As the lines at the banks and ATMs continue to grow because of the recent demonetisation of Rs. 1000 and Rs. 500 currency notes in India, the auto industry is likely to see a sudden change in buyer behaviour. While the new car business may not be so drastically impacted, my guess is that the used car business is going to take a hit, because that's where a lot of cash transactions take place compared to the new car market. Donning my arm-chair economist hat, here are a few areas of the auto industry I see being impacted by the sudden cash crunch being faced by the country. Feel free to share your opinions or experiences in the following posts. 
1. Drop in used car purchases in the short term
According to CarDekho, our sister site, there has been a significant drop in used car searches on the site. Traffic is down 27% on the site in the used car section. In ZigWheels too, we saw a short-term drop of nearly 25% in used car traffic for about a week from November 9, because of demonetisation. But this has recovered. One of the main reasons for this is that cars are a discretionary purchase. With cash falling in short supply, most buyers are currently trying to manage their own households and basic needs first with the little liquid cash that they have. Used car dealers, who earlier dealt in huge wads of cash (and not all of this was necessarily white), felt the pinch. However, the recovery in traffic shows that searches for used cars continue on our site and confidence that deals will be more transparent and will involve cheques, demand drafts or fund transfers is increasing. Statistics from several other sites say that used car business from unorganized players has dropped nearly 50% in North India especially. But organized used car business is not likely to be hit - and may even improve.
2. Marginal drop in luxury SUV purchases
While the new car business mostly involves bank financing or outright cheque / draft purchases, there were some sections of society that largely dealt only in cash. Those who had a large sum of disposable income in cash (not necessarily in the tax books) would often sink that in new car purchases. With a lot of real estate deals happening in two types of transactions - by cheque and cash - the cash component had to be used somewhere and many used that for new cars - particularly large white SUVs, if you know what I mean. However, a Mahindra and Ford dealer said that there has not been much of a drop in enquiries at their dealerships as such. So far sales are on track they say.
3.Luxury car makers face no drop in sales
Luxury car makers won't face any issues due to demonetisation, because most of the deals that happen for large luxury sedans from Mercedes, BMW and Audi are usually corporate or business purchases, almost entirely transacted by non-cash methods. Many of these luxury car purchases are, in-fact, done to save on tax due to the depreciation benefits these cars bring in to the companies' books.
4.Small car makers may see a drop in demand
However, carmakers like Maruti, Honda, Hyundai and others may see a drop in sales in cars priced below Rs. 12 lakh. These are the cars that your average 'middle class' buyer would normally look at. Most of these deals too are financed - but given the hard time that the banks are having in providing services to customers these days, many buyers are likely to defer their purchases. Also since it is already November, most buyers anyway choose to pick up cars in January as they get a newer model year of the car. This is also the reason why most car companies offer significant discounts on cars in November and December to try and prop up sales or clear inventory.
5.Financing may cover entire amount of car purchase
Most small and medium car buyers often pay the downpayment on a car with cash - cash that has been saved up, cash gifts from weddings, cash got from the sale of an older car. This money now becomes a problem. Banks such as ICICI Bank, HDFC and Axis bank have offered to cover 100% of the ex-showroom price of the car with their new car loan offerings. Honda recently announced that it had tied up with these banks for 100% financing on their cars.
6.Interest rates on loans will drop
One good side to demonetisation is that interest rates will fall. This means banks, which are now flush with funds, will be forced to lower interest rates to try and get more business on the loans front. While there has been no immediate impact, expect interest rates to drop as early as next month.
7.Two-wheeler market will take a bad hit
While cars are reasonably insulated from the effect of demonetisation, the two-wheeler market will be badly hit. Most two-wheeler purchases happen in semi-urban and rural India, and in the commuter bikes segment in urban India. Rural markets account for nearly 66% of entry level motor cycle sales in the country. Business here is transacted almost entirely in cash - cash from crop sales, cash from commodity sales etc. With no disposable cash at hand, bike and scooter sales at the entry level will see a significant hit.
8.Spare parts business and mechanics to be badly hit
The unorganised auto sector - like the used car market - is going to take a hit. Here, I am talking about roadside mechanics, friendly neighbourhood garages and multi-brand spare parts businesses. I was recently talking to my mechanic and he says that his business has been hurt bad (Yes, he took a cheque payment from me for the first time, something I did not know he did). Mechanics say a large part of their business run on cash. Purchase of parts is usually done in cash. Many deal with used car parts or scrap parts - all the business here happens in cash. That has been hit.
9.Automobile accessories business to take a huge hit
If you drove into Karol Bagh on a weekend, you would see the sheer size of this accessory business for both cars and two-wheelers. And most of the purchases there happen in cash. Car customisation and accessory businesses are likely to take a beating after this demonetisation, as a large portion of unaccounted for cash was spent on sprucing up vehicles here. This market will see a clean up of sorts after this move. An accessories dealer I spoke with says his business has dropped hugely for the past two weeks.
10.Pile up of inventory may lead to big discounts
Just as the excess cash in the bank will lead to a drop in interest rates, the slump in car sales in the small and medium segment cars will see a pile up of inventory - because of demonetisation and because it's the end of the calendar year. This will probably lead to huge discounts on many cars in the month of December.
Got more thoughts on how demonetisation will affect the auto industry in India? Share your opinions and experiences (if you've been trying to buy or sell a car or bike) in the posts below.
1. Drop in used car purchases in the short term
According to CarDekho, our sister site, there has been a significant drop in used car searches on the site. Traffic is down 27% on the site in the used car section. In ZigWheels too, we saw a short-term drop of nearly 25% in used car traffic for about a week from November 9, because of demonetisation. But this has recovered. One of the main reasons for this is that cars are a discretionary purchase. With cash falling in short supply, most buyers are currently trying to manage their own households and basic needs first with the little liquid cash that they have. Used car dealers, who earlier dealt in huge wads of cash (and not all of this was necessarily white), felt the pinch. However, the recovery in traffic shows that searches for used cars continue on our site and confidence that deals will be more transparent and will involve cheques, demand drafts or fund transfers is increasing. Statistics from several other sites say that used car business from unorganized players has dropped nearly 50% in North India especially. But organized used car business is not likely to be hit - and may even improve.
2. Marginal drop in luxury SUV purchases
While the new car business mostly involves bank financing or outright cheque / draft purchases, there were some sections of society that largely dealt only in cash. Those who had a large sum of disposable income in cash (not necessarily in the tax books) would often sink that in new car purchases. With a lot of real estate deals happening in two types of transactions - by cheque and cash - the cash component had to be used somewhere and many used that for new cars - particularly large white SUVs, if you know what I mean. However, a Mahindra and Ford dealer said that there has not been much of a drop in enquiries at their dealerships as such. So far sales are on track they say.
3.Luxury car makers face no drop in sales
Luxury car makers won't face any issues due to demonetisation, because most of the deals that happen for large luxury sedans from Mercedes, BMW and Audi are usually corporate or business purchases, almost entirely transacted by non-cash methods. Many of these luxury car purchases are, in-fact, done to save on tax due to the depreciation benefits these cars bring in to the companies' books.
4.Small car makers may see a drop in demand
However, carmakers like Maruti, Honda, Hyundai and others may see a drop in sales in cars priced below Rs. 12 lakh. These are the cars that your average 'middle class' buyer would normally look at. Most of these deals too are financed - but given the hard time that the banks are having in providing services to customers these days, many buyers are likely to defer their purchases. Also since it is already November, most buyers anyway choose to pick up cars in January as they get a newer model year of the car. This is also the reason why most car companies offer significant discounts on cars in November and December to try and prop up sales or clear inventory.
5.Financing may cover entire amount of car purchase
Most small and medium car buyers often pay the downpayment on a car with cash - cash that has been saved up, cash gifts from weddings, cash got from the sale of an older car. This money now becomes a problem. Banks such as ICICI Bank, HDFC and Axis bank have offered to cover 100% of the ex-showroom price of the car with their new car loan offerings. Honda recently announced that it had tied up with these banks for 100% financing on their cars.
6.Interest rates on loans will drop
One good side to demonetisation is that interest rates will fall. This means banks, which are now flush with funds, will be forced to lower interest rates to try and get more business on the loans front. While there has been no immediate impact, expect interest rates to drop as early as next month.
7.Two-wheeler market will take a bad hit
While cars are reasonably insulated from the effect of demonetisation, the two-wheeler market will be badly hit. Most two-wheeler purchases happen in semi-urban and rural India, and in the commuter bikes segment in urban India. Rural markets account for nearly 66% of entry level motor cycle sales in the country. Business here is transacted almost entirely in cash - cash from crop sales, cash from commodity sales etc. With no disposable cash at hand, bike and scooter sales at the entry level will see a significant hit.
8.Spare parts business and mechanics to be badly hit
The unorganised auto sector - like the used car market - is going to take a hit. Here, I am talking about roadside mechanics, friendly neighbourhood garages and multi-brand spare parts businesses. I was recently talking to my mechanic and he says that his business has been hurt bad (Yes, he took a cheque payment from me for the first time, something I did not know he did). Mechanics say a large part of their business run on cash. Purchase of parts is usually done in cash. Many deal with used car parts or scrap parts - all the business here happens in cash. That has been hit.
9.Automobile accessories business to take a huge hit
If you drove into Karol Bagh on a weekend, you would see the sheer size of this accessory business for both cars and two-wheelers. And most of the purchases there happen in cash. Car customisation and accessory businesses are likely to take a beating after this demonetisation, as a large portion of unaccounted for cash was spent on sprucing up vehicles here. This market will see a clean up of sorts after this move. An accessories dealer I spoke with says his business has dropped hugely for the past two weeks.
10.Pile up of inventory may lead to big discounts
Just as the excess cash in the bank will lead to a drop in interest rates, the slump in car sales in the small and medium segment cars will see a pile up of inventory - because of demonetisation and because it's the end of the calendar year. This will probably lead to huge discounts on many cars in the month of December.
Got more thoughts on how demonetisation will affect the auto industry in India? Share your opinions and experiences (if you've been trying to buy or sell a car or bike) in the posts below.
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