With auto sales down 18% in FY2020 and the auto industry staring at an uncertain future, apex dealer body calls for the Prime Minister's intervention
13 Apr 2020 | 32759 Views | By Sumantra B Barooah
The Federation of Automobile Dealers Association (FADA) has written to Prime MInister Narendra Modi requesting urgent support to the auto retail industry “which will help the businesses remain afloat in these unprecedented times and also help save lakhs of jobs in the process.”
FADA says the onset of Covid-19 ...
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The Federation of Automobile Dealers Association (FADA) has written to Prime MInister Narendra Modi requesting urgent support to the auto retail industry “which will help the businesses remain afloat in these unprecedented times and also help save lakhs of jobs in the process.”
FADA says the onset of Covid-19 has come as a shock as the Indian automobile industry was preparing for recovery in sales growth after 15 months of a downturn. The new normal growth rate is projected to be far lower than the normal (on the back of Covid-19 impact), under which the industry has been operating in recent times.
The dealer body says the SIAM has projected that India Auto Inc will witness a huge drop in auto sales -- as high as 35 percent for some segments, and is over and above the 18 percent de-growth reported in FY2020.
FADA says if the industry is not supported in such a scenario, many auto dealers will go out of business and will impact the livelihood of hundreds and thousands of employees. The letter mentions that the dealership businesses in India range from Rs 10 crore to Rs 1,000 crore, with majority of the auto dealerships being family-run, small-scale businesses spread across the country. FADA says each dealership on an average employs 70-150 people, and a majority of the employment generation locally.
Dealer sustainability badly impacted, says FADA president
Speaking to Autocar Professional, Ashish Harsharaj Kale, president, FADA, says that manpower cost has the largest share among fixed costs in the auto retail industry. "Manpower cost is 40-45 percent of our gross earnings. 50 percent in some cases. With rental and loan interest, fixed costs go up to 70 percent of our operating costs. With zero earnings and cashflow, government support is an urgent necessity for the auto retail industry," he says. In the absence of any external support, Kale fears that "many" dealerships will have to fold up business. It is estimated that even large dealerships may find it difficult to sustain beyond 1.5 or 2 months if there's no sales. "Very thin margin" of auto dealers have also affected the sustainability of dealerships. Citing a CRISIL study, Kale says that net level margins stand at between .5 to 2 percent in the retail industry. That's an industry challenge, for which FADA has approached SIAM for support.
For over 15 months, the auto industry has already been under an unexpected severe slowdown, which resulted in over 275 dealerships shutting down during and in turn resulted in thousands of jobs being lost.
The letter suggests key decisions that “if acted upon immediately, will help the auto dealership industry remain afloat in these unprecedented times and also help save lakhs of jobs in the process.”
Working capital support
FADA has called for:
- Resetting of the clock for the lockdown period for auto dealers on all working capital limits (complete waiver of interest on all category of loans from banks and NBFCs for the period).
- Extension of 4 percent Interest subvention/subsidy for working capital/loan requirements to companies for a 9 months post-lockdown.
- 20 percent additional overdraft on sanctioned credit limits for a period of 6 months, post-opening to support salary disbursements and other fixed expenses cash.
- Salary of Employees for the lockdown period should be paid through ESIC as this is a health pandemic and salary liabilities and should be covered under the same by ESI.
- Grant of MSME extension to auto retail.
“We request the government to kindly include wholesale and retail trade and repair of motor vehicles and motorcycles in MSMED Act from April 1. A request to the MSME ministry has already been put up with details in September 2019 and we request fast-tracking and immediate favourable consideration. The subsidies and incentives received under the MSME division will provide much- needed relief to automobile dealerships which provide direct and indirect employment to lakhs of individuals,” said Ashish Harsharaj Kale, president, FADA.
“These temporary support measures are extremely urgent and important to help us cushion the shock to our cash flows and the only way for us to continue in business till demand comes back to normalcy,” added Kale.
Dire need to revive demand
The automotive industry has been facing slowdown, on the back of numerous factors, even before the Coronavirus pandemic gripped the country. FADA says the post-Covid scenario is expected to dent consumer sentiment even further and till a complete cure is not found, the confidence on spending will be very low with the fear of another lockdown hanging out there.
“We would hence like to suggest demand boosters which if implemented, will attract auto demand and overcome the dent in consumer confidence to some extent till complete economic normalcy is restored,” said Kale.
In addition, FADA has suggested the following steps to help improve sales –
- Reduction of GST or Direct Benefit Transfer: A temporary reduction in GST, whose net impact ranges from 29% to 50% depending on vehicle category, will lower the cost of acquisition and will be a good incentive towards stimulating demand. Alternatively, direct benefit of 3-4 percent interest rate reduction to consumers should be given out.
- Banks and NBFCs can also reduce the overall cost of ownership can also be an alternate or additional tool for demand generation.
- An incentive-based scrappage policy should be introduced immediately for all vehicles which are running on road prior to 2010. Such schemes have been used as a demand revival tool at different time points in the West.
- Priority sector tag for auto industry for a 12-month period The government should include the auto industry in the Priority Sector lending so that both retail and wholesale financing can be made available easily.
In his letter to the Prime Minister, Kale has said that the present situation can lead to an existential situation for many of FADA members and their employees. “Over the years, the auto dealership business model has come under severe strain with increasing costs and low operating margins thereby reducing our sustenance towards any such shocks as this current Corona situation and its after effects. While we are taking it up with SIAM at a complete change of the business model to build up sustenance for the aftereffects of Covid-19 and for any future disruptions, the immediate situation is extremely bleak if not supported.”
What matters most
In the current scenario, the government, which is facing tremendous challenges in fighting the Coronavirus outbreak, may be receiving distress calls from many sectors.
On being asked if the government can't accept all the requests made in the SOS call through the letter, which ones should be given priority for response, Kale says "first and foremost" would be the MSME recognition for the auto retail business which provides direct employment to 15 lakh people, and another 25 lakh indirectly, as that will automatically qualify dealerships for some benefits that the MSME sector already receives from the government.
The next would be the 20 percent working capital support along with interest subsidy "because working capital is very much required as cash flow will drastically drop, and we have to try and maintain our workforce". The manpower intensive auto retail industry, pegged at close to Rs. 5 lakh crore in turnover, is not looking at any retrenchment yet but in the absence of any cash flow it will be very difficult, according to Kale.