While the auto industry is fighting the double edged sword of already reeling slowdown and the unprecedented contagion, dealers in the sector are being seen as the worst hit.

Amongst the many worries of automobile dealers is the TCO maintenance of dealerships. While major investments for a dealership are capital cost and manpower, high inputs and limited revenues are creating a problem for the dealers, putting them under pressure.

The biggest challenge for a dealer remains to reduce these costs and improve their financial health, as most have a very low percentage of their own equity. They are highly leveraged and therefore heavily dependent on debt.

As a result, small sized dealers have almost come to halting their operations and others are working on restructuring their rentals.

Ashish Kale, President, FADA said, “A drop in volumes is expected in the industry. So most OEMs are in discussion with their dealers to rationalise the infrastructure.”

FADA President further added, “Negotiations have begun and due to unprofitability, dealers are in discussions with their landlords as well. They are working on reducing the unviable setups, relocating them and shifting the manpower to focus on existing outlets that give viability.”

As per ETAuto research, the problem arises more for the dealers operating on rental outlets with big ticket items in metro cities of Delhi, Mumbai, Chennai and Bengaluru, where the real estate cost takes a major hit.

While the rental cost for a showroom in cities like Vadodara or Surat may range from Rs 6-7 lakh, those in parts of metro cities like Delhi or Mumbai may range from Rs 11-15 lakh for a similar showroom.

“It majorly depends on the location. For instance, a prime location in Mumbai may cost you even more than Rs 11 lakh for a premium car dealership while a similar dealership in a less crowded place may cost you less. For a city like Mumbai, sometimes they also compromise on the size,” explained a Mumbai-based dealer.

A Hyundai dealer that also agreed that he will have to give up on three of his rental showrooms, “because sales are not normal, times are not good and we need to save cost.”

Now, the auto industry has been in the grip of losses since 2018, making it a count of almost two years of losses in the sector that contributes to almost 49 percent to the manufacturing GDP of the country. While over 280 automobile dealerships shut down last year in 2019, others were already working on prioritising their capital.

As a solution, dealers are investing their own money as capital in the businesses and reducing their dependence on rental debt with a hope of making an opportunity cost of their own money with no cash outflow.