Iyer said that the working capital interest has to be super efficiently managed with inventory, and financers can act as co-lenders and provide guarantees for dealers to reduce their cost of borrowing, but such deals can only be when dealers work transparently and maintain discipline.
20 Jun 2023 | 4398 Views | By Amit Vijay M and Radhika Dave
With auto sales continuing to be sluggish, and new customer acquisition getting increasingly difficult, Ramesh Iyer, Vice Chairman and MD of Mahindra Finance says that the industry needs to collaborate and not compete, to increase its consumer base.
Giving a speech at FADA’s second Finance and Insurance Summit, Iyer ...
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With auto sales continuing to be sluggish, and new customer acquisition getting increasingly difficult, Ramesh Iyer, Vice Chairman and MD of Mahindra Finance says that the industry needs to collaborate and not compete, to increase its consumer base.
Giving a speech at FADA’s second Finance and Insurance Summit, Iyer spoke on the importance of discipline in finance when it comes to collaboration. “It is also important that you have the same discipline for finance, and they will fall apart if people don’t maintain standards. “If I expect that you should collaborate with me then, I must have the same transparency. I must have the same honesty on the same, ethical practice, with which we can work”, he further added.
Iyer said that the working capital interest has to be super efficiently managed with inventory, and financers can act as co-lenders and provide guarantees for dealers to reduce their cost of borrowing, but such deals can only be when dealers work transparently and maintain discipline.
Echoing similar views Manish Raj Singhania, President of FADA said that dealerships today face many obstacles, including rising interest rates, slow-moving vehicle inventory build-up at dealerships, supply chain constraints, the increased cost of funds, and the ever-evolving IRDAI norms.
Singhania said that issues impact dealers' ease of doing business and together, they underscore the necessity for cooperation and coordination within our industry.
Singhania pointed out that from Germany to Japan, international markets have adopted innovative practices, that we can learn from and adapt to fit our context.
Iyer of Mahindra Finance also pointed out that banks are coming out of tough NPA cycles, and they ‘are not going to allow one more NPA to hit their balance sheets,’ therefore stressing the importance of financial discipline in the balance sheets.
"Money will be available for those whose financial discipline has a very high rating. Banks don't want more NPAs to hit their balance sheet. The main ask is to ensure that other dealers do the right thing and ensure that unfair actions don't bring the industry down," Iyer said.
Dealers will have to plan in advance for the working capital requirements so it's available on tap. Margins will be under pressure—volumes will be there, but customer demand will be there for incentives”, he added.
Iyer further noted that manufacturers will substantially increase production, inventory will be higher, and working capital interest will come into the balance sheets. "Dealers will have to plan in advance for the working capital requirements so it's available on tap. Margins will be under pressure—volumes will be there, but customer demand will be there for incentives."
Iyer further said that with product and price of products being similar the customer experience will be the differentiator.
"It's extremely unlikely that customer differentiation will come from the kind of technology one uses, skill sets of people will be a cost on the P&L of the dealership. OEMs will not increase margins, and the only way to increase margins will come from volumes, as first-time customers will shy away, but the existing customers who are owing multiple cars will be the ones who will want to upgrade to newer vehicles,” he added.
Another challenge sighted at the second Finance and Insurance Summit was the ability of dealers to work with OEMs and financiers to target the 4,00,000 un-serviced small centers in the country and grow the distribution footprint to ensure that new customers are added to the business footprint.
Hinting at a possible consolidation he said that while demand is there but margins are not likely to go through, and many dealers will not be able to survive the current season where customers will be extremely demanding.
"Existing financiers will have to be around to bail out stressed dealers or even help other dealers to buy out dealers that are unlikely to survive this new order. So the clear focus is to create new markets and collectively reach out to new customers."
The general mood amongst industry participants at the summit was that auto manufacturers and dealers, finance firms, and insurance providers work in tandem to offer 'all-in-one' packages for customers, simplifying the process of purchasing, insuring, maintaining, and owning a vehicle.
In Japan, Singhania mentioned that "telematics insurance" leverages advanced technology to offer custom insurance packages based on driving habits, resulting in cost-effective solutions for customers and lower-risk portfolios for insurers.
Singhaina urged dealers to adopt these practices like in the USA, where financiers partner with dealers to provide inventory floor planning – a practice that supports both the dealer in maintaining a comprehensive inventory.
The second FADA Finance and Insurance Summit had multiple sessions on understanding these trends including a session on "Financing the Future of Auto Retail: Smart Strategies for Growth and Profitability," which discussed the nuances of financing for dealers keeping the principles of leverage, prudence, and effective inventory funding.
Some of the other industry participants also spoke about the role of mergers and acquisitions in shaping the industry’s future needs our attention.
“The pressure of excess inventory is another concern that requires strategic thinking. Banks and finance companies play a critical role in this context. A healthy dealership balance sheet necessitates an optimum level of inventory - enough to meet customer demand, but not so much as to burden the dealership with over-leverage" a leading Mumbai-based dealer shared while speaking at the Summit.