Auto dealerships are expecting a 30 per cent drop in sales during the upcoming festival season in case chip shortage persists. Generally, the festival season accounts for a third of yearly sales for most dealerships and dealers were betting on this period for recovery from the sales washout following the second wave. With OEMs facing supply chain issues, they have now gone on record telling dealers that they will not be able to supply enough passenger vehicles to facilitate stockpiles necessary to fulfil the surge in demand during the Diwali period.

Vinkesh Gulati, President, Federation of Automobiles Dealers Association, told BusinessLine that dealerships will be looking at a maximum of 30-day inventory in the Diwali and Navratri season, where generally they carry a stock of 45-60 days.

Uncertainty ahead

Dealerships are facing a period of uncertainty as OEMs struggle to manufacture with the chip shortage worsening globally in the second quarter of this fiscal. “Commitment from the OEMs has gone for a toss, where they began this month promising a certain amount of vehicles and have ended this month stating that they will only be able to deliver 50-60 per cent of the initial number. This means that we are also unable to make straightforward commitments to our customers much to the detriment of our sales,” said Gulati.

While the demand has bounced back well, leading to a situation where supply is much greater than demand, Gulati believes that too much gap will be a cause of concern, “ideally demand higher than supply means dealerships have to invest less energy in push marketing and sales efforts, yet gaps extending to 2-3 months means that we will start to lose out on customers.”

Manish Raj Singhania, owner of Ralas Group, a Mahindra and Mahindra dealership in Raipur, told BusinessLine : “The demand is so strong for the festival season, that if the supply was there, we would have been back to pre-pandemic levels in terms of sales. But now, OEMs are cutting down sales (billing) targets of dealerships by 25-30 per cent, as they do not have vehicles to supply. Popular models such as Thar, SUV 300 have already started to see long wait times.”

Fixed costs

With the performance of a dealership being contingent on the rate of turnover they are able to achieve, a dip in sales during the festival season will make it hard for them to cope. Sai Giridhar, a dealer for Skoda India in Jaipur, explained: “After the second lockdown, scarcity of cars is hitting the bottom line for dealers very hard. During the first lockdown, we got a lot of support from the government and OEMs. We have lots of fixed costs as well such as rent and labour which are important during the festival season.”

Amar Seth, State Chairman, FADA Maharashtra and Honda Cars India dealer, believes that they will have to maximise return on sales for each car given that the sales are limited. This means customers should not expect Diwali/Navratri discounts since dealers no longer have excessive stock to sell. Singhania believes that dealers will need to seek other kinds of revenues from customers such as extended warranty periods etc.

The demand for cars during the festival season is usually a choice-based demand. This means it is unlikely to come back in the form of pent-up demand once the supply chain issues are resolved by the OEMs. Giridhar explained, “Most of the need-based demand was cleared after the first wave. Demand for Diwali is usually excess of funds that people have, which will be invested in something else such as gold or jewellery if they are unable to purchase a car during the festival season.”

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