Despite supply-side challenges, India's used-car market is on an upswing as consumers get more comfortable with the idea of investing their dreams on a pre-owned vehicle.
23 Jun 2024 | 6262 Views | By Prerna Lidhoo
In the bustling city of Bengaluru, where technology and tradition meld seamlessly, lives Jayashree S, a 34-year-old software engineer at a tech firm. For years, Jayashree relied on the city's dynamic public transportation system and the occasional rideshare. However, as her career progressed and her family expanded, so did her ...
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In the bustling city of Bengaluru, where technology and tradition meld seamlessly, lives Jayashree S, a 34-year-old software engineer at a tech firm. For years, Jayashree relied on the city's dynamic public transportation system and the occasional rideshare. However, as her career progressed and her family expanded, so did her need for personal mobility. "Reliability and value for money are very important to me, even when buying a pre-owned car," Jayashree explains. It took her two to three months to settle on a Baleno after visiting numerous physical dealerships and browsing online portals. "I spent countless evenings poring over reviews, comparing features, and seeking advice from friends, often being overwhelmed by the sheer number of choices, each promising the best value and quality," she said. Deciphering which certifications truly mattered and distinguishing between genuine deals and clever marketing took up most of her time.
"Earlier, the thought of buying a pre-owned car brought up images of shady dealerships and questionable deals," she reflects. Jayashree recalls her parents' apprehensions about second-hand cars, viewing them as a compromise. "But we've come a long way from there," she says. Today's market has transformed these perceptions, creating a burgeoning ecosystem that gives buyers like her the confidence to opt for pre-owned vehicles.
Jayashree's journey mirrors the broader shift in consumer attitudes towards pre-owned cars. With certified pre-owned programmes, rigorous inspections, and transparent pricing offered by both established OEMs and innovative online platforms, the pre-owned car market has evolved significantly.
Gone are the days when buying a pre-owned vehicle was synonymous with settling for less. The journey from 'used' to 'pre-loved' cars signifies a profound shift in consumer attitudes and market dynamics. While 'used' implies wear, depreciation, and potentially lower quality, 'pre-owned' or 'pre-loved'—as the companies prefer to call it—reimagines these vehicles in a positive light, suggesting care and enduring value. This semantic shift is more than just words; it reflects tangible market growth. In FY23, the industry sold 5.17 million units, marking a 56% increase from the 3.3 million units sold seven years ago. By FY28, it's expected to almost double to 10 million units.
Buyers are now more informed and discerning, seeking value for money without compromising on quality. The rise of certified pre-owned programs by OEMs like Maruti Suzuki's True Value, Mahindra & Mahindra's First Choice, Volkswagen certified pre-owned, etc., online startups like Spinny, Cars24, Cardekho, car&bike, etc., improved financing options, a burgeoning middle class, growing desire for personal mobility, and advancements in technology that ensure better quality and reliability of pre-owned vehicles, has further bolstered confidence in the market. The market is also expected to outgrow new car sales. By FY28, the new car market is expected to grow at a CAGR of 6% while the pre-owned car market is expected to grow by 16%. With everything going in its direction, the supply challenge is what's keeping OEMs and auto tech companies up at night.
The used car market faces a significant challenge: a supply-demand imbalance. Used car players face the pressure of maintaining a supply of used cars in accordance with demands of models and car types. Both OEMs and auto tech companies deal with the problem of lack of availability of good quality cars in a four-to-six year range.
While supply remains to be a bottleneck, demand, especially from first time buyers, is like never before. "Our internal research shows that over 90% of customers are first-time buyers. Also, there is a growing demand for cars that are just four or five years old. We are also seeing a growing demand for SUVs in line with the new car segment," said Partho Banerjee, Senior Executive Officer, Marketing & Sales, Maruti Suzuki India Limited that runs India's largest pre-owned car company True Value.
He adds that with its relatively moderate pricing, pre-owned cars are a good entry point for first time buyers. "Our vast network of sales touchpoints helps us procure younger and low mileage vehicles that are in demand. The wide range of models and a large car park brings variety and multiple options to the customers. We also use our customer database to reach out to potential sellers and buyers of pre-owned cars," he said.
While OEM-backed companies benefit from a constant supply of cars through exchange programs when customers purchase new vehicles, new-age startups, with their robust digital presence, attract consumers through features like money-back guarantees, doorstep delivery, and customer acquisition strategies. Cars below four years are often still under warranty and less likely to be sold, while cars over ten years are close to scrappage age, with minimal resale value.
Banerjee says that customers value the advantage of selling their old car to their pre-owned car outlet for the advantages of fair pricing, instant payment and hassle-free transaction. "The assurance that their car will not fall into the wrong hands is a big relief for the seller. The buyer too is assured that the ownership chain of the pre-owned car and accompanying advantage of a widespread service network for future care of the car. The demand for certified pre-owned cars has been experiencing a significant upward trend year-on-year. Post-Covid-19, with the base year being 2020-2021, we have observed a Compound Annual Growth Rate (CAGR) of 23% in demand for certified pre-owned cars," he adds.
The industry has faced tough years, particularly contrasting with the new car market. "This year has been a tough year for many segments of the industry. Our fortunes actually contrast with the new car market in a way. When the new car market was down, the used car market was up. This was the situation we were in during the pandemic. We were providing mobility solutions for a lot more people than we had supplies for. The new cars did not sell that much in those two years, the supply into the used car market — which is at a lag of two or three years—is at its lowest in this particular year," Ashutosh Pandey, MD and CEO at Mahindra First Choice said.
He adds that because FY23-24 has been great (for the new cars), FY25-26 and beyond should be good, because newer cars will start coming in. “If you look at the broad long-term trend, a few things stand out: one is that there's a very strong movement towards organisation of this space. And this is not just in India but worldwide. In India we started off from a very low base of organisation in 2010 when barely 5-7% of the market was organised and we were just starting out. Today, roughly 25-27% of the market is organised. This is testament to the fact that customer maturity has come," he said.
According to Indian Blue Book, over 43% buyers still opt going to local dealers, followed by 24% that prefer startups and close to 22% of buyers, who prefer OEM-backed outlets.
Whenever a customer today goes and identifies a car to be bought, he/she definitely considers both a new car as well as a used car, industry players say. "That's a sea change from a time when a used car was somebody's upgrade from a two-wheeler or due to affordability issues. Today, it's a mainstream product and not a compromise. This is going to define the used car market in the next 4-5 years," Pandey explains. "Investors, despite the fact that organised players have reported not so great results over the last couple of years, have continued to put their confidence in this space."
For context, Spinny’s losses increased 67.3% to Rs 820 crore in FY23 from Rs 490 crore in FY22, its gross revenue or gross merchandise value (GMV) grew to Rs 3,262 crore in FY23 from Rs 109 crore in FY22. Cars24, too, posted an Ebitda loss of Rs 337.6 crore in FY23, compared to Rs 997.7 crore in FY22, and its revenue stood at Rs 5,535 crore in FY23, marking an 8% increase from FY22.
Ashish Gupta, the Brand Director of Volkswagen Passenger Cars India, notes that approximately 30-35% of Volkswagen's sales come from vehicle exchanges, which highlights the importance of the used car segment in their overall strategy for the company. "Increasingly, the difference between a used car and a new car buyer is diminishing. Price points for new cars used to be twice of a used car. Now, many customers are preferring used cars as their first car," he said. As a result of the demand surge, the gap in availability has driven up selling prices by 8-10% annually. From FY21 to 23, average prices for used cars have risen by 30%.
"Currently in the used car market the demand is more than the supply. More customers are looking for young used cars, around three to five years old, whereas the availability of cars is five years and beyond. That's driving the demand or selling prices in the market," he explains.
Volkswagen's used car business has shown substantial growth, with sales of close to 30,000 pre-owned vehicles last year, marking a 12% increase. The company operates 137 facilities across India and projects a 10% growth in the coming year. The inclusion of models like the Taigun, which boasts a resale value of 81% after 2.5 years, underscores the strong residual value of Volkswagen vehicles, he says. Even a used Polo GT, is selling at the same price of around Rs 10 lakh that the new Polo GT would sell five years ago at Volkswagen certified pre-owned outlet. Owing to this trend, Volkswagen Passenger Cars India is set to rebrand its used car business this year, Das WeltAuto to Volkswagen Certified Pre-Owned, marking a significant shift in its strategy to capture the growing used car market demand in India.
Modern consumers rely heavily on digital technology, reducing the need to visit physical dealerships. AI-powered dealership management systems and customer relationship management tools enhance efficiency and customer experience. In the first quarter of 2024, Indians selling their cars to CARS24, resulted in a collective amount of Rs 1,385 crore in transactions, the company said. Although gradual, players like CARS24 are seeing a significant uptick in seller participation. "What's noteworthy is how customers actively contributed to addressing the demand-supply gap by introducing newer cars into circulation. This influx of younger vehicles also broadened the array of options available to potential buyers in the pre-owned car market. With younger cars finding eager buyers within minutes of being listed, the market experienced a newfound dynamism, reflecting the evolving preferences and behaviours of consumers across the country," Gajendra Jangid, Co-founder of CARS24 said.
He said that there are a lot of tailwinds in the used car market currently. "In India the car penetration is very low, less than 3%. As India is developing, more people will head toward owning a car. India will see a lot of numbers of new car owners. Car was traditionally an aspiration but post Covid, people started realising that it's also a fundamental need," he said.
The escalating prices of new cars, where entry-level models demand Rs 5 to 8 lakh, are steering consumers towards the more economical options available in the pre-owned car segment. This observation sets the stage for the market's unprecedented growth, with projections indicating a robust 15% Compound Annual Growth Rate (CAGR) over the next decade. According to Cars24, this trajectory foresees a quadrupling of the market size from USD 25 billion to a staggering USD 100 billion.
"Our expansive presence across 200 cities has enabled us to capture a 5% share of the available market, marking a substantial ascent from our 1% foothold, just five years ago," he said. This underscores Cars24's ambitious plans to outpace current market leader Maruti True Value within the next three years.
He says that Cars24's emphasis on operational efficiency and real-time consumer insights enables it to navigate supply challenges seamlessly, setting it apart from its unorganised counterparts. "Our digital-first approach remains instrumental in delivering a seamless and transparent buying experience, with 20% of our customers opting to book cars online before physically inspecting them," he adds.
In terms of technology, MSIL is implementing several innovative initiatives to enhance customer experience and streamline processes. "Our customer website provides a smooth and interactive experience with a large stock listing, while the self-evaluation tool allows customers to independently assess their vehicles. The Digital Evaluation Mobile App features AI-based defect identification and refurbishment cost suggestions, along with detailed inspection reports. The Certification Mobile App ensures refurbishment quality, and chatbots facilitate customer interaction and feedback. Our pricing engine utilises machine learning for accurate pricing, and the Easy Financing app offers customers an option to choose from multiple financiers," Banerjee said.
Average EMI today ranges from Rs 10,000 to Rs 15,000. With easy and affordable financing options, thanks to more organised players, in FY19, only 17% buyers opted for financing but that number has risen to 26% in FY23.
A decade ago, the market was completely unorganised and financing was very rarely available to the customers, Jangid said. "For new cars, 80% of the customers who buy new cars get it financed, but in used car financing penetration is extremely low because banks and NBFCs don't want to deal with the used car market because it's largely unorganised and there's no standard pricing of used cars. These factors were not encouraging customers to buy used cars. 60% cars on our platform get financed," he said.
He added that the trend towards used cars is stronger than ever, transforming the entire auto scene. "It's not just tweaking the rules; it's rewriting them in real-time. This isn't a blip on the radar; it's a seismic wave of change. Old habits are out, new trends are in, and we're all players in this epic transformation," he said.
Looking ahead, the trajectory of India's used car market appears undeniably promising. Projections estimate a valuation of USD 73 billion by FY28, as compared to USD 32.44 billion today. To harness this potential, stakeholders must enhance supply chain efficiencies, expand financing options, and leverage technological innovations. Collaboration between OEMs, startups, and traditional players will be crucial in addressing market challenges and driving innovation.
This feature was first published in Autocar Professional's June 15, 2024 issue.