Used car dealers such as Mahindra First Choice Wheels reported 40-50% growth in FY19
The ratio of used-to-new cars has been steady at around 1.2 in the last three years
As new car sales growth chugs in the slow lane, the double-digit growth registered in the used car market raises some pertinent questions. Do used car sales rise during an economic slowdown? Further, does this impact growth in new car sales?
Based on available data, new car sales growth in India was about 3% in FY19. Analysts say the sluggish growth may persist until FY21. However, used car sales dealers, such as Mahindra First Choice Wheels Ltd, recorded 40-50% year-on-year growth in FY19, while the overall market grew 10-12%. At first look, it seems there is an inverse relationship between expansion in the used car market and new car sales, with the former impacting the latter.
But that may not be the case. “While talks of double-digit growth in used car market impacting new car sales have surfaced, our analysis suggest that around 75% of used car trade-ins lead to a new car purchase," analysts at JM Financial Services Ltd point out in a recent report on used cars. They add that the ratio of used-to-new cars has been steady at around 1.2 in the last three years. This is far lower than that seen in mature markets, where the average hovers around 2.5.
Also, the ratio rises in developed markets during major downturns. For example, in the US, the used-to-new car ratio hit a high of 3.4 during the global financial crisis of FY08 and FY09, mirroring a decline in new car buyers. Along with the US, the ratio in France and Germany rose during the dot-com bubble burst.
According to Mitul Shah, vice-president (research) at Reliance Securities Ltd, used car sales rise during a slowdown as people even sell the additional car and do not replace it immediately. This impacts the ratio of used-to-new car sales.
However, the stable ratio in India could be for various reasons. The surge in growth seen in Mahindra First Choice Wheels and portals such as Cars24 is due to the shift from unorganized to organized dealers.
Overall sales of used cars may not be growing at the same pace. The IndianBlueBook’s India Pre-owned Car Market Report indicates that organized dealers accounted for 18% of used car sales in FY19, compared to 10% in FY11. IndianBlueBook is a pricing guide for vehicle valuation in India and part of Mahindra First Choice Wheels.
Perhaps, the impact will be more pronounced in the future as the share of organized dealers increases, certification for used cars improves, and the cost and availability of finance for used cars improves.
At present, the rate of interest on used car loans is about 13%. New cars get financed at about 9%. If these dynamics turn in favour of customers, the used car market could start having a larger impact on new car purchases, especially during major downturns.