Short supply limits the pace of used car sales

With consumers delaying new car purchases and holding on to their existing vehicles amid the coronavirus crisis, short supply of pre-owned cars is expected to stifle sustained demand and sales, three executives working with leading car makers told Mint.

“Demand for used cars has gone up substantially, and this is reflected in the enquiry levels, which are up 15-18% year-on-year in a market (for new cars) that has declined by 18% so far this fiscal. However, the problem in the used-car space is not of demand but of supply,” said Shashank Srivastava, executive director, Maruti Suzuki India Ltd.

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According to Srivastava, replacement car buying has reduced during covid-19, leading to short supply of popular models in the used cars space. Replacement car buyers are customers selling their existing cars in exchange for a new one. “People are not willing to get rid of their old cars to buy a new one,” he said. While first-time car buyers comprise 45% of new car sales in India’s passenger car industry, additional buyers and replacement car buyers contribute roughly 30% and 25%, respectively.

“While typically replacement demand is about 25% of the total new car sales, for this fiscal, it has dropped to 19%. This drop is reducing the availability of used cars, impacting their sales. This is also reflected in average age of cars coming for exchange, which has gone up from a typical 6-7 years to 8-9 years,” Srivastava said.

However, this supply shortage caused by the replacement demand would correct itself once the economic situation improves, he added.

Ashutosh Pandey, managing director and chief executive officer, Mahindra First Choice Wheels Ltd, said short supply remains the biggest concern, but it will get streamlined in FY21-22. “The new car market would grow in FY21-22. This also means that there will be increased supply of used cars in the market as pre-owned car volumes are derived from the overall car parc,” said Pandey. He added that 20-25% of new cars sold every year come to the pre-owned car market and the used car market may see sales of about 3.6 million units in 2020-21 against 4.2 million in FY20.

“While pre-owned cars sold directly to dealers are expected to remain stagnant, we do see an increase in the supply of used cars by way of increased re-possessions by financing institutions in the coming months,” he said, adding that increased vehicle repossessions by lending institutions is already being seen in the market.

He, however, maintained that the demand-supply mismatch would continue for popular cars such as Maruti Swift, Dzire, WagonR, Hyundai i20, Honda City and Mahindra Scorpio.

Gajendra Jangid, the co-founder of used car sales platform CARS24 Services Pvt. Ltd, which sold more cars than last year, said fewer customers are approaching carmakers to exchange their old cars for new models. “OEMs are facing a supply crunch as fewer customers are going for exchange. This is because consumers now are ready to buy used cars in exchange for existing cars, which was not the norm earlier. This trend will continue to grow and while OEMs may see a supply crunch, used car players will continue to see a surge in transactions.”

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Katherine E. Ackerman

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