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The Rediff Business Special/Veeresh Malik

Used vehicle market thrives on lack of adequate laws

Till five or six years back, the waiting list and shortage regime ensured that a second hand car sale helped you recoup investments made years ago. This was even more important in the case of private automobiles, as motor finance was, in those days, largely restricted to commercial vehicles that could repay their costs out of their earning capacities.

Private vehicles were usually purchased cash down and waiting lists were manipulated to keep a certain class of people satisfied. The second hand vehicle customer, therefore, was nobody's priority or concern.

It was, however, the arrival of foreign banks, notably Citibank and ANZ Grindlays, and leasing companies with taxation structured packages, on the motor finance scene that contributed in no small measure to changing this picture.

Aiming at the middle-class buyer as well as the corporate client, they widened the spectrum of possible purchasers of new automobiles. This they did by incorporating a variety of roles, including that of the speculative broker indulging in massive block bookings, in between the manufacturer and the buyer.

This, in turn, induced larger numbers of people to go in for a product, which they really did not need. For them, an automobile was an asset, which had to be paid for, but which was not, in any way, an asset which provided a profit value. The only hope was of using it and then selling it at a price which would help them recoup most of the original cost. But, very soon, the sheer numbers went against them. So, if you want to put a date on when the bottom fell out of the second-hand vehicle market, 1993-94 would be a good datum.

Meanwhile, finance for vehicles both new and used became easier to obtain. Newer players, like manufacturers and suppliers, formed their own finance companies to tap into what they felt was a lucrative business. Matters reached a head when people with no credit-worthiness could actually purchase a brand new expensive car with little, if any, margin money, and a moratorium on repayments for a few months.

Banks, being the secretive creatures they are, refused to provide figures but at one time in 1997 the default rate on private automobile finance from the individual customer segment was said to be as high as 50 per cent.

But the juggernaut once set in motion, has to roll on. Manufacturers have to sell cars, so new players enter the scene.

Operational leasing, a new concept in India where all motoring costs from cradle to grave (except fuel) are factored into one EMI (equated monthly installment) is the latest in vogue. Financing for individual customers, however, became tougher.

In the bargain, with fewer customers for second hand cars, prices continued crashing till they reached a point, around mid-1998, when canny buyers realised that pickings were excellent if they looked around a bit. Two-year-old cars in good shape at one-third to one-half of their original list price, especially in the mid-size luxury segment became the thumb-rule.

The Indian customer, so far starved of good second-hand options, had suddenly discovered value for money. Why block vast sums of money for a new car with no ostensible benefits, when the same car was going to be available a couple of years down the line for a pittance? The social aspect of purchasing a second hand car, too, took a favourable turn. It was no longer socially incorrect to save and buy a cheaper car!

Imported second-hand cars, meanwhile, were the monopoly of the State Trading Corporation, restricted to dealing mainly with diplomatic vehicles, and mired in a web of corruption which, even today, ensures that cars rot and rust by the hundreds while the STC quibbles over unrealistic reserve prices.

Time was, thus, ripe for a new resurgence in the automobile market.

India is one of the few remaining right-hand drive markets in the world, with an annual consumption of about 400,000 brand new cars. The technology on about 84 per cent of these cars remains rooted in the carburettor-based systems of the 1980s and pre-'80s.

The well-oiled and well-organised second hand car industry in Japan, a motive force if ever there was one, fresh out of their successes in New Zealand and the United Kingdom, suddenly realised that here was a market called India, which drove on the same side of the road, waiting to be tapped. With second hand automobile prices in Japan crashing to near scrap values, it was worth their while to ship them across to India.

It is easier said than done. It is not that simple to import cars into India. Still, the very fear that this would happen has put the fear of the devil in the babus (bureaucrats) at the Society of Indian Automobile Manufacturers.

Obviously, there is a difference between foreign made second hand cars and made-in-India cars. The latter have already reaped a double, if not more, profit for the manufacturers. While the Japanese second-hand cars have, so far, reaped just one profit for the manufacturer. How?

This is how. Even years after beginning to manufacture colour televisions, Indian companies are still mired in the kit culture regime. Ditto for cars.

So, when, for example, the power train or gearbox for a car is imported, the manufacturer makes one profit at the point of manufacturer. He then applies another mark-up to export it and yet another mark-up when he sells it to the joint venture or subsidiary, according to an Indian-origin CEO of one of the largest automobile companies.

The import of second-hand cars, especially from Japan, is viewed as a major threat by the manufacturer. But it will be a major boon for the customer.

Second-hand automobile exporter lobby is looking at India as a market. The trade, in Japan, is totally controlled by a handful of companies to the extent that sellers have to route through them. They have already broken into protectionist regimes like the UK and New Zealand, and are working overtime to do the same for India. A large number of expatriates are already active in this trade, in the back alleys of Nagoya and Yokohama, and the buzz is that well before the Indian elections, they will have moved in to India.

So, over the next few months, there might be an upsurge in imports of cheap second-hand cars, especially cheap second-hand large cars. The routes are various, and under- or over-invoicing to suit the situation has never been a problem. In short, if the customer can get an imported product cheaper than what his domestic supplier can provide, he would probably opt for the former.

The Indian second-hand car market was never more interesting and beneficial than it is now. The onset of imports will make it only exciting.

And to think that not too many years ago, you bought a car or a scooter and, say, ten years later, sold it again for almost the same price. Registration data was available, even though it was from ledgers and files, and you could check ownership records. Prices could be set by model and mileage, and selling was a comfortable Sunday kind of activity.

Today, it is different. Buying a second hand automobile is so dangerous that as a motoring correspondent, I always advise readers to check documentation before they even look at the vehicle. As for data on second hand vehicles, forget it. It is just not there.

When Verle Behets, managing director, Leaseplan India Private Limited -- it is the fully owned subsidiary of ABN-Amro Bank, new players in the operational leasing business -- looks for figures on second-hand automobile sales, she can't find them. Likewise Sant Singh Bhogal, used car dealer in Delhi's Lajpat Nagar -- buy/sell all models, his firm says -- gets away with what he feels the market and the buyer will bear. As for Rajiv Kakkar of Citicorp-Maruti, he has seen it all, as one of the biggest players in the automobile finance business, and accepted as a fact of life that there will be large seasonal as well as geographical variations.

None of them, truly speaking, can hope to access any sort of databank on the totally unstructured second hand automobile market in India. And the main reason for this is that the simplest of parameters, raw registration data, is not available even for a new vehicle. There is talk that certain manufacturers even get away with buying older motor vehicles, doing them up, and putting them on the market again as "new", thus bypassing the excise and other tax laws. This sort of thing is common in alcohol and other items in India.

For second hand motor vehicles, this data is impossible to source. Enough people buy second-hand vehicles on "undated transfer letters", and drive around on them till it is time to sell again. Others don't even bother with that any more, buying second hand vehicles on cash without even bothering about the transfer letter. Sell for scrap once it is useless, easier that way. Especially in rural and semi-urban India, where small matters like re-registration, insurance and roadtax, even number-plates, are considered superfluous.

The problem here is that road transport is what is known as a "Centre-state" subject. The Laws and Acts and Rules can be made by the Centre, but the states have the rights to amend them. As for implementation, the less said the better, it is part of the National Malaise, does not merit a discussion. Even a simple concept like how to go about adopting a uniform alpha-numeric system for registration marks has gone haywire, with each state adopting its own method. Thus, re-registration of second hand vehicles is easy for the crooked, and difficult for the straight.

Stolen vehicles get back into the system and that this is big business and a big headache for the authorities in India. Vehicles stolen from India find their way into Nepal (via the Tanakpur-Sharda Barrage route or past Gorakhpur) or into Pakistan (via anywhere along the Rajasthan/Punjab borders, especially the riverine Sutlej belt. Sources in places like Patti talk about regular two-way trade, cheaper small cars and two-wheelers peddled into Pakistan and larger, expensive cars coming from Europe via Turkey and Pakistan. Unconfirmed figures from sources within the National Crime Records Bureau place the number of motor vehicles stolen in fiscal 1998-99 to over 75,000, with the north (Delhi, Punjab and Haryana) accounting for over one-third of all thefts.

As a result, two major factors affect the second hand automobile market in India. Stolen vehicles re-enter the system with regenerated documents of scrapped vehicles as legitimate old vehicles. The pricing mechanism is highly dependent on the agricultural fortunes of the bulk buyer and on the cash-without-trace buyer.

Nobody has been able to set up a "blue book" on car prices based on model and distance run, simply because past ownership is no longer a confirmed commodity, unless you knew the past owner and the vehicle personally. Likewise, the automobiles which re-enter the market from what is known as the "finance-fail" segment of those who could not pay their installments in time, are quickly resold "as-is-where-is" at risk of the buyer, in distant parts of the country, to try and prevent the original owner from trying to get them back.

The only new trend discernible in the second hand market is that matters are becoming even more disorganised than before. Prices crash due to over-supply as well as the fact that buying a new automobile is simpler and safer. Depreciation is highest for expensive cars, some of them losing upto 50 per cent the moment they roll out of the showroom.

Comparisons with other countries cannot be made, due to the sheer numbers and lack of regulation involved. In countries like Japan and the Persian Gulf, for example, sales can be effected only through registered brokers. In India, anybody can put up a board under a tree and get into business with a bagful of fake rubber stamps.

Any sort of business plan for large corporates hoping to make the second-hand motor vehicle a part of their activities is subject to vast amounts of guesswork and dependence on the monsoon. Ford India is the latest to venture into the field. General Motors tried this last year, and has quietly moved out of it. Maruti, the largest player, refuses to get into the business.

The second-hand vehicle market in India, is, thus, the bailiwick of the disorganised sector. And thus it shall remain, unless the laws pertaining to registration go through some drastic changes.

Veeresh Malik is a Delhi-based motoring correspondent. His email address is veeresh@vsnl.com

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