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May 19, 2000
The Rediff Business Special/Neena Haridas
Car majors drive into used-car arena
Would you like to buy a Ford Ikon for the price of a Maruti Zen? Or an Opel Astra for much less than its showroom tag? If anyone harbours such aspirations, he can stretch the size of his car without actually burning a hole in his pocket.
Of course, there is a catch: the best you can get is an almost new vehicle. Yes, this is the used-car mart with a difference.
Major car manufacturers like General Motors, Ford and Maruti are entering this market and giving it a twist, the second-hand twist. These companies, after taking Indian roads by a storm with their new models, have now decided to lend their brand name, credibility and value-addition to the hitherto-unorganised used-car market.
The used-car market is estimated to be about 1.5-2 times the size of the new cars segment. This unorganised sector consists of dealers who buy the cars, spend money to spruce them up and then sell the done up version, and brokers who bring together the seller and the buyer and collect a commission for their efforts. (New car sales in 1999-2000 were about 639,000 units)
The dealers try to get the best possible bargain from the sellers. They have tie-ups with local mechanics who refurbish the cars. The dealers typically spend anything from Rs 5,000 to Rs 15,000 on refurbishing a car. Their overheads too are not much as they often use public space to park the cars. Also, they do not change spares, but just recondition and reuse them.
The brokers, meanwhile, depend on volumes for their survival.
However, in both the scenarios, there is an element of fear for the seller and the buyer: of being cheated.
And it is this fear that General Motors, Ford, Maruti and others of their ilk want to exploit to their advantage.
What does branded used-car market mean for the consumer? It means used-car divisions of these companies such as Ford Assured and General Motors 5*****OK will evaluate a used car, acquire it, refurbish it, and even arrange finance if need be, for the consumer.
In other words, a buyer gets an almost new Opel Astra from the General Motors showroom for the price of say a new Daewoo Cielo.
Besides, the companies are also backing it up with warranties and free services.
"We see the market for used cars growing rapidly. This is very much on the lines of our experience in other underdeveloped markets like Brazil, says Ravi Mangipudi, general manager, new business development, Ford India.
"Our entry is very much in keeping with the market expectations. This is the natural evolution of the market from an unorganised to a more organised one,'' he says.
But why the used-car market? Says auto expert Murad Ali Baig, "It is often better for the consumer to buy a second-hand car for the sheer economics involved. For instance, the Daewoo Cielo is a very good second-hand buy because it does not have a high resale value. The buyer, thus, gets a luxury car for the price of a new Maruti 800 Deluxe. The manufacturers have obviously realised this niche market and are now opening up new revenue models for themselves and their dealers."
Will this mean the end of the broker and the dealer in the unorganised sector? "Currently, trade in the used-car market is on trust. But, the consumer always is wary of the wheeler-dealers. Hence, I think this is the way the market will evolve in the future. More and more branding is likely to happen because India has a huge used-car market," says Baig.
Rajeev Chaba, vice-president (marketing), General Motors India, feels the company's efforts to introduce a branded product will succeed and that the middlemen will finally bow out of the scene.
GM is banking on the premise that second-hand car buyers will not have the time to run around and hunt for a good bargain.
"People no longer have extended networks of family or friends who can find them a car of their choice. People are relocating and moving a lot more than before and they want what they want now, not a week or a month later. And a consumer will always trust a company more than individual. For instance, we offer the customer a written warranty. The warranty will be administered by a third party administrator of warranties and is tied up with a nationalised insurance company," says Chaba.
However, existing car dealers do not feel they are facing extinction. "It will take a very long time for the entire market to become branded and organised. And I don't think it is possible. A large portion of the market will still be unstructured despite multinationals' efforts. As of now the multinationals are able to provide few choices to the customer, whereas we can give the customer a wide variety to choose from. I think we are here to stay," says K K Kurien, auto consultant.
D K Mehrotra, a leading car dealer with over 15 branches across Delhi, echoes Kurien's sentiments, "The overheads will be too large for these MNCs to maintain: office space, staff, the cost of the warranty, etc will squeeze their margins."
Car manufacturers, however, brush aside these speculations saying that the warranty and extra services will come with a price, which customers will not mind.
Vinod Kumar R, associate vice-president, Business Consulting Group, who has done work on the used-car market, points out that dealers interact among themselves on a daily basis.
"The price mechanism is more or less structured in the used-car market, especially in the last three years when a lot of new models have come in. There is an informal understanding among dealers on the price. It will be quite difficult for the car manufacturers to break this dealer network. If at all, they will have to work in tandem with them."
In fact, Maruti Udyog has done just this. It has tied up with several dealers across the country who not only deal with new cars, but also used Maruti cars.
Says a company official, "We were among the first to identify the potential of the used-car market. We have tied up with dealers and finance companies, such as Citibank, who are involved in the evaluation, refurbishing and selling of the car."
In fact, MUL organises frequent car melas in the metros and other cities where a consumer can come a make spot purchase. "We also have programmes to exchange cars -- any model -- during these melas. We evaluate the car that the consumer currently owns, buy it off him and then finance the rest of the money required to buy a Maruti."
While credibility and trust could attract consumers to go in for used cars from MNCs, the clincher could be the finance options. As of now, consumers get barely 60 per cent finance assistance through private dealers. However, with MNCs entering the scene, finance option could range from 75 per cent to 80 per cent.
"When there is an MNC backing it, it is much easier to finance a customer. We could even lower interest rates once the business picks up for these MNCs," says an official at Citibank.
While it may be too early to write off dealers and brokers, the multinationals' initiative will definitely give the used-car market in India a new dimension and direction.
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