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Used car market in India, online start-ups organising the sector

  • Per capita car ownership is low as compared to other developed nations and the global average
  • Used cars were not a preferred means of ownership due to lack of trust among buyers and sellers
  • Online start-ups brought back the trust factor through transparency
  • Makeover for used cars in India, no longer a social taboo

 

Owning a car has evolved from being a luxury to a necessity in India for the average middle-class families. There are a plenty of options available for consumers to choose from depending upon their budget. India currently stands as the 4th largest automobile market in the world with a large consumer base and rising urbanisation. However, there is a large section of the population, which cannot afford a car. The taxation in the country continues to be high, making it one of the most expensive markets in the world. The per capita car ownership in India (22 vehicles in use per 1000 population) vis-à-vis the developed (e.g. USA – 821 vehicles in use per 1000 population) and the global average (182 vehicles in use per 1000 population) is still very low. The above factors are leading consumers to look for options of used cars. 

Moreover, about a decade ago used cars were not preferred due to the social stigma attached to the lack of resources to own a new car. In those days, almost all sales in the Indian used car market segment took place in the unorganised sector (through self-appointed and street-level used car dealers, roadside mechanics, etc.) and C2C (customer to customer) trade accounted for more than 95% of the market share. There were many instances of sellers’ palming off substandard products to buyers, which created a sense of mistrust and large number of people preferred buying cars in the close circle of family, friends and acquaintances.

But in recent years, Indian used car market has grown at a tremendous pace backed by the emergence of organised players, which have taken care of the trust deficit plaguing the Indian used car market for years. The nation is a price sensitive market and hence it rapidly picked up on the opportunity. The used car sales volume registered a 13.3% CAGR (2011-17) and is estimated to double by 2020. According to the CRISIL, the ratio of new to used cars sold in India is currently at 1:2.2 (an increase from 1:1.2 a few years back) and is further estimated to reach 1:3 by 2020 (in-line with mature markets like the United States).

The growth slowed in 2016 due to demonetization drive by the Government of India (organised sector grew at 36% spike in FY 16-17, while unorganised segment witnessed a declining trend)

Furthermore, around 60% of the people, who purchase used cars are first-time buyers. Thus, used cars have helped in extending the affordability to more people. There are multiple trends which have led to the evolution and growth of used car segment in India, which are analysed below.

Emergence of organised dealers: currently, the organised sector accounts for 15% of the total used car market in India, while the organised dealers account for ~9% (>2,500) of the total dealers across the country (source: IBB report).  ‘Maruti True Value’ was India’s first organised dealer for used cars, which was started by India’s largest automaker Maruti in 2001. The used car market segment has witnessed a huge jump in the quality standards for buying and selling of used cars (it is the responsibility of the dealers to maintain quality and transparency and there is a little chance of misappropriation at either buyer or seller end) with the emergence of organised dealers, which in turn drove the demand for used cars. Some major organised dealers are Maruti True Value, Mahindra First choice Wheels, Ford Certified Pre-owned, Toyota U Trust, A Tata Motors Assured, Chevrolet Certified, Honda Certified Pre-owned Vehicles, BMW Premium Selection, Audi Approved Plus, Mercedes-Benz Certified, etc.

Advent of online players: e-commerce is growing rapidly across industries and nations, especially in developing nations such as India. The rising penetration of online platforms in the used car segment enable dealers to boost their reach for a larger audience. Cars24.com, Droom Technology, Carnation Auto, Cardekho.com, Carwale.com, Cartrade.com, Olx are some major players in the used cars e-commerce segment. In the traditional offline medium, the supply side of used cars was mismanaged. The seller had to physically reach out to the prospective buyers and talk to a lot of people to get their views on a car and the price, which is time-consuming (typically 4-6 weeks). However, the online platforms like cars24.com organised the supply side of the used cars in the market. In this model the seller approaches a physical store of Cars24 and a car gets inspected for the engine, suspension, brakes, transmission, electrical, A/C, exterior, interior, tyres, accessories, etc. and on a real-time basis, the specs are uploaded along with the pictures on the proprietary online platform. There are tens of thousands of buyers (used car showrooms, corporates, logistic firms, cab aggregators, etc.) logged into the system, who can submit their bids simultaneously. These bids are collated and presented to the seller, who has a choice to accept the maximum bet and sell the car or leave the deal altogether. This reduces the transaction time of a seller to a few hours from weeks earlier, while also help a buyer in terms of saving the time and energy on the initial round of checks. Thus, the platform acts as a liaison between a seller and a buyer and keeps a typical margin of 2-4% per transaction. 

Olx is the largest player in the segment with over 77% of the used cars sales in India (2017) handled by its platform, however their initial focus was on the C2C model, whereby they provided used car listings on the website and had no say on the quality as well as on the transactions (a seller uploads photos of a car, sets a selling price and furnishes some basic details [not compulsory]). Recently, the firm has shifted focus towards B2C (Business to Consumers), which is in-line with the overall industry trends, with 30% of the total listings from dealers (from 0% until 2 years ago) and the percentage is expected to grow further.

Image makeover: years ago, people did not prefer to buy a used car since it was considered as an inability to own a new vehicle. However, with a greater participation of reputed and big OEMs and the advent of online players, the used car purchases have become a lot easier and transparent. The customers now feel more confident in transacting for used cars and it has now become more acceptable in the society. A recent Droom Technology ad-campaign emphasised on ‘no shame’ in buying/selling used cars and broke the taboo regarding the purchase of used cars.

Improved quality offerings in the used car market: with rising disposable incomes and urbanisation the customers no longer prefer to keep a car for several years and always long to upgrade to the latest model. Over the years the car ownership period has reduced considerably to ~4 years for mass-market cars and below 3 years for premium cars, which was 5-6 years a few years ago. This enhances the quality of the available cars in the used car segment due to better maintenance owing to the latest service technology. Further, many urban families have more than one car due to which the second car is less driven and is well maintained.

Availability of financing options: a lack of financing or expensive financing options were the major bottlenecks in the used car market space. However, the rise of the organised sector has taken care of this aspect. Major players, like Toyota and Maruti Suzuki dealing in the used car sector, have tied up with financial agencies that give out loans for used cars similar to the likes of new ones.

Demand from Tier-2 and Tier-3 cities: the focus of organised players have shifted from metro and capital cities to smaller towns (which make up for over 50% of the used car sales [Source: IBB]) in a bid to organise the vastly unorganised used car market in India.

Upgradation at a lower budget: with the premium used car market gaining more and more newer cars, which offers extra luxury, comfort, and prestige. The used luxury car market is witnessing an unprecedented growth with individuals increasingly opting for used premium cars for satiating their zeal for owning a luxury car. A high depreciation value on new cars (over 30% in the first year) further means that buying a used luxury car is no more a huge dent on a person’s pocket.

Government regulations: the economic slowdown due to the 2016 demonetization by the Indian government has started to wane off and the industry has picked up the pace in the last two years. Additionally, after the implementation of the GST (goods and service tax), the cost burden for used car dealers had increased considerably. However, there has been rationalization in the GST rates in recent times (from 28% to 12% or 18% depending upon size, and removal of cess [that varied from 1 to 15%]). This has provided the required relief to the sector and paved the way for its long-term growth.

In totality, Indian used car market is growing rapidly, especially after the emergence of organised players in the sector and the growth is expected to continue (15-20% CAGR as per industry experts) in the near future, especially in e-commerce segment with an increasing internet penetration and rising use of smartphones in Tier-2 and Tier-3 cities. In addition, the players are investing in ancillary services to provide a one-stop solution to consumers. For instance, Cars24.com raised INR 340 crores in June 2018 from venture capital firm Sequoia Capital India to establish its NBFC (non-banking finance corporation) subsidiary to provide dealer financing services. The consumers are increasingly attracted towards the used car market owing to low-cost, high-quality, easy availability of finance and improved after-sales service, which aids well for the enhanced and continued growth of the industry.

 

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