Analysis: Demonetisation & How It Affects The Car Industry

With Rs 500/1000 notes no longer legal tender, how are things going to be with the auto industry?

By now it’s clear that the government’s demonetisation move has had an impact on both industries and individuals. Rs 1000 and 500 notes have ceased to be legal tender, in addition to which, there are limitations on how much money can be withdrawn on a daily basis. The auto industry sees transactions that are largely in six-figure sums at the least, so of course, there are many questions regarding the impact of this decision.

Keeping things simple, let’s explore the implications:

What’s the problem?

A fair amount of car buying transactions, particularly in the used car and luxury segments, are, at least in part, cash based. For people dealing entirely through recordable means of money exchange, the demonetisation doesn’t make much of a difference. However, the industry as a whole has seen a sales slowdown. According to CarDekho's in-house experts, used car dealers are reporting a dip in business of around 60 per cent, while new car sales have dropped by nearly 40 per cent.

Traditionally, the October-December period i.e. the festive season is when carmakers and dealers throw in discounts and special benefits to boost sales and clear their stock. With the cash component eroding, sales, at least in certain segments, have been hit.

But aren’t car buying transactions cashless anyway?

Not entirely. For example, rural areas account for a large share of two-wheeler sales, particularly in the 100cc space where scooters/motorcycles cost around Rs 50,000-60,000. Here, several buyers pay almost entirely in cash. So dealers are seeing a drop in demand, with buyers choosing to postpone or cancel their purchase decisions.

Similarly, the used car market sees a lot of cash based transactions, particularly in semi-urban areas where many retailers deal almost exclusively in cash. In fact, even new car sales often involve cash transactions, with dealers more than willing to accommodate the buyer’s payment method. We’re talking amounts that enter well into the higher seven-figures. Thanks to the new ruling, many dealers have started shying away from accepting cash payments, including those for the booking amounts, which will largely be in the Rs 500/1000 denominations.

What’s the upside?

Deals and discounts for those who buy cars without involving raw cash. It’s the year end and every new/used car dealer is looking to clear what stock they have. With the purchase sentiment seeing a dip, a dealer’s arm can be twisted to get a better deal.

This is particularly fruitful on the pre-owned car lots as in just one month, these cars will have one more year’s worth of depreciation cut from their market value. Many say this is a golden period to buy a used car as the situation will switch back in a few months, once the new denominations are freely circulated in the market.

How have manufacturers responded?

• Maruti Suzuki hasn’t issued an official statement and is currently analysing the situation to see if any corrective action is required. Company sources say that no severe impact is expected, since most customers opt for cashless means already.

• Sudeep Narayan, PR & digital director, Volvo Auto India, stated, “Demonetisation’s impact on luxury car sales is a short term phenomena. Customers are postponing purchases as the sentiment is not conducive for high-value purchases. Majority of luxury cars are purchased with auto loans and hence it is just a matter of time that the order books will come back to normalcy.”

• Renault is giving its customers the option of paying the booking amount through online wallet apps, in addition to offering 100 per cent on-road funding across its product range. Renault is also extending cashless options such as use of cheques, demand drafts, e-wallets, debit or credit cards and NEFT (National Electronic Funds Transfer)/RTGS (Real Time Gross Settlement)/IMPS (Immediate Payment Service) transactions for all aftersales services. All these facilities will be available without charging any additional transaction fees.

• Expecting a dip in sales, Honda Cars India has announced 100 per cent on road and ex-showroom funding deals with HDFC, AXIS and ICICI bank.