Auto dealers take customers for a ride by charging premiums  

September 7, 2010

Auto companies are busy producing more and more vehicles to meet increasing demand in the domestic market. However, a few dealers are asking buyers to cough up 'on money' or premium for immediate deliveries

Remember the heady days of the mixed economy when an Indian who wanted to buy a bare-boned Bajaj scooter - or any other vehicle for that matter - had to wait for a few years to get actual delivery?

History - of sorts - seems to be repeating itself in the Indian automobile market. Only this time, it's a problem of plenty. Manufacturers are notching up impressive sales figures, but many customers, who want to buy a vehicle, are finding it difficult to get possession even after making full payment in cash. That's because various automobile dealers also want to earn some extra bucks in the boom.

Therefore, if you pay extra 'on money' (read premium) then you can get any vehicle that is being sold in the country immediately. If you would rather not spend the extra money, then you will have to wait for almost eight months (in a few cases) before you get possession. The scenario is the same for some top-selling cars and two-wheelers (especially scooters).

Moneylife contacted various dealers in Mumbai to ascertain the ground reality. If you wish to buy Toyota's 'Innova' diesel version, then it takes at least a month to receive the delivery of your car. Toyota Innova's petrol versions are not readily available with dealers in Mumbai and buyers have to wait for two to three months. This is surprising, considering that the demand for the petrol variant of the car is supposed to be on the lower side because of comparatively higher cost and low mileage.

The wait for Toyota's sports utility vehicle 'Fortuner', which was launched on 24 August 2009, is even longer. The company had an order backlog of 6,000 units for its SUV within a month of its launch. Dealers have kept bookings on hold and there is a waiting period of six to seven months for new buyers. The Toyota Fortuner is the latest favourite toy among politicians and other well-connected individuals.

Toyota is not the only company whose vehicles are in good demand. From Maruti Suzuki and Tata Motors to new entrant Nissan, all automakers are finding it difficult to meet the demands from markets. 

"There is huge demand in the Indian automobile market. Our manufacturing facilities are coming up with around 1,00,000 vehicles a month. This is around 20% more than our capacity, every month. In fact, in the current fiscal, our production is around 24% more than last year. At the beginning of this fiscal, the growth estimates were around 12%-15% for the industry but much greater bounce has been seen in recent times, resulting in a shortfall in delivery and a (supply) mismatch in the market. As a counter-measure, we are trying to increase production at all our facilities by 'de-bottlenecking' operations and streamlining processes," said a Maruti Suzuki spokesperson, preferring anonymity.

During April-July, Indian automakers produced 898,429 passenger vehicles, an increase of 31.7%, while they sold 899,795 units, including 756,659 units in domestic markets. This represents a growth of 33.8% in domestic sales and 9% growth in exports from the year-ago period.

The mismatch between the automobile industry's expected growth rate and the higher-than-expected demand from consumers is believed to have led to this situation of customers having to wait for the vehicle of their choice.

However, what is the ground reality? If you are ready to pay the extra premium in cash, then you can buy and take delivery of almost any vehicle from dealers. In fact, we made a few unannounced visits to the warehouses of various dealers - where there is absolutely no space to stock existing inventories.

On the other hand, auto manufacturers, riding high on current demand levels, are speeding up production schedules.
According to a Tata Motors official, the company has built up stocks to ensure that the demand for the forthcoming festive season can be met immediately. "Production is matched with demand, but at times a waiting period does develop for exceptional models in a range," the official said.

Consumers wanting to buy the Nissan Micra's light mid-variant 'XL' have to wait for one month while for the top-variant 'XV', the period is two to three months - depending on the city from where you want to make the purchase. "We hope to reduce the waiting period to less than two months. We had not factored that in our initial production period schedule but now because of our flexibility in the manufacturing line we are able to amend the production schedule. We have an order book of around 4,000 cars, out of which we have already delivered 2,000 cars," said an official from Nissan Motor India Pvt Ltd.

To meet the increased demand, while auto manufacturers are ramping up production, others are setting up new plants at a faster pace. The Maruti Suzuki official said, "On a longer-term basis, we have invested in a new manufacturing plant that will add 2.5 lakh units to our capacities, by 2012. Efforts are underway to complete this new manufacturing plant faster, in view of the market demand situation."

The demand-supply mismatch and 'extra premium' scenario is prevalent in the two-wheeler segment as well. Surprisingly, scooters (almost all of which are gearless now) are in huge demand, even compared to the booming motorcycle market.

The delivery period for scooters is also much more than motorcycles, with Honda's 'Activa' having a delivery period ranging from two months to eight months across the country. Many dealers across the Mumbai Metropolitan Region are citing non-availability of stocks as the primary reason for the delivery problems, purposefully overlooking their overflowing warehouses.

A sub-dealer of Honda told Moneylife, "The on-road price of the Activa is Rs50,800, but if you want the delivery tomorrow then you have to pay (a) premium of about Rs10,000. For a new Activa, there is a waiting period of seven months. Earlier, there was a premium of Rs4,000 to Rs5,000 but now it has gone up to Rs10,000 due to supply problems."

This sub-dealer says that authorised dealers are not charging any premium for immediate delivery. He says, "You don't have to pay the premium if you buy it from authorised dealers but you have to book the bike first and wait for seven months. They will not take a single (extra) paisa on (the on-road price) but will put you on the waiting list."

According to other sub-dealer, who deals in all kind of two-wheelers, for an Activa, the delivery period is almost six months. If you want urgent delivery, then you can pay Rs63,000 and take possession of the vehicle. The other option is to pay 80% of Rs63,000 and take delivery in three days by paying the balance amount.

So have Indian automakers grossly underestimated demand for their products? With stronger rural demand expected due to the good monsoon and the festival season coming up, would delivery schedules hit more bumps on the road? Or are a few middlemen going to play spoilsport by creating an artificial scarcity for vehicles - further muddying the waters, on and above the production constraints that Indian Big Auto seems to be facing?

According a report by brokerage Sharekhan Ltd, "We expect dealers to utilise the festive period (24th September to 7th October) to step up inventories to feed the festive demand. The industry has been vocal about vendor-side constraints limiting the final output. Almost all the players indicated a 10%-15% volume loss during the month because of component shortages. Our channel check revealed shortages primarily in bearings, tyres and castings," the report added.— Yogesh Sapkale and Ravi Samalad