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CARMAKER TO ALSO INCREASE DEALER MARGINS Tata Motors Uses Production Cuts, Retail Push to Ride Out Slowdown

July 05, 2019 05:01 AM


Tata Motors Uses Production Cuts, Retail Push to Ride Out Slowdown
Nehal Chaliawala & Ketan Thakkar


Tata Motors has decided to implement periodic production cuts at its passenger-car plants and focus on retail sales to prop up dealerships amid an industrywide slowdown in passenger vehicle sales.

Mayank Pareek, president of Tata Motors’ passenger vehicle division, told ET in a recent interview that the company has also increased dealer margins to about 5.8%—which is about 200 basis points higher than the industry average— to ensure its channel remains healthy.

Pareek said the company is aiming to reduce factory inventory to less than 1,000 units of cars in July, and the overall inventory to 21 days at the dealerships by September.

Tata Motors is the country's largest commercial vehicle maker and the fourth largest manufacturer of passenger cars. It sells the popular compact SUV Nexon. Pareek did not disclose which plants would implement the periodic production cuts.

In India, automobile manufacturers report only wholesale numbers, or units sold by manufacturer to dealers. This does not reflect the actual number of units sold by vehicle dealers to consumers, which is called retail sales. In the absence of retail sales figures, the wholesale numbers are used as yardstick to measure the performance of automakers and have a bearing on share prices.

“We're changing our focus from wholesale to retail. The wholesale despatch is not a real reflection of the demand in the market place. Retail is the real sale,” Pareek said.

The problem of inventory accumulation in the auto industry started around September last year, when factors including high fuel cost, liquidity deficit in the lending system, and high insurance costs kept car buyers away. However, manufacturers refrained from taking production cuts and the mismatch between production and sales led to an inventory pileup.

Inventory with car dealers peaked to an average of up to 60 days during this period before easing to 40-45 days at the end of May, as per data from the Federation of Automobile Dealers Associations (FADA).

ET had reported in May that the high cost of doing the business along with rising inventory has pushed hundreds of dealerships out of business. “Industry had oversold about 12-15% vehicles (to dealers),” Pareek said.

According to experts, manufacturers’ focus on meeting their wholesale targets with disregard for actual retail on ground is the primary reason for the excess inventory.

Tata Motors, which had outpaced the market for the best part of the last three years, has registered double-digit decline in sales for four consecutive months to June this year in wholesale despatches. However, its retail sales are higher than despatches.

Tata Motors is not alone in cutting production. In recent months, every other manufacturer, including market leaders Maruti Suzuki and Hyundai, have observed this step. However, Mumbai-based Tata Motors is the first to report retail sales numbers along with wholesale

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