to the lack of a nationwide Goods & Service Tax. Add to that the logistical and bureaucratic nightmare of re-registering a car from one state to another, thanks to the absence of a nationwide car registry. The former is a political hot potato.

The latter is also a national security issue, which the Ministry of Road Transport and Highways has been promising to fix for years, yet has seen no progress. The third problem is of expensive real estate. "Used car lots need to be massive and should hold hundreds, even thousands of cars. But the return on investment right now is minimal," says Bajaj.

Yet, as more people buy cars, they will also want a way to get rid of their old cars, and problems aside, the used car market is going to only get bigger and more organised. Bargain car buyers will have it better than ever before.

How the 'Certified' Used Car Market Works

  • Log on to the website of a used car company to check for the ballpark price of the car you want to sell
  • Trained mechanics examine the car and accurately determine the price
  • Some dealers can take the car as part-exchange for a new car. Others could sell you another used car and, in some cases, even a new car of another make
  • Once the dealer has bought the car, he will refurbish it using after-market spares, bringing it up to a saleable level
  • Most organised used car chains give the buyer a one-year, limited mileage warranty and a few free services

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