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Auto, real estate firms made a killing during boom time; it’s time now for them to think beyond profits, cut prices

  • A meaningful cut in prices from automakers can help draw the buyer back to showrooms

  • The carmakers made good money during the boom period by tapping into newer markets

  • The government has tried to boost the sentiment in the real estate sector by offering a distressed fund

An economic slowdown also gives wonderful excuses to smart businessmen to hide own mistakes and lobby for a government bailout. But the problem is that it can’t be a one-sided deal. It is a fact that automakers and realtors, two segments currently witnessing a major sales slump, made a killing when times were good. Hence, they can’t entirely play the victim card now only blaming the higher government taxes and a sluggish economy. They should be made answerable for reluctance to pare high prices even when markets show alarming signals. But, it appears that this situation is changing.

Recently, Maruti Suzuki India chairman RC Bhargava hinted at a price cut on cars in the approaching days. This is a good sign. A meaningful cut in prices from automakers can help draw the buyer back to showrooms. Automakers have made significant gains in the past two decades when the economy was on a fast-growing trajectory.

The carmakers made good money during the boom period by tapping into newer markets especially the entry-level hatchbacks targeting first-time car buyers. Prices have only gone up even for the entry-level cars over the years. Sales slump of this nature warrants automakers too think out of the box on the pricing front. If the carmakers show the willingness to cut prices by, say, 40 percent at least as a short-term measure, demand can be revived to an extent. Automakers also need to introspect on the quality of the product they offer to the Indian audience vis-à-vis customers in other advanced markets.

 Auto, real estate firms made a killing during boom time; it’s time now for them to think beyond profits, cut prices

Representational image. Reuters

Isn’t the quality and safety features offered by Indian carmakers on entry-level, mid-level car segments still lower than what customers in other markets get—especially the basic safety features? There have been consumer complaints that what they get is not on par with what they pay when compared with what same carmakers offer to customers in other developed markets in the comparable segments. This crisis is a good opportunity for carmakers to introspect and see if they have been taking the Indian customer for granted vis-à-vis other markets.

Also, there is, of course, a case for the younger generation to go for rented cars than owning one. Carmakers may be realising this already and working to adapt to this change. One example is the recent announcement from Mahindra and Mahindra that it will buy a 55 percent stake in ride-hailing firm Meru Cabs, in a bid to get a pie in the growing market for shared mobility. Carmakers can own and operate rented car services thus helping these companies to push sales in this channel.

The transition from BS-IV to BS-VI could be another factor carmakers need to acknowledge. This could have partly contributed too to the mess right now. There may be a section of potential buyers who would want to wait out for another six months to buy BS-VI cars. The carmakers have been pushing for the extension of the BS-VI deadline but perhaps need to adjust their production accordingly, which in a way they are already doing.

Besides, this is also a good time to push for auto companies to invest in the R&D department on electric vehicles (EVs), affordable ones. There is a largely untapped market for affordable electric vehicles. But to begin the switch, customers need to be taken into confidence about the quality and maintenance of new era cars. As this Mint article highlights, carmakers are already preparing for the shift but there is a long way before the EVs become acceptable for Indian car buyers. This is a good time to work on the strategies.

Similarly, it’s time realtors too wake up to the new market reality. Real estate prices dramatically increased since 2000 through the boom years but over the last half a decade or so, there had been hardly any meaningful appreciation in prices.

Real estate sector mess

Realtors are desperately seeking government aid and at the same time, they are paying price for holding the rates too high, too long. Buyers do not see much sense in taking up a big liability on something where the cost of acquisition is too high and the return on investment (RoI) is too low. This is true for appreciation on a residential real estate property or rental yields. For instance, in Mumbai which is one of the biggest markets for high-end real estate inventory, prices haven’t appreciated much in the last 5-6 years. Investors do not gain much with a meager return on money locked in for a considerably long period where the rental yields are less too (2-3 percent post-tax).

The general economic sentiment and the uncertainty surrounding it have taken the confidence element away from the potential homebuyers. People fear job losses and do not want to commit to a big liability. Cash exchange has slowed since demonetisation in 2016. Also, the unemployment rate going up to record highs (a tad above 6 percent at the last count) shows the pathetic state of the employment situation. Also, stricter LTV (loan to value ratio) rules means that the buyer has to bring in at least 30 percent money upfront, which is not possible for many. This wasn’t the case before when banks used to offer even up to 90 percent of the cost (in some cases even higher).

The government has tried to boost the sentiment in the real estate sector by offering a distressed fund. Announcing the measure, Finance Minister Nirmala Sitharaman had said the government will contribute Rs 10,000 crore for the special window and roughly the same amount is expected from outside investors. Of course, the economic slowdown has hit all segments hard. It is the job of the government to repair a damaged economy.

Automakers are lobbying hard for lower Goods and Services Tax (GST) rates, currently at 28 percent. At the same time, businesses must remember that only if the products become reasonably priced to the aspiring buyer, sales will recover. Both automakers and realtors are also paying the price for greed and artificially keeping the prices high.

(Part of this piece was published earlier on Firstpost)

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Updated Date: Sep 24, 2019 13:29:28 IST