Auto dealers seek higher sales margin, cost reduction measures to tide over dwindling profitability

Automobile dealers have sought a rise in sales margin per vehicle to at least 7 per cent in order to make their businesses sustainable amid high operating costs and a drop in volumes due to a prolonged slowdown earlier and the coronavirus pandemic now.

The Federation of Automobile Dealers Associations (FADA) has also asked automobile companies to reduce cost structures at dealerships by at least 20 per cent to make the business viable.

In a letter to auto industry body Society of Indian Automobile Manufacturers (SIAM), FADA President Ashish Harsharaj Kale has sought an urgent action from the auto original equipment makers (OEMs) with dwindling profitability due to high costs and low operating margins.

He said that while the employee compensation, interest cost and rent are skyrocketing, sales and dealer margins have not matched the rise in expenses.

Kale said Indian auto dealers operate on the lowest margins possible, in the range of 3-5 per cent, when compared to peers globally.

Auto dealerships in India are operating at an average net profit level of 0.5-1 per cent of total turnover, he added.

"Due to the slowdown in the past 15 months, even this thin margin has taken a beating and many dealerships are in the red due to a drop in volumes and fixed costs remaining more or less the same," Kale said.

Dealerships on an average are spending 85 per cent of their gross revenues on costs and majority of that is on manpower, interest and infrastructure, he added.

"In such a scenario, FADA would strongly urge all our OEMs to urgently take action on two fronts...minimum fixed dealer margin of 7 per cent on selling price of the vehicle to make this business model sustainable and shockproof and comparable to international standards," Kale said.

Besides, any variable margin linked to target achievement, processes and quality parameters, among others, to continue and be over and above the fixed margin, he noted.

The dealers' body also sought reduction in the cost structures which have been built up in dealerships by at least 20 per cent if not more on an immediate basis.

"It becomes even so urgent now as due to COVID-19 and its economic aftermath, SIAM projections talk of a range of volume drop of 10-35 per cent this fiscal on top of the 21 per cent de-growth of 2019-20," Kale said.

These are unprecedented times and unprecedented actions will be required as an industry to survive and remain robust in normal times, he noted.

As per sources, SIAM has sent the FADA communication to its executive committee, which comprises officials from the country's leading automakers.

The auto industry body, sources say, favours leaving it out to individual OEMs to work out margin details with their respective dealerships.

Dealer margins on passenger vehicles across the globe, including Europe and the US, range between 6 per cent and 14 per cent.