Car sales on auto pilot, component market booms

The auto sector is in a piquant situation with overall car sales slowing for a long, long time, but a reprieve to this trend, if one could call it that, has come from the rural segment.

For every three cars sold by leading car makers like Maruti Suzuki and Hyundai --  to mention a few -- in the nine months to December 2013, one customer was from the rural market. In contrast, the corresponding number was one out of every 30 cars in 2007-08.

Notwithstanding the Auto Expo 2014 in Delhi where premium car makers have taken everybody by storm at the show unveiling their very 'best' products — from SUVs to sedans to compact cars — the sound and the fury does not reflect the current reality of bearish sales.

Industry observers maintain that overall auto sales may not improve easily as most existing car owners — who under normal circumstances would go in for lifestyle makeovers by upgrading their cars with improved models, preferably SUVs or sedans — have now indefinitely deferred decisions to buy new cars. Instead, they prefer to spend a bit more on maintenance of their existing vehicles through timely replacement of quality spares.

In the process, new car sales may not have picked up exactly the way the automobile industry wanted it to happen, while at the same time, those in the aftermarket business of the auto sector have reason to smile. Sales of spare parts, which are fuelled by demand from existing vehicles, have been expanding at a brisk pace even as new car sales plummeted to a 11-year low in 2013.

For instance, Navi Mumbai-based Shomik Mukherjee, who owns a Swift, was toying with the idea of upgrading to a bigger vehicle like a sports utility vehicle (SUV), but factors like spiralling inflation coupled with rising daily expenses and uncertainty in the job market made postpone his buying plans.

A new car? Spare me

Instead, Mukherjee chose to give his nearly 6-year-old car which has clocked close to 100,000 km a thorough servicing at one of Maruti Suzuki’s authorized service outlets. He spent Rs 45,000 on the job, yet felt that the move was prudent. It is common knowledge that most new cars, after their first five years on the road, will notch up more owner cash on maintenance — one will have to routinely, if not frequently, fork out dollops of cash on spare parts replacements. “I thought it’s better to spend money on maintenance instead of buying a new vehicle at a huge price,” Mukherjee said.

Decisions by those like Mukherjee are taking a toll on new car sales, while at the same time, giving the aftermarket business a chance to get a bite of the action. Sales of spare parts, which are fuelled by existing vehicles, have been expanding at a brisk pace even as new car sales plummeted to their lowest in 11 years in 2013.
For instance, spare parts sales in the last three years as a percentage of net sales have been expanding at a brisk pace. Market leader Maruti Suzuki saw its business division’s share as a percentage of net sales expand to 9.1 per cent in fiscal 2013 from 5.7 per cent in fiscal 2011, as per the company’s annual report.

During this period, Tata Motors too saw its spares and accessories sales surging to 7.3 per cent from 5.7 per cent, while utility vehicle maker Mahindra & Mahindra (M&M) witnessed spare parts sales expanding to 2.9 per cent from 0.3 per cent. 

“Customers are taking better care of their cars as they are not in sellout phase,” said Y V S Vijaykumar, chief executive at Mahindra First Choice Services, a part of the aftermarket division of M&M. Alex John, assistant general manager at one of Maruti Suzuki’s service outlets in central Mumbai said, “We have seen a few cases where owners who should have upgraded to a new car have chosen to get a thorough servicing done on their existing car.”

"Usually, the salaried class upgrades to a new car after 3-5 years. However, owing to the economic slowdown, people are postponing buying new cars, stretching out the normal cycle," said Suresh Rao, who is service head at an authorised service centre of Maruti Suzuki in Thane. “We have been aggressive with our follow-ups for service with such customers,” Rao said.

Higher margins

Interestingly, the auto parts segment has also offered lucrative margins. As against the sale of a new car, which typically turns in a margin of 2-2.5 per cent, spares and accessories yield margins of 8-14 per cent. No wonder that this segment has emerged as the new battleground for everyone in the ecosystem — from car and auto component makers to dealerships and those engaged in the organized and unorganized car servicing business.

So much so, that Tata Motors has chosen to boost its presence in the aftermarket segment by improving the availability of spare parts. The company is planning a network of more than 3,500 retail outlets for Tata original parts, trademarked as 'TOP' Shoppe. It is also enrolling local mechanics, who have a strong say in the market and are instrumental in promoting the use of original parts in its loyalty programme.
“More than increasing its product portfolio in the parts market, Tata Motors’ approach has been promoting and improving availability of the parts and market share through a range of initiatives,” a company spokesperson said.

Auto component makers too are honing their aftermarket strategies. Typically, component makers supply parts to auto makers and their spare channels, but many sell parts directly to the aftermarket under their own brand labels. This dual presence has helped them stay afloat in a laggardly market. From a macro perspective, the Indian auto component sector has been growing at 20 per cent annually since 2000 and is projected to maintain a 15-20 per cent growth rate till 2015.

“Those with a strong aftermarket presence are able to ward off the slowdown better,” said Sanchit Mathur, analyst at India Ratings, the research arm of Fitch Group, citing Shriram Pistons and Rings, a listed entity from Delhi that makes critical engine parts. Even in a sluggish market, the company has been able to maintain EBITDA margins of 18 per cent. EBITDA or earnings before interest, tax, depreciation and amortization is a key measure of operational efficiency.

The auto spare parts business has remained largely unaffected by flagging market demand, and this is more true for parts like oil filters and shock absorbers, says Sachin Puri, vice-president (aftermarket business) at auto components supplier Anand Group. According to him, aftermarket sales account for 30 per cent of the profits and 12 per cent of revenues at the Anand Group, which supplies a diversified range of parts to two-wheeler, car and commercial vehicle manufacturers and has a strong presence in the aftermarket business. Parts for which replacements can be postponed have seen slower offtake, Puri noted.

“When the car is serviced, some customers try to keep total costs down by avoiding discretionary work,” concurs Jagdish Khattar, former managing director of Maruti Suzuki, and currently founder of Carnation Auto India Pvt. Ltd, a multi-brand network for service and sales of new and pre-owned cars.

The brand strikes back

Lumax Industries Managing Director Deepak Jain said his firm has been expanding its overall product portfolio in the aftermarket business. Lumax supplies headlamps and other lighting components to several car and two-wheeler firms, and sells wipers, motors, cables and other parts in the aftermarket. According to him, the margin in the aftermarket is 8-9 per cent in comparison with 2-3 per cent for parts supplied to auto makers.

Even as carand auto component makers try to create a buffer for their core business through the aftermarket, competition in the car service industry is getting stiffer. Unlike in mature markets, where the servicing business is divided equally into two halves between authorized company workshops and branded service outlets, in India authorized company outlets account for only 33 per cent of the service stations. The remainder is unorganized.

Branded service outlets like Carnation Auto, Mahindra First Choice and Bosch occupy less than 2 per cent of the Rs 12,000-crore car service pie, as per Vijaykumar of Mahindra First Choice. An industry observer points out that a majority of car owners choose to get their cars serviced in unauthorized neighbourhood garages once the warranty period is over. "This is the customer segment that branded service outlets are targeting," he says.

According to Jnaneswar Sen, senior vice-president, sales and marketing, at Honda Cars India, the company’s authorized service outlet has been working on boosting customer retention. 

Owing to the sparse presence of branded firms that boast of better service quality and their increasing acceptance among car owners, branded outlets are drawing aggressive expansion plans.

Mahindra First Choice Services expects its revenues to jump threefold to Rs 35 crore in fiscal 2014 from Rs 12 crore in fiscal 2013. Vijaykumar said this will come from doubling the number of company-owned outlets to 26 by the end of this fiscal year. To expand at a brisk pace, it will adopt the franchise model. Carnation Auto is also in the process of setting up franchises for faster ramp-up. The company plans to have at least 300 service outlets in two to three years, Khattar said.

With more and more franchise models emerging on after-market service front in the auto sector, that segment is consolidating without a doubt. But it still cannot take the question of sustenance for granted. At some point, new car sales will have to gather momentum to keep the aftermarket business thriving and also improving the country’s growth rate. But that will be another story.