Used Cars Market in India — What Are the Possibilities and Challenges?

Remember the days when Tata launched “Nano” and released with it the emotive story of a family of four riding upon a two-wheeler that inspired Mr. Ratan Tata to come up with the idea of the world’s cheapest car?

Although the ₹1L ($1,349) car was a commercial failure, the premise upon which it was founded stands true. Owning your own car still remains a high priority on the consumer index, be it new or old.

Recently, CARS24, a digital online platform to buy and sell second-hand cars, raised $200m, upping its valuation to the remarkable $1bn mark.

The company claimed surpassing pre-COVID business traction witnessing a four-fold increase in online engagement and annual sales exceeding 200,000 units.

This just gives us an idea about the stellar growth of used car business in the country, especially in the midst of an economic downturn. It’s only right to explore this trend.

The Used Car Market in India

As per SIAM data, in FY18, the used car (or “pre-owned” car) market topped 4 million units in sales, making it 1.3 times bigger than the new car market.

There are largely four sectors which govern sales in used cars. The online sales platforms like CarDekho, CARS24, and Droom, fall under the organised category.

A number of Original Equipment Manufacturers (OEMs) or the traditionally popular car companies have also shown presence in the used car segment (Renault was the first to enter in 2015).

Key Trends in the Used Car Market

• ET Auto data says that the pre-owned vehicle sector (accounts for 18% market share) recorded sales of 4.4 million units in FY20 already whereas new passenger vehicle sales stood at 2.8 million units.
• Used car market was valued at $24.24bn in 2019 with projected CAGR growth of 15.12% for the 2020–25 period.
• The organised sector of the pre-owned car market has almost doubled its share from 10% to 18% during FY11 to FY19.
• The organised segment is expected to be the fastest growing channel with a CAGR of 22.79% for 2020–25.
• Over 75% of pre-owned cars purchases consist of hatchbacks and sedans.
• Over the last four years, combined investment in the new digital companies dealing with used car businesses stands at ₹5,000cr ($674.4m).
• Fast increase in digital aggregators which facilitate used car transactions has commensurately boosted growth in used car-related queries (170 million in FY19).

Secret Behind This Booming Business

A study conducted by CarDekho said that the used car segment bounced back up to 99% in the aftermath of the lockdowns, as opposed to the new car segment which recovered only up to 77%.

The India’s automobile industry was at its peak in 2018 with record sales registration. However, the pandemic has been estimated to set it back by 4–6 years. The striking results for used car sales in this scenario hints at primarily one thing: growing urge towards self-mobility.

Social distancing measures and need for isolation in the pandemic-frenzied world has been a convenient motivation for people to invest in lower-priced cars in place of availing ride-hailing alternatives that compel shared mobility.

Added to that, policy imperatives have contributed to this shift in user choice. In cities like New Delhi, owning and operating a diesel car is prohibited beyond 10 years. The need to dispose of them spills into the used car market. Furthermore, GST rationalisation from 24% to 12–18% continues to add meaningful tailwinds across the entire value chain.

In any case, a host of factors like reducing demand, repressed inventories and deep economic downturn have stymied new car sales (Sales in April-June quarter saw record drop of 78.43%). The enforcement of BS-VI emission norms from April 1st 2020 (although environmentally sound) has raised costs of ownership in the new car market and sent customers evaluating second-hand alternatives.

Opportunities Aplenty

The rise in organised used car market shows considerable promise and growth in digitisation across dealership and registration operations.

As more options for personal mobility come into picture with social-distancing risks looming large, second-hand vehicles are no longer stereotyped with downsized social status.

However, the consumer-to-consumer used car segment is still 32% which isn’t favourable vis-a-vis regulation and accountability in the sector. However, this presents an additional growth lever for the organised channel. In fact recent growth through organised modes has been somewhat driven by cannibalisation of the consumer-to-consumer and unorganised channels — a trend that should bode well for companies such as CARS24.

Financing is another obstacle. Loans and other value-added services (insurance, warranty, maintenance etc.) that one finds in the new car segment isn’t widely available in the used car business. Greater customer-engagement and fast-tracked approval of loans through improvements in captive financing can perhaps accelerate the sector. Expectedly, “customer financing” is one of the uses of funds identified by CARS24 management.

Capitalising on an estimated $20bn+ used car market is a great opportunity for finance companies. With many opting steadily towards used car ownership, the sector is teeming with possibilities.

(Originally published November 26th 2020 in transfin.in)