Demand stagnates, car manufacturers use price discounts to eliminate inventory bottlenecks

New Delhi: Car discounts have doubled since August last year and are expected to remain high throughout the festive season till the end of December as automakers and dealers rush to sell off their huge inventories amid declining sales.

From market leader Maruti Suzuki to Hyundai, Tata Motors, Skoda and Honda, all are offering cash discounts, exchange incentives and additional perks even on popular models, industry insiders told ET.

“The current discounts are among the highest I have ever seen on the market,” said an industry executive who wished to remain anonymous.

Several senior industry executives and dealers ET spoke to said these were the highest discounts seen in the local market since FY2020, when the industry launched a series of special offers to liquidate inventory ahead of the switch to Bharat Stage VI emission standards.

While the industry began the fiscal year with normal inventories of about 300,000 vehicles in the channel, enough to meet demand for 30 days, sluggish sales soon added another 100,000 units. This prompted automakers and dealers to offer promotional programs that peaked in the last four months, with benefits this month equivalent to those in fiscal 2020.

Passenger vehicle sales in the country hit a record 4.23 million last fiscal year, partly due to pent-up demand after a global semiconductor crisis limited production for several months. However, after three years of robust growth, sales began to slow in the new fiscal year.

“Supplies improved with the easing of the semiconductor crisis from July 2023. Wholesale volumes in the second quarter of the last fiscal (10.78 lakh units) were the second highest ever. These supplies helped meet the pent-up demand of the last few months,” said the executive quoted above. “Now that the (pent-up) demand is over, a surge in wholesale volumes has resulted in inventories piling up at very high levels. Automakers and dealers are offering deals to attract buyers.”

Another senior industry executive said discounts have increased by almost 100% compared to August 2023. “Last year, companies had planned to launch several SUVs before the festive season — Hyundai Exter, Tata Nexon EV facelift and Honda Elevate — which were well received. This year, there are fewer launches. With the pent-up demand gone, all these models are now available at huge discounts,” the person said.

Industry estimates put inventory levels of cars, sedans and commercial vehicles in the channel currently at 400,000 to 405,000 units – enough to meet demand for 40 days.

However, traders estimate the number to be significantly higher, namely 67-72 days.

“Retail sales are going well. But automakers have ramped up production, leading to unprecedented inventory build-up in the channel,” Manish Raj Singhania, president of Federation of Automobile Dealers Associations (FADA), told ET. “Dealers are under pressure and are offering discounts in addition to stock clearance offers from companies.”

He said banks and financial institutions finance dealers to hold inventory for a limited period, usually 30 to 45 days. However, given the pressure in the channel, some financial institutions are considering extending inventory financing to 90 days, Singhania said. But when inventory levels are high, auto dealers offer discounts to balance inventory levels and clear outstanding payments to banks, as any default will affect capital availability for ongoing operations, he explained.

SHIPPING IN LONG HALL
In July, wholesale shipments from factories to dealers fell by 2.5% to 341,510 units for the first time in more than two years. Industry experts say wholesale volumes are likely to decline further in August.

Automakers and dealers are banking on the upcoming festive season, which begins with Onam in Kerala next month, to give the market a boost.

“Kerala will be a harbinger of what to expect this festive season,” said the senior industry executive quoted earlier. “If sales pick up and inventories are cleared, wholesalers will move. Otherwise, dealers may be reluctant to add more inventory. So far, vehicle sales in Kerala are doing well due to remittances and better prices for natural rubber.”

The average discount per vehicle at Maruti Suzuki was Rs 21,700 in the first quarter ended June, 50% higher than the Rs 14,500 in the last quarter of FY24.