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Will OEMs bailout car dealers from the crisis?

The COVID-19 has affected the economy hard and all the industrial sector, especially the ones that operate offline, that is, in brick-and-mortar stores. Among the many sectors facing such a financial crisis, the auto industry is among the biggest sufferers after airlines & hospitality.

 

Car sales have gone down drastically in the last fortnight and the first quarter of 2020 registered a massive fall. Besides just the automakers, the dealerships are also facing a serious crisis. Due to sales being shut, the owners of the dealers will now have to face serious liabilities, like paying the entire employee-unit their salaries and managing other fixed expenses like rentals & interest, etc.

Dealer expectations

Since the sale of cars is at zero at the moment, the dealerships have to shoulder a lot of expense burden. Keeping these in mind, the dealers are expecting support from the parent company to be able to sustain in this crisis period said Atishay Jain Dealer owner for German and Korean brand in Delhi.

 

Most of the Dealer owners CDT spoke to, unanimously suggested the following support measures for the next three months

 

  • Interest support: Though the sales have come to a standstill, the dealerships have to manage the burden of interest subvention on the unsold stock.
  • Salary & Rental support: Salaries and rentals are almost 50% cost of total expense to dealerships that have to be met, despite the operation being at a halt.
  • Incentive Support: Incentives are generally sanctions based on performance. However, the dealerships expect the automakers to release the incentives in full & timely, without considering the performance parameter for the next three months.
  • Wholesale support: The dealers also expect their respective automakers to pass schemes upfront with car wholesale.
  • Credit Support: Credit billing of 30 days, to reduce the working capital pressure on dealers
  • Profit Margin support: Fixed margins at par with global standards approximately 8-10 %

Few automakers have already extended their help

A few of the automakers have already taken the initiative of helping the dealers negate the mandatory expenses. Among the many, Skoda Auto, a Czech based automaker, has extended financial support to dealerships by covering for the salaries and other fixed costs on behalf of the outlets. This financial support will extend for the April-June quarter. The company is likely to sanction around Rs. 50-60 crore towards this funding.

 

Apart from Skoda alone, other automakers operating in India are also extending their support to the dealers. The combined efforts to mitigate this financial crisis is worth Rs. 1,800 crore, out of which, around 50% is contributed by Maruti Suzuki as it controls around 50% of the market share. The other half is contributed by Hyundai (under Hyundai cares), Ford (under Going further together) and Toyota (under Dealer Support Package).

 

This support from the automakers will help the dealers grapple with two major challenges for a longer time - zero cash flow and obligations to pay interests). Apart from these, the incentives are also being released in full amount and not on the usual performance parameters as these could bring the amount lower.

 

With most of the automakers already extending their help towards dealers’ crisis, other automakers might also join the initiatives soon. Nevertheless, most of the dealers’ expenses expectations are being taken care of.