Sales down, automakers up dealers’ cut

Automobile makers have started increasing the commission they pay to dealers from Monday.

“The increase in commission will be in the range of 20-25 basis points starting Monday. It’s happening as volumes are low and operational costs like rentals are increasing,” said a source in Maruti Suzuki India who did not wish to be named.

Manufacturers pay commission between 2.5% and 3% of the value of the car.

The move comes at a time when automobile manufacturers are already reeling under slowdown in sales.

Vineet Hetamasaria, head of research at PINC, a brokerage, said if Maruti Suzuki has done it, then others will follow suit. The higher commission was proposed by dealers during the Auto Expo held in New Delhi early this month.

“Costs have gone through the roof whereas dealership margins have remained constant over the years. We had put across a suggestion that there is a need to revisit the dealership business model which includes dealership sales margin as well,” said Gulshan Ahuja, secretary general, Federation of Automobile Dealers Associations.

According to him, the cost of dealership management has gone up tremendously over the years with the kind of infrastructure dealers are supposed to have — world class showroom, state-of-the-art workshop, among others.

The manpower costs have also shot up phenomenally because of competition in the market place and shortage of skilled manpower. Another top Motown executive said manufacturers generally pass on such increase in commissions through price hikes of vehicles. “Customers will have to pay for such increases,” said the official. However, a rise in commission by auto manufacturers does not mean the car financiers are also willing to pay higher commissions.   

“We may if required pitch for reducing the commissions. Three years back we did it. We got it down from 4-4.5% to 1.5%. We want to protect our margins,” said Ashok Khanna, senior executive vice president and business head (auto loans), HDFC Bank.

According to Khanna, ultimately the risk is taken by financiers. Currently banks pay dealer’s commission in the range of 1.5%-3% of the loan depending upon the bank.

Earlier this month, industry body Society of Indian Automobile Manufacturers said car manufacturers in India will see only marginal sales growth at best in the current fiscal due to high interest rates and increased costs.