BackBuyers put off new car purchases but increase spend on spare parts
Customers taking better care of cars is giving those in after-market business a reason to rejoice
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Mumbai: Till six months ago, Mumbai-based Shushant Dave, who owns a Wagon R, was considering upgrading to a sedan or a sports utility vehicle (SUV), but uncertainty in the job market and rising daily expenses have forced him to put off a new purchase.
Instead, Dave decided to give his six-year old car that has clocked close to 100,000km a thorough servicing at one of Maruti Suzuki India Ltd’s authorized service outlets. He forked out ₹ 45,000 for the job but felt it was a wise decision. “I thought it’s better to spend money in maintaining what I have instead of buying a new one," he said.
While such decisions by Dave and many others are taking a toll on new car sales, it has given those in the aftermarket business a reason to rejoice. Sales of spare parts, which are fuelled by existing vehicles, have been expanding at a brisk pace even as new car sales plummeted to their lowest in 11 years in 2013.
In the last three years, spare parts sales as a percentage of net sales have been expanding at a brisk pace. Car market leader Maruti Suzuki, for instance, saw the business division’s share as a percentage of net sales expand to 9.1% in fiscal 2013 from 5.7% in fiscal 2011, according to the company’s annual report. Spare parts sales expanded to 2.9% from 0.3% at Mahindra and Mahindra Ltd and to 7.3% from 5.7% at Tata Motors Ltd over the same period.
“Customers are taking better care of their cars as they are not in a sell-out phase," said Y.V.S. Vijaykumar, chief executive at Mahindra First Choice Services Ltd, part of the aftermarket division at Mahindra. Alex John, assistant general manager at one of Maruti Suzuki’s service outlets in Central Mumbai, seconded that view. “We have seen a few cases where owners who should have upgraded to a new car have chosen to get a thorough servicing done of their existing car," he said.
Bangalore-based D.M. Suresh, service head at an authorized service centre of Hyundai Motor India Ltd, said typically, the salaried class upgrades to a new car after three-five years. However, owing to the economic slowdown, people are postponing buying new cars, stretching out the normal cycle. “We have been aggressive with our follow-ups for service with such customers," said Suresh.
A Maruti spokesperson declined to participate in the story. Hyundai officials were not available for comments.
Along with the relative resilience of the aftermarket for auto parts in tough economic times, the segment offers lucrative margins. As against the sale of a new car, which typically turns in a margin of 2-2.5%, spares and accessories yield margins of 8-14%.
It’s no surprise then that this segment has emerged as the new battleground for everyone in the ecosystem—from car and auto component makers to dealerships and those engaged in the organized and unorganized car servicing business.
Car makers like Tata Motors have chosen to boost their presence in the aftermarket segment by improving the availability of spare parts. The company is planning a network of more than 3,500 retail outlets for Tata original parts trademarked as TOP Shoppe. It is also enrolling local mechanics, who have a strong say in the market and are instrumental in promoting use of original parts, in a loyalty programme.
“More than increasing its product portfolio in the parts market, Tata Motors’ approach has been promoting and improving availability of parts and market share through a range of initiatives," a company spokesperson said in an email response.
Auto component makers, too, are honing their aftermarket strategy. Typically, component makers supply parts to the auto makers and their spare channels, but many also sell parts directly to the aftermarket under their own brands. This dual presence has helped them stay afloat in a slow market.
“Those with a strong aftermarket presence are able to ward off the slowdown better," said Sanchit Mathur, analyst at India Ratings, the research arm of Fitch Group, citing Shriram Pistons and Rings Ltd, a Delhi-based auto parts firm that makes critical engine parts. Even in a sluggish market, the company has been able to maintain an Ebitda margin of 18%. Ebitda, or earnings before interest, tax, depreciation and amortization, is a key measure of operational efficiency.
Sachin Puri, vice-president, aftermarket business, at Delhi-based auto components supplier Anand Group, says the spare parts business has remained largely unaffected. This is more true for parts such as oil filter and shock absorbers, he said. Aftermarket sales account for 30% of the profit and 12% of the revenue at the Anand Group, which supplies a diversified range of parts to two-wheeler, car and commercial vehicle manufacturers and has a strong presence in the aftermarket business.
Parts for which replacement can be postponed have seen slower offtake, Puri added.
“While the car is serviced but some customers try to keep the total cost down by avoiding discretionary works," agreed Jagdish Khattar, former managing director of Maruti and founder of Carnation Auto India Pvt. Ltd, a multi-brand network for service and sales of new and pre-owned cars.
Deepak Jain, managing director at parts maker Lumax Industries Ltd, said his firm has been expanding its overall product portfolio in the aftermarket business. Lumax supplies headlamps and other lighting components to several car and two-wheeler firms, and sells wipers, motors, cables and other parts in the aftermarket. According to Jain, the margin in the aftermarket is 8-9% compared with 2-3% for parts supplied to auto makers.
While car and auto component makers try to create a buffer for their core business through the aftermarket, competition in the car service industry is getting stiffer.
Unlike in mature markets, where the servicing business is divided equally into two halves between authorized company workshops and branded service outlets, in India authorized company outlets account for 33% of the service stations. The rest is unorganized.
Branded service outlets such as Carnation Auto, Mahindra First Choice Services and Bosch Ltd, occupy less than 2% of the ₹ 12,000 crore car service pie, according to Mahindra’s Vijaykumar. A majority of car owners choose to get their cars serviced in unauthorized neighbourhood garages once the warranty period is over. This is the customer segment that branded service outlets are targeting.
According to Jnaneswar Sen, senior vice-president, sales and marketing, at Honda Cars India Ltd, the company’s authorized service outlet has been working on customer retention.
Owing to the sparse presence of branded firms that boast of better service quality and their increasing acceptance among car owners, branded outlets are drawing aggressive expansion plans.
Mahindra First Choice Services expects its revenue to jump threefold to ₹ 35 crore in fiscal 2014 from ₹ 12 crore in fiscal 2013. Vijaykumar said this will come from doubling the number of company-owned outlets to 26 by the end of this fiscal year. To expand at a brisk pace, it will adopt the franchise model.
Carnation Auto is also in the process of setting up franchises for a faster ramp-up. The company plans to have at least 300 service outlets in two to three years, said Khattar.
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