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Second-Hand Drive
The domestic pre-owned car market is coming of age as OEMs and online players step on the gas to grab market share.
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  • Used cars sold per year 3 million
  • Organised market share 0.6 million

Source: Industry

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RS Kalsi is an old hand at Maruti Suzuki India. The sales and marketing head of the country’s largest passenger car company is composed but also understandably pleased to share Maruti’s growth numbers from the past four years. “It was 9% in FY12, 14% in FY13, 18% in FY14 and this year, we are at 30-plus levels.” Contrary to one’s initial assumption, these numbers are not for the new passenger vehicles sold by Maruti but are, in fact, growth numbers for used cars that are sold by the company through its True Value outlets.

Kalsi, who laid the bricks for the first-ever pre-owned car showroom in India 13 years ago, is a little nostalgic. At the turn of the century, Maruti sent out a team to survey the old-car business elsewhere in the world, leading to the establishment of True Value. Today, that market is finally seeing its value. “The used-car population within the Maruti portfolio has increased. Today, we have nearly one-and-a-half crore customers. After 3-4 years, these cars will come back into circulation. So, the basic mass is increasing,” says Kalsi.

 
 
"We have nearly one-and-a-half crore customers. After 3-4 years, these cars will come back into circulation"—RS Kalsi, Head, domestic marketing and sales, Maruti
 
 
In India’s used-car market, around 3 million vehicles change hands every year, a figure that’s much higher than that for new cars. Of these, roughly a fifth pass through the organised market, where the other big player is Mahindra First Choice. What sets First Choice apart from True Value is that the former sells all brands under its roof, thereby offering a wider menu for customers to choose from. Nagendra Palle, CEO of the multi-brand car mart, testifies to the rapid growth in the used-car segment. “We will have sold 70,000 vehicles this fiscal, against 50,000 last year. The number of dealers has also increased to 410 in 220 cities.”

Almost all original equipment manufacturers (OEMs) have been trying to grow their used-car business, with those who missed the bus earlier now aiming to catch up. The most recent used-car business aspirant is Renault, which found fortune in India with its compact sports utility vehicle Duster. The company announced that it would soon be entering the previously-owned car business. Sumit Sawhney, CEO and MD of Renault India, believes that this is the right time for it to get into this segment. “While we have two products in the offing that will be volume drivers like the Duster, we are also in a consolidation phase. The pre-owned business is estimated to be significantly bigger than the new-car market and is growing at a faster rate,” he says.

 
 
In India’s used-car market, around 3 million vehicles change hands every year. Of these, roughly a fifth pass through the organised market
 
 
But it’s not just the OEM-driven used-car ventures that will drive this category. Erstwhile Maruti head Jagdish Khattar’s Carnation, which started off as a servicing company, is now active as a second-hand vehicle shop with 35 outlets. PE investors Premji Invest and IFC Ventures had invested Rs 104 crore in Carnation in 2008, and Gaja Capital Partners invested Rs 84 crore in 2012. “Used cars offer the best bargains and have a great future in India,” says Khattar.

The most recent company to get the PE world’s attention is CarTrade, an online classifieds forum and marketplace for cars. Warburg Pincus India, which had made a killing with Bharti Airtel, invested Rs 185 crore in CarTrade in November 2014. “We see tremendous potential in the Indian automobile market. CarTrade is one of the most innovative platforms in the online auto sector and has shown strong growth momentum in the last couple of years,” mentions Nitin Nayar, managing director of Warburg Pincus, in a press release announcing the fund infusion in the car portal.

Little wonder, then, that Warburg chose CarTrade. Vinay Sanghi, founder and CEO of CarTrade, says, “We are an internet directory for automobiles. We have 120,000 cars listed for sale by 2,500 dealers. About 4 million unique customers visit the website.” Incidentally, Sanghi headed Mahindra’s First Choice before starting CarTrade.

The iPhone Phenomenon

So, what is it that has changed during the last two years for used cars in such a big way? Industry analysts feel that in the past, a car’s replacement cycle used to be 7-8 years, which is now down to 3-4 years. Aswin Kumar, programme lead, automotive and transportation at Frost & Sullivan, says, “Our cycle for cars is becoming like the one for smartphones — you have to upgrade every year.” In the past, Tata Indica’s 2007 model got a facelift only by 2011-12; now, things have changed. “While the iPhone 5S sports very similar features to the 4S, for most customers, the 5S is a new model. Vehicle manufacturers are increasingly adopting this strategy just to give customers a sense of newness,” he says. The result is that cars introduced just a year back already appear old to the customer. This leads to a faster replacement cycle, resulting in some very good younger vehicles being put up for sale. There has also been a change in the mindset of the Indian customer. Today, customers think that by choosing to buy a car that has run 25,000 km, they can upgrade to a higher segment. So, for around the price of a new WagonR, one can now buy a used Amaze or Dzire.

 
 
"A typical young buyer is between 30 and 35 years old and is looking to spend around Rs 4 lakh"—Nagender Palle, CEO, Mahindra First Choice
 
 
Also, people are increasingly getting comfortable about buying a pre-owned vehicle as a second or third car. Adds Pradip Kataria from Maruti’s True Value outlet in Gurgaon, Pasco Automobiles, “Unlike earlier, people are okay with their second or third car being a used car. Having said that, around 50% of our customers are still first-time buyers, and they prefer small cars. Interestingly, we get some replacement customers also, who may have bought a used car earlier and now want to replace it with another used car.”

Palle of Mahindra First Choice elaborates, “With economic growth, you will obviously find younger people buying cars. A typical young buyer is between 30 and 35 and is looking to spend around Rs 4 lakh. These buyers don’t have the time to haggle with brokers and prefer OEM-run outlets.”

And the conventional rationale of OEMs stays intact. “Most car-makers would want to enhance the resale value of their cars by providing higher prices in the pre-owned car market, so as to still be able to sell new cars. That keeps up with the market strategy of new cars,” says Kumar. A closer look at the rate card for cars showcased at Pasco Automobiles reveals somewhat inflated prices. An official admits that its prices are actually 15-20% higher than the market (even when compared with other organised players such as First Choice) but that “we offer value and trust. Maruti provides all-India warranty and service facilities.” These higher prices also strengthen the perception that Maruti cars have a higher residual value.

Widening Road

Akhil Gupta of global information company IHS believes that OEMs are pulling out all stops to retain their customers. “Through the pre-owned cars’ channel, you are able to build a regular database of customers; identifying them would otherwise have been quite difficult. If you go to a company to sell a car, you will most likely buy a new car. Today, a customer needs to visit about three showrooms to make a decision but five years down the line, OEMs will approach the customer.” Madan Lal, CGM at Pasco Automobiles, says the company’s prescribed target is to sell 35% of its new cars through the exchange channel each month. 80% of the old cars sold to Maruti are sent to True Value outlets for sales and 10-15% are auctioned (mostly non-Maruti cars), while 5-10% are sold as scrap.

“We have taken an aggressive stance for our True Value outlets, and this has given new impetus to our exchange activity during these years,” says Kalsi. Maruti’s exchange penetration figures are a testament to this claim. In FY12, the figure stood at 22%, in FY13 it was 23% and, this year, it is 30%. “This year, we will have a figure of 300,000 cars,” he says, “up from 270,000 last year.” The number of outlets has almost doubled, from 400 in FY12, 450 in FY13 and 600 in FY14 to 763 till October 2014.

Kataria has been working with Pasco Automobiles for six years and he attests to the rise in sales. “Six years ago, we used to sell 20-25 cars per month. Today, that number is up to 225.” Between three True Value facilities in Gurgaon, the company stocks 90 cars. An Alto without warranty is available for as low as Rs 50,000, while one with warranty costs about Rs 1.5 lakh.” The priciest car in the parking lot is a second-hand Kizashi, wearing a royal price tag of Rs 840,000.

Carnation’s Khattar says, “We have 35 outlets and are now concentrating on adding two or three every month.” CarTrade, too, is in a hurry to double its dealer count to 5,000 and increase listings to 200,000 in a year’s time.

 
 
"We have 35 outlets across the country and are now concentrating on adding two or three every month"—Jagdish Khattar, Founder, Carnation
 
 
Khattar says, “The response is good; even people from the unorganised sector are joining us.” If that is true, then what is it that’s luring unorganised used-car dealers towards him? Khattar feels that it is public pressure. “I had earlier invited some of them to join us but they refused. In 3-4 months, they came back, saying their customers ask them about brands and warranty. So, I think it is these demands from customers that has made them join us.” Kumar says he can look through the aggressive expansion stance being taken by these players. “Market share for organised players is still low, which means that there is a huge potential to leverage on the basis of OE-driven certification. So, everybody wants to take a closer look at this market, because this is where money can be made.”

Myths and skepticism float in every market, and the second-hand space is especially prone to raised eyebrows. A mechanic in Delhi says big companies replace the original parts with cheaper imitation parts during the refurbishment process at their workshops. Lal of Maruti’s Pasco dealership, however, denies this. “We don’t do that. We only use genuine Maruti parts and accessories. Nothing else.”

Kumar also looks at another possible angle that points to the challenges faced in the dealership business. “Margins and sales of vehicles have been coming down due to pricing pressure, which means they have to give existing dealers other avenues. So it is only logical that the organised sector takes a closer look at it.” And the used-car business has a high margin in comparison with that of new cars. A dealer usually earns a 2-3% margin on the sale of a new car, whereas a used car can fetch 8-10%. Lal agrees that used cars offer an excellent business opportunity. “But we sell both. Our mandate is still to sell new cars.”

Different Strokes

In addition to the OE-driven certification they can provide, used-car sellers also offer easy access to their servicing networks. But on the flip side, non-OEM companies such as Carnation and First Choice provide servicing at their own centres. True Value boasts of very large stores (as these are also dealerships), while First Choice and Carnation have smaller outlets. True Value offers an experience similar to that of buying a new car and also leverages its strong network of a nationwide servicing presence — Maruti cars can pretty much be repaired anywhere and their parts are easily available as well. First Choice has, on the other hand, decided to innovate on warranty products. It offers four kinds of warranties — from a cover for up to 1 lakh km in its basic product, WarrantyFirst, to an unlimited warranty under AssistFirst.

Be it Maruti’s True Value, Mahindra’s First Choice or Carnation, these second-hand car sellers offer certified and refurbished pre-owned vehicles with warranty, finance facility and clean, transparent paperwork. However, these players are in the game with different models in place. While Maruti looks at this business as an extension of existing dealerships to push new cars (by way of exchange), for Mahindra, it is a for-profit, standalone business. First Choice runs all its 410 outlets under the franchising model; it charges a monthly royalty and provides franchisees with the brand name, along with support in technology, process, evaluation and engineering. Carnation follows a similar model and deals in multi-brand cars, much like Mahindra First Choice. “We are not tied down to selling new cars and are, instead, a pure used-car business,” says Palle of First Choice. He claims that unlike others, the company’s purpose is to create an ecosystem around used cars in India. “We had a profitable last year and we will continue to be profitable this year, which is probably not the case with most companies.”

Kalsi, on the other hand, believes in a higher purpose and he isn’t bothered about making easy money out of used cars. “We see a lot of synergy with existing car dealers and we want to give a 360-degree experience to our loyal customers so that they remain within our fold.” In line with this prioritisation of loyalty, True Value dealerships are given only to existing Maruti dealers, although they do have to open a new showroom for True Value.

 
 
The used-car business has a high margin compared to new cars. A dealer earns a 2-3% margin on the sale of a new car, whereas a used car can fetch 8-10%
 
 
But when, the world over, OEMs run used-car businesses as a standalone for-profit venture, why is Maruti digressing? “Maruti holds a unique position as a leader for the last 30 years and has a huge customer base and market share. These trends are unique to us in India, so we are building on them,” says Kalsi. “We also announce schemes from month to month, a decision that may be tactical in nature. There could be models that we want to promote, so an exchange scheme could be offered,” he adds. Puneet Gupta of IHS agrees. “Maruti isn’t looking for a profit from True Value as long as it retains a 40% market share — a leadership position. But if that comes down drastically, it might start looking at it as a profit-making avenue.”   

Kumar of Frost & Sullivan jumps in to decode the diverse models at work. “When it comes to Maruti, the margins for dealers are at a bare minimum. It makes more money on after-sale service. So, by having dealers who get into after-sales for used cars, it can drive a bigger bargain as it knows that used cars will fetch it more money,” he says. “But in the case of First Choice, where servicing is being franchised, it is important for the franchisee to have a source of revenue-generation to set off overhead costs, and that revenue is what the used-car sales provide.” Gupta says that the motives of Maruti and Mahindra have been quite clear. “Mahindra’s business model aims to make a certain amount of money from a car. This is evident from its outlets — the company keeps a tab on its costs. It doesn’t want to hold on to used cars for too long, and it tries to push [them out] quickly.”

While newcomer Renault is still figuring out its model, CarTrade has charted out its territory. Of the 2,500 dealers listed on it, Renault has 30 priority dealers to whom it provides branding. “In the next year, we will have 150 priority dealers,” says Sanghi. He says that the USP of CarTrade is that it is the only auto portal that gives a condition report on the car.

Online Traffic

Quite a few portals — namely, CarTrade, Carwale and Cardekho — have sprung up in the past 2-3 years. These are not OEMs and they don’t have a physical presence. What is it that draws PE interest towards them? Both Palle and Kalsi believe that auto portals can only serve as adjuncts to physical stores, as car buying and selling is an experiential process. First Choice has developed analytics and web engines around the used-car segment. Palle claims that “only First Choice has a complete hybrid model of offline and online”. However, Sanghi sees a different undercurrent at work. “In a year, about 3 million used cars are sold, while that number for new cars is about 2.5 million. Most people believe that the car market will double in the next five years, and with increased online penetration, the potential seems exponential. This combination is what has caught the eye of PE and venture capital funds.”

 
 
"With 120,000 cars listed on our website, we are three times our competition"—Vinay Sanghi, Founder and CEO of CarTrade
 
 
The belief is that even if a buyer isn’t willing to buy or sell directly through the Internet, auto portals can still serve as useful repositories of leads — their role is to eliminate middlemen, who charge a sizeable portion of the transaction without much value-addition of their own. “These websites will have a excellent database in five years; it will help OEMs. A possibility is that they could target specific new cars (launched by OEMs). If you post an ad on a website to sell a car, soon, car trade guys will start targeting you, as you might start looking for a new car,” points out Gupta of IHS.

Concurs Kumar. “Think about it: you just have to have 5% market share and make Rs 1,000 on each car sold or bought. That itself huge potential. They are going to make millions of rupees,” he says. By 2020, India is expected to be the third-largest car market in the world, which means that it will be the third-largest market for second-hand cars too. “It makes sense for the sites to entrench themselves and wait for payday,” he says.

Who’s In The Race?

For now, the scope for the used-car market to grow is exponential. The current ratio of used cars to new ones is 1.1 to 1, while in mature markets it is 3:1. Palle believes the ecosystem around the used-car market is just about coming up. “We see ourselves as being the key enablers of that ecosystem.” Khattar, too, feels that there is enough to go around for everyone. “This country needs more [players]. At the very least, we have to double that new-to-old ratio. So, there is no fear of competition for now.”

 
 
By 2020, India is expected to be the third-largest car market in the world, which means that it will be the third-largest market for second-hand cars too
 
 
Maruti likes to see the future in the light of its own priorities. “Others may not be able to provide what we can — a customer may not be able to upgrade to a car of the same brand. Only we offer this complete cycle at one dealership,” says Kalsi. He does concede that Maruti will tweak its model if required in the future, but says it currently has no plans to become multi-brand buyers and sellers.

In the auto-portal space as well, the competition is evidently on the rise, with even OLX and Quikr launching themselves into the fray. But Sanghi isn’t getting jittery. “With 120,000 cars listed on our website, we are three times our competition put together. We send our engineers to the ground to make a status report on the inventory, and we even list the price that we think customers should pay.”

The taboo associated with second-hand vehicles is fast fading. And this is most evident in the strata where it earlier held the most value — the luxury segment driven by the wealthy. Mercedes is increasing its used-car showrooms, Audi now provides 60-month loans on its pre-owned models, and even second-hand Ferraris are available. “My entire family is extremely comfortable with second-hand cars,” says Khattar. And if that indeed becomes the norm, used-car players will soon find themselves zipping around in top gear.

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