Auto Dealerships Struggle As Passenger Vehicle Sales Slow Down With Inventory Worth 73,000 Cr, FADA

The Indian automobile industry is currently grappling with a challenge as a slowdown in Passenger Vehicle (PV) sales has led to a massive build-up of inventory at auto dealerships across the country. The Federation of Automobile Dealers Associations (FADA) has reported that the inventory has soared to an all-time high of over 700,000 units, valued at Rs 73,000 crore. This stockpile, which has been steadily increasing, has now reached 70-75 days of inventory, up from 65-67 days in early July.

Manish Raj Singhania, the President of FADA, has raised concerns about the sustainability of auto dealerships under the weight of such high inventory levels. He stressed that the current situation necessitates extreme caution from all stakeholders, particularly the Original Equipment Manufacturers (OEMs). According to Singhania, the sustainability of dealers is at risk, and OEMs must take decisive steps to mitigate this risk.

Singhania has urged PV OEMs to realign their production strategies to better reflect retail sales figures rather than relying solely on wholesale numbers. He emphasized that reducing the gap between retail and wholesale figures should be a priority, advocating for a reduction in vehicle supplies to dealers. "Carmakers should realign their production around the retail figures. To achieve that, they should reduce their vehicle supplies to dealers. While the reduction cannot happen in a single month, the gap between retail and wholesale figures should be around 50,000 to 70,000 units," Singhania said.

He further elaborated that the ideal inventory level for auto dealerships should be around 30 days, with a possible excess of about a week. This balance, he argues, would help prevent the kind of overstocking currently plaguing the industry. "While carmakers can reduce their dispatches in the coming months, they can increase them during September-end or early October this year," he added.

Despite a 10% increase in passenger vehicle sales in July, which reached 3,20,129 units, the situation is far from rosy. FADA data revealed that PV wholesales saw a year-on-year decline of 2.5% in July, with 3,41,000 units sold, primarily due to a high base effect from the previous year. This disparity between retail sales and wholesales has contributed to the swelling inventories at dealerships, further compounding the challenges faced by dealers.

Singhania also highlighted the need for OEMs to introduce adequate schemes to help dealers bring these excess vehicles to market. He emphasized that if carmakers genuinely want to support their dealers, they should assist with the additional interest costs incurred due to the prolonged stock-keeping periods. "If they are bearing the excess interest cost, that won't be a drain on our margins," Singhania noted.

The Society of Indian Automobile Manufacturers (SIAM) has acknowledged the concerns raised by FADA, though it has taken a more measured approach. Vinod Aggarwal, President of SIAM, has indicated that corrective actions will be taken by OEMs to address the high inventory levels. "It is the individual companies' decision on how they handle their working capital. At the end of the day, it is in the interest of all the OEMs to make sure that their dealers are financially healthy and do good business," Aggarwal said.

While Aggarwal downplayed the severity of the situation, suggesting that such fluctuations in inventory levels are not uncommon, he assured that OEMs would act responsibly if dealers are struggling with excessive inventory. "We should not worry too much about the stocks because I am sure all the respective companies where the stock level is high will take corrective action," he remarked.

Industry experts have also chimed in on the issue, with some pointing to the need for a shift in how inventory management is approached within the Indian automotive sector. Ravi Bhatia, Managing Director of JATO Dynamics India, explained that the traditional model of dealers "stocking to sell" may no longer be viable. "Incentives to dealers were linked to dealer-reported retail. This sometimes leads to issues of over or under-reporting. As markets mature, such changes are required," Bhatia said.

Puneet Gupta, Director at S&P Global Mobility, suggested that OEMs' anticipation of higher sales led to a surge in dealer inventories. However, he cautioned that it is time to adjust expectations, given that pent-up demand has subsided and rising interest rates are dampening consumer interest. "The pent-up demand has waned, and ongoing uncertainties are dampening consumer interest," Gupta explained.

As the festive season approaches, there is cautious optimism that inventory levels could stabilize if sales pick up as expected. However, experts like Arun Malhotra, a veteran in the auto industry, warn that production needs to be rationalized to ensure long-term sustainability. "Inventory levels should come down by October-end if there are robust sales. But the production has to be rationalized in the long run to be sustainable," Malhotra advised.

The current inventory crisis in the Indian auto industry serves as a stark reminder of the delicate balance required between production and sales. As dealerships grapple with high stock levels and the associated financial pressures, the onus is on OEMs to take swift and decisive action to prevent further strain on the sector.

*Inputs from Moneycontrol*