[greenhorn]

Originally Posted by smartcat

The most obvious question is - why lease it to dealers? Why not make these company owned and operated dealerships?

Dealership business has poor margins, return ratios and profitability (relatively speaking, compared to car manufacturing & selling) primarily because of high rentals. Take that out of the equation and you will have decent numbers.

This way the dealer gets all the risk, and maruti gets all the returns!

[jeepster_chd]

Originally Posted by smartcat

The most obvious question is - why lease it to dealers? Why not make these company owned and operated dealerships?

Because, it costs way more money (resources, headache) to run your own store than it does to sit back and collect cash. Just my two cents.

[GTO]

Originally Posted by smartcat

The most obvious question is - why lease it to dealers? Why not make these company owned and operated dealerships?

Reasons why a manufacturer wouldn't want to get into retailing:

- Building a car and selling it require completely different skillsets. They're in the manufacturing business, not retailing.

- Annoy the existing network of 2,000 dealers.

- Right now, the car is booked as a 'sale' by the manufacturer the minute it leaves the factory. Won't be the case if you have your own dealership.

- Inventory cost, they don't want to hold crores worth of cars on their own books.

- They can hide behind the dealer and let him handle all the 'pesky' customers. However, directly interfacing customers comes with its own share of responsibilities & liabilities.

- Further to the previous point, a 'dealer' can adopt shady tactics for a sale that a 'manufacturer' can't.

- Auto CEOs have enough on their plate already. Taking on the retail challenge would be a HUGE responsibility. No management bandwidth.

- The automotive landscape is fast changing (EVs, car sharing, fuel-cell tech). Tapping into retail would be a major distraction, leaving no time for the core business.

- A dealer can hire a chap for 6k - 10k without benefits. A manufacturer can't. Salary costs will shoot up bigtime, potentially making the business unprofitable. A dealer will run things informally, while a corporate manufacturer has to stick to 'systems' and 'compliance'.

Car manufacturers would rather let the dealer take his 2 - 5% commission in exchange for the headache. Think about it - other than Tesla, why has no manufacturer ventured into auto retailing? No Japanese / German / Korean / American manufacturer?

[petroguzzler]

Originally Posted by GTO

Reasons why a manufacturer wouldn't want to get into retailing:

- Building a car and selling it require completely different skillsets. They're in the manufacturing business, not retailing.

Exactly! This, in business management jargon is called core competence.

Originally Posted by GTO

Think about it - other than Tesla, why has no manufacturer ventured into auto retailing? No Japanese / German / Korean / American manufacturer?

Actually, Tata (Concorde) and Hyundai (Hyundai Motor Plaza) have ventured into the retail segment.

Some other probable reasons could be that it can potentially bring dis-economies of scale and would not offer economies of scope.

[scwagh]

Originally Posted by GTO

Also makes sense because:

1. Buy land properly and it'll only appreciate

2. Maruti can 'control' its dealers even more

3. Easy to replace a dealer who is running a showroom on your property

4. Dealer retention will improve. Maruti obviously won't allow a dealer on its own land to switch to Hyundai (as an example)

Additionally now it is entirely dependent on Maruti to select the location of their new dealership. With a Dealer in between they might not get this freehand on having a say on location every time.


Maruti's strategy is in a way similar to D'mart's real estate strategy. D'mart typically own the land where they open their stores, if they are not able to purchase it they lease it for a period of 30 years. As per their estimates the cost of leasing for a short term lease eats up to 4-6% of the revenues. This is one of the reasons that they are not very quick in opening of new stores and still is the leading supermarket chain of India.

Maruti is sitting flush with cash hence this move makes the perfect business sense for them.

[Passiautonate]

Originally Posted by Sebring

Car/Bike companies should have spectacular showrooms outside city limits, only One per city. consumers book an appointment via internet/phone and land up there.

Since it's a high involvement purchase one wouldn't mind going the distance. It also boosts the car brand value. In my opinion test drives in city limits with its high traffic, is absolute waste as you cant check the speed nor handling.

Just a theory!

Well true from a certain angle but overlooking aspirations associated with a car. "A BMW showroom and spanky models on display enticing a prospect on his way to office". I feel a vast majority of my decisions to go and look at the car were a progression to window shopping.

[petrolhead_chn]

This strategy certainly demonstrates the level of confidence MSIL has on its products and future plans. Though the company has abundant cash reserves, spending or investing it wisely takes a lot of effort and planning.

If what MSIL claims is implemented, even existing or new startup businesses who would otherwise opt for a supermarket franchise might consider joining hands with MSIL, as major part of real estate expense is borne by the paymaster. As time progresses many such potential businessmen would join MSIL network, work for them as a dealer, earn as much money as they possibly could.

As for MSIL the businessman would just be like an off-role employee. They can simply swap, consolidate or even remove such outlets if they become an NPA.

On the flip side if MSIL cars become super duper mass hit in the coming years and the existing market share rises to 65%, these lands/buildings could simply be used as warehouses to stock spares, yards to stock cars, run a ASC, etc., I mean anything could happen.

Or maybe existing dealers are demanding an increase in commissions and MSIL has started this strategy as a preventive measure just to shut their mouths off by this move - a typical corporate move.

Either ways this is a great move by MSIL and I personally feel this is a great futuristic thinking and a giant's leap.

[theMAG]

I wouldnt want to be Maruti's competitors! This is one of those classic moments where the decision is admired and a wish-I-had-thought-of-it hat comes on as a result.

I see this as a true win-win: this levels the playing field to include potential smaller groups that may not have had the capital to venture into car dealerships before due to the real estate weight; and it is typically these young and upcoming businesses that work harder to please customers than established heavyweights.

[i74js]

Though its a smart move, managing a land parcel has its own set of problems. The lease / rental act in India is of the British era and not much has changed since then.

There have been multiple threads in the forum when the dealers have shown cunning behavior and sold cars (credit inventory from the manufacturer) without paying the manufacturer and closed shops. Almost every manufacturer has witnessed this.

Removing existing dealer (operating on MSIL land) will not be easy as these are commercial establishments. Our courts, in case of such disputes, are slow to react and decide. Obtaining a "stay" and pulling on in the courts is given for such disputes. Look at the present case of McDonalds in north India (Connaught Plaza Restaurants and McDonald Corporation US). McDonalds is another real estate giant ! and dispute originally started because of non-payment of royalty by CPR while they were paying the loan EMI for the assets purchased for McD's operations in north India.

Lets hope MSIL has a clear workable strategy for lease and operations of business on their land.

[SmartCat]

Originally Posted by theMAG

I wouldnt want to be Maruti's competitors! This is one of those classic moments where the decision is admired and a wish-I-had-thought-of-it hat comes on as a result.

This cannot be easily replicated by other car manufacturers. Nobody has cash flows like Maruti right now. Instead of parking surplus cash in fixed deposits, Maruti is parking it in land assets.

However, in the past, Mahinda & Mahindra and Bajaj Auto utilized their surplus funds to become a lending institution (by creating M&M Finance & Bajaj Finance) - funding automobile purchases initially, but moving on to become almost like quasi-banks.

I think Maruti will have better returns on their cash if they fund their customer purchases. All major car companies have their own lending arm (VW, Ford, Mercedes etc). Since majority of cars are purchased via loans, Maruti lending arm can boost sales by offering unique loan products not offered by other banks (Eg: 7 or 10 year loan, 100% finance etc)

[narayan]

Originally Posted by smartcat

I think Maruti will have better returns on their cash if they fund their customer purchases. All major car companies have their own lending arm (VW, Ford, Mercedes etc). Since majority of cars are purchased via loans, Maruti lending arm can boost sales by offering unique loan products not offered by other banks (Eg: 7 or 10 year loan, 100% finance etc)

You are essentially referring to a captive NBFC as is prevalent in the premium car segment ( VAG, MBIL, BMW, Volvo ) and more recently Ford.

Maruti did dabble with this long back via its tie up with Citicorp ( Citicorp Maruti Finance Limited ).

My take is that this captive NBFC stuff works well in

1. Premium car segment ( due to the high sticker price ) - to push numbers and bring out innovative schemes for the self employed ( who form a large segment for premium cars )
2. Commercial vehicles - where financing is the default option for purchase

Unique to both the above segments is also the fact that main stream financiers ( Banks ) have not been very comfortable dealing with buyers here and hence that gap got filled by NBFCs ( and within that - the captives help the in house brand further ).

Ford is possibly the only exception and they probably thought it was a good way to grow their sales. In my view, Ford hasn't reaped the benefits of having a captive as can be seen in their sales #s.

For Maruti's scale, i feel getting into a NBFC arrangement would require a lot of due diligence and maybe management doesn't have appetite to mange that risk. After all they control 50% + of the market and they can arm twist banks to lend to their customers and earn a kick back on all loans disbursed through dealer channels without any capital investment.

[GTO]

Originally Posted by petroguzzler

Actually, Tata (Concorde) and Hyundai (Hyundai Motor Plaza) have ventured into the retail segment.

Ah, good point .

Originally Posted by i74js

The lease / rental act in India is of the British era and not much has changed since then.

I lease out properties and can say that, as long as you take the right precautions, it's relatively safe to do so. Plus, don't forget - the dealer (branch manager??) will be Maruti's customer in two ways - buying their cars as well as renting the property. Maruti has its ground covered that way.

Originally Posted by Sebring

Car/Bike companies should have spectacular showrooms outside city limits, only One per city. consumers book an appointment via internet/phone and land up there.

Interesting thought, but no one will move their showrooms out of the city. You'd need guts to do the same and the competition will gain bigtime.

Either way, manufacturers always insist on prime locations, which some dealers resist by citing high costs. Manufacturers couldn't care less about the dealer - all they want is good visibility for their brand.

[manishkapadia]

This is future planning by Maruti. Do remember that the parent company / promoter is Suzuki family. They are Japanese and cost of finance in Japan is near 0%. They can get all the money they want if needed. They can afford to do this and a lot more. In the end what will have visibility will sell. They will always have showrooms at prime locations.

Imagine this. Finance to fund property buy is at Zero percent. It generates rental yield. Even if that is low at 3-4 percent per annum. That still makes money for them.

[Lone Ranger]

I am going against the tide here - I don't think this is the best use of the company's capital. When a company looks outside its core area of competency for investing capital it could be an indication that it is running out of ideas.

Currently, Maruti is ideally positioned to think long term (it does not have to sweat over quarter to quarter survival strategies) and invest this money towards proper hybrid (not the SVHS gimmick) and electric technology development. Suzuki does not have this competence and India is anyway its most important market for cars. Maruti already has a good reputation for frugal fuel consumption - investments in this area will reinforce their strengths.

Given that Maruti's cars are already lightweight and fleet friendly, they should be moving a lot faster in this area. Consider the fact that Mahindra and Tata are showing keen intent in this area - the government's push in this area should help in bringing mass market acceptability sooner, which in turn will help drive down costs.

[PearlJam]

Originally Posted by Lone Ranger

I don't think this is the best use of the company's capital. When a company looks outside its core area of competency for investing capital it could be an indication that it is running out of ideas.

I agree with you theoretically. However, in this case, I don't think it is outside it's core area, unless it's going to set up houses and apartments there and sell it (which actually might not be a bad idea the way real estate is going)

Any company must deliver more than bank FD returns on their surplus cash. Otherwise, there is no point in running the business - because they can either park it safely in FDs with close to zero risk, or return the money back to shareholders and creditors. Given Maruti's massive appetite to grow (note that more sales from new showrooms also means more requirements to set up land intensive service centers and tinkering works), this might be a great idea.