Driving on when the chips are down: Pre-owned car sales gain traction as semiconductors fall short

Vijay C Roy

Advertisement

WHEN a Chandigarh-based businessman visited a local dealer to purchase a Rs1 crore-plus Mercedes Benz GLS, he was told that the delivery could take up to six months. This failed to disuade him, keen as he was on the particular model. A long wait is the new norm for car buyers, especially for high-end vehicles. The global shortage of chips or semiconductors has affected almost all automakers, irrespective of the brand.

From consumer electronics to healthcare to automobiles, there is hardly any sector or manufacturer in the country that has escaped the worldwide shortage of semiconductors. The semiconductor or chip shortage even found mention in the Economic Survey tabled in Parliament. Data from the Society of Indian Automobile Manufacturers (SIAM) shows that domestic auto sales declined 13 per cent last December on a year-on-year basis to 2,19,421 passenger vehicles. The decrease in sales was not attributed to a fall in demand. Rather, it was a supply-side issue related to the continuing scarcity of semiconductor chips.

“Due to chip shortage, availability is an issue and waiting periods have gone up. On an average, the waiting period for premium Mercedes models varies between three and four months,” says Sanjay Dahuja, managing director, Berkeley Group, which has Mercedes dealerships in Karnal and Dehradun.

Why the shortage

The demand for chips had far exceeded the supply even before Covid-19, but the pandemic-induced lockdowns forced the chip-making facilities across the world to shut down. With the auto sector almost closed in 2020, the chip manufacturers shifted their focus to consumer electronics goods like computer equipment and mobile devices, the demand for which had risen significantly with more people working remotely. Even after the ports reopened, the problem continued as the transportation supply chain did not have the capacity to handle congestion at the ports. Manufacturers struggled to create enough chips. Since it is time-consuming to set up chip foundries, the backlog began to form and continued to build.

While the supply chain disruptions have had spillovers in more than 169 industries, the automakers have borne the brunt. The waiting period for most models has increased by an average of two months. Renault and Tata Motors’ dealers say it varies from four weeks to months.

“The good thing is that discerning buyers are ready to wait for their favourite cars even if it is taking them six months,” says Deepak Joshi, managing director of Joshi Autozone, Chandigarh. Mohit Pratap, managing director, PMG Automobiles, Chandigarh, agrees that people understand the current crisis so they prefer to wait rather than cancel their plans.

Despite shortage, there has been no compromise on features, say manufacturers. “Most of the cars are on telematics. Since they are interconnected, features can’t be reduced. So manufacturers have cut short production,” say industry insiders.

“As of December last, information from various car manufacturers’ websites revealed a cumulative pendency of more than seven lakh orders,” the survey points out.

The severity of it

Passenger vehicle dispatches from factories to dealers in India fell 8 per cent in January this year mainly due to semiconductor shortage, according to SIAM. The total passenger vehicle wholesales dropped to 2,54,287 units in January compared to 2,76,554 units in the same month last year.

Maruti Suzuki India had reported a 48 per cent fall in Q3 (October-December) net profit last year as the global chip shortage slowed down production and high material cost squeezed margins. The firm, however, said there was no lack of demand as it had more than 2.4 lakh pending orders at the end of the quarter. Production was constrained by a global shortage in the supply of electronic components because of which an estimated 90,000 units could not be produced.

Some manufacturers claim to have minimised the impact. “Our planning and execution helped optimise production. Our market share has increased with decade-high sales,” says a spokesperson for Tata Motors. “We are doing our best to manage optimum levels of production and are coordinating with our teams. We are evaluating the market month on month with cautious optimism,” agrees Tarun Garg, director sales, marketing and service, Hyundai Motor India.

“Our planning cycles are long and hence, we have been able to manage well,” says a spokesperson for Audi India, adding that this is a developing situation and it is difficult to predict things for a long-term period.

Gains for pre-owned car market

A change in the industry dynamics over the past year or so has been the surge in sales of pre-owned cars. The market has seen a shift from people who do not want to wait for a longer period to buy a vehicle. The increase in demand has also led to a rise in the price of pre-owned cars.

“There has been a significant shift towards used cars. With the onset of the pandemic, every household seeks a car as a necessity. The global chip shortage has already started to disrupt the new car industry with exceedingly long waiting periods, encouraging buyers to go in for used cars,” says Niraj Singh, CEO, Spinny, a used car retailing platform.

“Without doubt, there is a huge demand for pre-owned cars. We hardly have any inventory left. There are, however, constraints on the supply side as people are hesitant in selling or replacing their old vehicles with new amid the shortage,” says Anil Malhotra, True Value Manager, Maruti Suzuki, Lovely Autos, Jalandhar.

Two years into the pandemic, people are also opening up to buying used cars online. The pandemic saw an increase in the test drive trials for pre-owned cars. “The consumers realised that there is an easier and quicker way of selling and buying cars”, says Mehul Agrawal, co-founder of CARS24.

Hatchbacks rule the choice

In the pre-owned car segment, it is the hatchback which is in high demand. Spinny found that 57 per cent of first-time buyers went for hatchbacks, followed by sedans and SUVs. “Maruti Suzuki, Hyundai and Honda reigned supreme on the buyers’ list, with Hyundai Grand i10, Maruti Suzuki Swift and Hyundai Elite i20 being top preferences in car models. Most of these buyers were in the 25-35 age group. Out of these, 28 per cent of buyers were women,” says Niraj Singh. In 2021, the pre-owned SUV sales went up five times compared to CY 2020, affordability driving the demand, adds Mehul Agrawal.

Looking ahead

Despite shortage, automakers are positive on demand. “We expect the demand for passenger and electric vehicles to sustain even as concerns related to the supply of semiconductors, high input costs, besides the pandemic, are keeping the overall situation fluid,” says a spokesperson for Tata Motors.

Normalcy is likely to return by July, feel industry insiders. Adding to the hope are the initiatives that the Centre took last December. Schemes worth Rs76,000 crore were rolled to attract international semiconductor and display manufacturers and establish the country as a global chip manufacturing hub. The manufacturing of semiconductors requires large capital and has an average gestation period of six to nine months. Moreover, it has a fairly long production cycle of about 18-20 weeks. Hence, any recovery from the supply chain disruptions will be slow and expensive.

Used car market

The Indian car market is still at a nascent stage and underpenetrated compared to its counterparts in developed markets. The Indian pre-owned market has immense potential with car ownership, at less than 2 per cent. The pre-owned vehicles industry is largely unorganised, with a multitude of gaps. The arrival of various new-age start-ups that have digitised the sales of used cars has added to the trend of buyers choosing pre-owned cars.

What numbers say

Used car market: $25 billion

Size: 1.5 times that of new cars

Expected growth: 10-15% over the next five years

By 2025: $50 billion