Auto dealers battle spiralling realty costs

India's auto-makers are having trouble reaching out to people because their dealers are finding it increasingly difficult to open more outlets in big cities where rising real estate costs and the unavailability of land make such outlets economically unviable.

Five years ago in New Delhi, it cost around Rs 15 crore to set up an outlet, comprising a showroom and a workshop on around an acre of land. Today, such an outlet would cost around Rs 50 crore to set up, say dealers.

"The infrastructure cost is going very high in bigger cities," said Arvind Saxena, vice-president of marketing and sales at Hyundai Motor India. "It is difficult to get a good number of applications (for dealerships) as compared with smaller cities."

While manufacturers are constantly expanding into smaller towns, recent international entrants like Volkswagen AG and Volvo are looking for space in the metros to kick-start sales. And they are fighting for real estate with new businesses such as organised retail and existing businesses that are growing in step with an expanding economy.

That, coupled with a government move to allow foreign companies to enter the local construction industry in 2005 has sparked a boom in India's real estate market, making it one of the most sought after investment destinations in Asia. In the last three years real estate has become at least three times dearer in some of the top cities.

Even motorcycle and scooter makers are feeling the pinch. "The opportunity cost for dealers is high," said Satya Sheel, managing director of Suzuki Motorcycle India. "Rising real estate costs don't allow the dealership to remain viable."

However, it is car makers that are the worst hit because they need more space than two wheeler dealers. The companies are hoping that high sales would encourage dealers. "Volumes are larger now," said Saxena. "The large number of cars sold so far also means more vehicles for servicing."

Car-makers plan to open at least 300 outlets in the next 18 months. Sales in the domestic market are expected to reach 2.2 million by 2010 from 1.4 million in 2006-07, according to the Society of Indian Automobile Manufacturers, an industry body.

The problem is more pronounced in bigger cities. "The location matters," said Jnaneshwar Sen, senior general manager of marketing at Honda Siel.

"It has to be convenient for the customer to visit and service his vehicle."

Maruti purchased two tracts of land in New Delhi and Mumbai, and leased it to dealers in an effort to address the problem. But that was a one-off move.