Secondhand Car Market is at an Influx Point

Revati Kasture Head - Industry Research; Vishal Srivastav - Analyst; and Kunal Maheshwari - Analyst

Industry characteristics

The secondhand car market has been existence in India since inception. Two decades back, a car was considered a luxury, which people from rich class only could afford. Secondhand car was the only economical way to buy a car for aspirers from middle class population. During those times, price of secondhand cars was also on higher side as compared to recent period and unavailability financing options made owing a secondhand car an expensive prospect as well. However, during last one decade rising income levels, easy availability of finance and wide model offerings at competitive prices have led to spurt in the demand of new car market. Consequently, increasing affordability has also resulted in drastic reduction in holding period of the car enabling sharp spurt in second hand car market.

The size of secondhand car market has increased more than six folds

The second hand car market has almost erupted in last 8-10 years. CARE Research estimates, the size of secondhand car market has increased at a CAGR of around 20 per cent during past one decade from 0.3 million units in FY2000 to around 1.8 million units in FY2010, scaling it upto the levels of new car sales. Increasing urbanisation, rising income levels have also raised the aspiration of Indian middle class to purchase first vehicle as a car or to upgrade from two-wheeler to a car, even if it is a secondhand car.

 
Similar to new car market, small cars dominate secondhand car market as well

Similar to new car market, small cars dominate secondhand car market as well, accounting for around 60 - 70 per cent of market, with car models like Maruti's 800, Zen, Alto, WagonR, Hyundai Santro and Tata Indica being sold the most. In mid-size segment, Honda City, Maruti Suzuki Esteem and Hyundai Accent are the most popular cars. CARE Research believes that the popular models in new car market command higher buyer preference in secondhand car market also. However, as compared to passenger cars, the secondhand market for utility vehicle segment is negligible. Being, primarily used for commercial purposes, utility vehicles undergo significant wear and tear, making its resale value insignificant. Also, utility vehicles offer relatively low fuel economy and the households that can afford operating the vehicle on low fuel economy would typically prefer to own a new utility vehicle.

Unorganised segment continues to expand secondhand car market

Secondhand car market has been dominated by unorganised segment since inception. Even currently, secondhand car market is dominated by the unorganised sector, contributing around 88-90 per cent of secondhand car sales. As buying secondhand cars involves greater degree of trust in terms of knowing genuineness of ownership or title, quality of the spare parts, transparency in any charges relating to accident, etc, buyers prefer to purchase from known sellers through direct personal contacts. This has led to evolution of localized secondhand car brokers. It is estimated that around half of used car deals happens through such local brokers.

 
Brokers are critical component in the value chain of unorganized market

Local brokers are the most important party in value chain in unorganised segment. CARE Research believes that a medium size broker closes deal for nearly 8-10 vehicles per month and charges commission around 2-3 per cent per deal from both buyer and seller. These brokers also provide services like insurance, registration of transfer of title in the Regional Transport Office (RTO). In some cases, these brokers also own workshops, whereby, they provide refurbishment of used car as well.

 
Organised market has been gaining momentum

Huge potential of secondhand car market had influenced almost all major passenger car OEMs to venture into used car business. Maruti True Value and Mahindra First Choice were among the early entrants in this market. Initially, secondhand car business was used as a tool by the OEMs to sell their own vehicles by offering attractive exchange offers. However, as the awareness about the organised secondhand car market has increased, the response of the buyers has been very encouraging. That has led OEMs to consider used car business as high potential business.

 
Some of the major used car business ventures of the OEMs are listed below:

▪	True Value (Maruti Suzuki)
▪	First Choice (Mahindra, in joint venture with HDFC and San & Sanghi)
▪	Assured (Ford)
▪	Advantage (Hyundai)
▪	Auto Terrace (Honda).

 
Online portals - a fast emerging concept

Online portals are a fast emerging concept in used passenger car market. Vast coverage has attracted many buyers and sellers to register their cars through these portals. However, the conversion ratio through these portals is very low as trust factor between buyer and seller is missing, which is very important criteria in Indian used car market.

Financing scenario

The entry of organised players in the secondhand car market attracted many financial institutions to this market. Some of the major private & public sector banks and financial institutions currently finance secondhand car purchases, which include Kotak Mahindra Prime, HDFC Bank, ICICI Bank, State Bank of India and Punjab National Bank. Currently, the maximum tenure offered for loans is 60 months and up to 70-85 per cent of the deal value is financed depending upon the profile of the buyer and usage of a car. However, these players have restricted themselves to finance used cars purchased through organized segment. The rate of interest for pre-owned car finance is around 300-400 basis points higher than that for new car finance.

Increasing demand for low cost cars -A key challenge for secondhand car market

The pre-owned car market faces competition from new car market as well as benefits from it. New launches in the low cost segment like mini and entry level compact take away many aspirants from the used car market. It also has a negative impact on the resale price of the pre-owned vehicles. Similar scenario was observed during the launch of Tata Nano. However, new launches in higher-end mid-size, executive and premium segments and owners upgrading to these cars by selling their existing cars, fuels growth in secondhand car market.

 
Secondhand car market to grow at CAGR of 18 - 20 per cent till FY15

CARE Research believes that secondhand car market is at influx point. It estimates, the size of secondhand car market to increase at a CAGR of around 18-20 per cent in next five years growing from 1.8 million in FY10 to around 3.8 million by FY15. Rising income levels, huge base of two-wheeler owners upgrading to used cars and healthy financing scenario would be key factors that would determine growth in domestic secondhand car market. CARE Research also foresees that organised segment will dominate industry growth. With increasing number of OEMs venturing into secondhand car market, the share of organised segment would rise to a substantial 30-35 per cent in next five-year period.