State of the market

With over 3 million used car sales, India’s used car market has overtaken the new car market, which could only manage around 2.5 million units. This puts the ratio between new car and used car sales at about 1: 1.3. While this ratio seems quite optimistic for the industry, it is still well behind Western levels of 1: 3 in the UK and US, and around 1: 2.2 in Germany and other Western European economies.

However, the market has been adding a compound annual growth rate of 15-18% in the last five years. The CAGR is expected to skyrocket to around 22-25% for 2018. Experts have pegged the ratio of new car sales to used car sales at 1: 2 for 2017-18. Therefore, used car sales are likely to more than double in the next 5 years.

An investigation by CRISIL found that between 2008 and 2013, used car sales doubled to 2.6 million units, leading to a four-fold increase in market size to Rs. 520 billion. The report further estimated that used car sales will reach around 8 million in 2018, putting the used car market valuation at 1.5 trillion rupees. While new car sales are expected to reach around 4.2 million units.

Business model

The market is made up of competitors with three different business models. The parties to the transaction include franchised and independent dealers who take the financial risk of buying and selling cars. Transaction facilitators (online sales platforms and online matchmakers) rely on fees that are derived from sales transactions. Information providers offer information on price trends and condition details for specific cars.

Used cars are sold to end customers through these three channels. Most of the transactions are handled by the private sellers themselves. The second main channel of transactions includes franchised dealers. Independent distributors and other online sales platforms make up the remainder of total sales.

Although the market is still heavily dominated by unorganized players, the proportion of organized players has been increasing. With a compound annual growth rate of 40%, the organized segment now represents around 18% of the total market and is expected to increase to around 25% by 2017-18.

Key Market Trends:

• Changing demand

Most of the total car sales in India consist of two-wheelers. Among this population, many people are looking to upgrade from a 2-wheeler to a 4-wheeler. In addition, there is a growing economic and social need among buyers in the 25-40 age group to own a car. These first-time buyers and 2-wheelers looking to upgrade are mainly offsetting the demand in the used car market. With the increased availability in the number of available used cars and the increasing presence of organized players in the market, more buyers are likely to enter the used car market. Vehicle certification and auto history reports, warranty, and after-sales support are going to bridge the existing information asymmetry above and are likely to be the key drivers of demand.

• Supply change

Average replacement cycles are falling. According to a survey, in 2006-07, buyers kept their new cars for 54 months (4.5 years). This was reduced to 48 months (4 years) in 2011-12 and is expected to decrease to 42 months (3.5 years) in 2016-17. This increase in the frequency of replacement will allow an increase in the supply of used cars of up to 3-4 years. Also, with improvements in car quality (which translates to longer service life), the demand for used cars will increase in the near future.

• More online transactions

Used car buyers are slowly but surely turning to the Internet to research and buy cars. Consumers are coming to dealerships armed with more information on specific cars and a better understanding of market prices, and they are visiting fewer dealerships before purchasing their chosen car. The increasing use of mobile devices is driving this trend: More than 20 percent of all “used car” related Web searches are now done on these devices. Traditional dealerships will be forced to follow this audience online, perhaps offering used cars through online marketplaces that provide referrals to dealers with binding offers – a model that is already available in the United States.

• Greater transparency

The availability of information on the Internet has already significantly increased the efficiency of the used car market, providing greater transparency on prices and even the status of specific used cars. The increasing use of online transaction platforms will only further drive market efficiency; indeed, digital intermediaries have the opportunity to shape the structure of the industry as their influence grows, accentuating competitive pressures and revealing the disparity between the most efficient buyers and sellers and the laggards.

• Increasing importance of convenience

With the advent of increased Internet penetration and continued mistrust of the validity of independent dealer claims, more and more private sellers are looking for fast, hassle-free, alternative ways to sell their used cars. This trend will have a real impact on the used car market as private owners turn to newer online business models to sell their cars. By offering fast and guaranteed transactions, online shopping platforms are very likely to benefit.

• Growing market penetration

The vehicle ownership rate in India is 18 per thousand people. At 2 out of 100 people, this is one of the worst in the world. With the increase in GDP per capita and an increase in the percentage of wealthy households, the property rate is likely to change for the better. This presents an incredible opportunity for OEMs to expand their production in India. In the US, property rates are as high as 95% and around 60-70% in Western Europe.