Mumbai: The aftermarket arm of Mahindra and Mahindra Ltd (M&M), the company that sells two out of every three utility vehicles sold in India, is betting big on sale of second-hand cars, services and spares. The strategy is to gain revenues from businesses related to its core business.
Sensing opportunity: Rajeev Dubey (above), president, human resources, aftermarket and corporate service, says growth will be driven by its First Choice stores. M&M has close to 90 such outlets across the country, offering services to second-hand car customers.
M&M is eyeing Rs6,300 crore revenue from these businesses by 2015, said Rajeev Dubey, president, human resources, aftermarket and corporate service. Created in April 2008, aftermarket wing’s revenue in the seven months to October was Rs689 crore.
“We want to create an ecosystem in the space of pre-owned cars,” said Dubey.
The Mahindra Group has a history of entering new businesses that are contiguous to its mainline operations. For example, its tractor engines are tweaked into electricity gensets under the Mahindra Powerol brand. Similarly, Mahindra Finance Ltd started off by financing tractors and utility vehicles and is now a full fledged non-banking finance company. Mahindra Systech, its component manufacturing and engineering services arm, is a significant player in the auto component business.
“Our group’s pursuit for growth often comes from exploring adjacencies to our core business,” said Dubey, who took charge of the aftermarket sector more than a year ago. The Boston Consulting Group Inc. drew the blueprint for this business.
According to Dubey, the growth will be driven by branded stores, First Choice Wheels. M&M has close to 90 such stores across India, offering second-hand car customers services that include warranty, parts, finance and insurance.
Till recently, the one million-plus unit second-hand car market in India, which typically mirrors the new cars market, was characterized by sundry dealers. With car makers sensing opportunity in offering certified pre-owned cars with warranty, it’s now a key focus area for all—Tata Motors Ltd, Hyundai Motor India Ltd, General Motors India Pvt. Ltd, Honda Siel Cars India Ltd.
While the outlets of these firms sell their own brands, M&M’s business model is different. It buys, refurbishes, and sells second-hand cars of any make along with warranty and insurance.
The foundation of Mahindra’s used car business was laid eight years back when Anand Mahindra, vice-chairman and managing director, saw merit in an idea that came from a Harvard Business School student who had joined the company as an intern.
What started in 2001 as an online portal called Automart.com, for second-hand car sales, is now a full-fledged business for the company, transacted at branded stores. First Choice Wheels sold 10,000 second-hand cars in fiscal 2009 and targets doubling it in the current fiscal. The portal now supplements the physical sales.
Dubey expects M&M’s used car sales to catapult to 100,000 units by 2015. Unlike the US market, where for every new car, there are two old cars sold, India sells one pre-owned car for every new one, and hence there is a lot of opportunity, he said.
In a bid to strengthen the used car business and cash in on the high yielding vehicle service business, First Choice Wheels branched out to First Choice Services in April 2008.
Experts say that given the healthy margins, spare parts for and service of cars that are outside the warranty period, and negligible presence of independent business entities, there is a strong business case for auto makers to tap this segment. “Nobody makes margins by selling cars,” said V.G. Ramakrishnan, transport and automotive practice head at global consulting firm, Frost and Sullivan. The average margin is 17-18% for spares and 25% for services.
Currently, the organized spares and service business in India is estimated to be Rs15,000 crore and is growing at 18-20% per annum, according to the executives of car service firms.
First Choice Services expects to draw synergies from Mahindra Spares, its spares division, for the services business. Currently it addresses the requirement of Mahindra vehicles but plans to expand the scope by going for other brands as well. It has seven service outlets in metros and plans to open 300 by 2015, a mix of company-owned stores and franchises.
“We would require huge experience in procuring parts for the sale and service of pre-owned cars,” said Dubey.
To be sure, M&M is not alone is chasing this segment. The vehicle maintenance and services business in India is either addressed by authorized company outlets or by roadside garages. Bosch Car Services, My TVS, Reliance Auto Zone (the car service arm of Reliance Retail Ltd) and more recently, Carnation Auto India Ltd, a brainchild of Jagdish Khattar, former managing director of Maruti Suzuki India Ltd, are targeting vehicles that are outside the warranty period. They are encouraged by the ownership of multiple cars by consumers in metros. “With multibrand ownership in a household increasing, we see immense potential for organized firms in car servicing business,” said K. Ravi, vicepresident automotive aftermarket, Bosch Ltd.
TVS and Sons that presently has 60 My TVS outlets, plans to have an all-India presence in one year. It wants to grow its revenue from Rs30 crore to Rs350 crore in the next five years, said Srivat Chan, president, CCB (consumer centric business) at TVS and Sons. Bosch too plans to ramp up the number of service outlets to 500 by 2011 from around 300 now.
But the car service business may not have a smooth ride as procurement of spares from car makers is not easy. The authorized company service stations enjoy hefty margins in the business and they may not like the idea of sharing it with outsiders.
In a recent interaction with Mint, Khattar had said the big three—Maruti, Hyundai and Tata Motors—have refused to supply spares to Carnation and he is lining up imports from Taiwan and Thailand. Dubey too conceded it is an issue but First Choice Services has so far not embarked on imports. “We will see how to overcome this, once we have the scale,” he said
Mahantesh Sabarad, an analyst at Centrum Broking Pvt. Ltd, a Mumbai-based brokerage, estimates ratio of revenue earned from services, spares and commissions from offerings such as finance and insurance, in the range of 48:28:24. But this is true for only those big dealers who offer the three Ss—sales, spares and service. “For Carnation or any company-owned outlet like Mahindra First Choice Services, the revenue earned from services will be higher,” he said.