Impact of un-utilized assets : A Mathematical Model

A few weeks back I was wondering what happens when we buy a car but don’t drive it. While the automobile industry witnesses a growth but is it something that increases the drag on the economy.

I spent a few hours to work on a very simple model to find what happens in various consumption scenarios.

Approach:

I had to create a simple-one -product economy. Hence  I assumed that

• Our economy produces cars each worth Rs 12 lakhs.
• Average utility lifetime of the car as 1lakh miles
• Additional spends required based on consumption as 5 Rs per mile

I also simulated 6 different scenarios from a household’s perspective. namely:

• Scenario 1: Normal usage. Uses for full life of the product
• Scenario 2: Stops using after a time. Does not sell it or buy another
• Scenario 3: Stops using and sells it off but doesn’t buy another
• Scenario 4: Stops using, doesn’t sell and buys another which is used
• Scenario 5: Sells this and buys another which is used
• Scenario 6: Doesn’t sell, buys another, stops using that also and buys a 3rd

Once these assumptions were plugged in, I calculated a few ratios and interesting things emerged.

1. The value derived from each product drastically changes between two similar scenarios where the old stuff is traded vs where it is not sold. Does this mean that in a resource constrained economy, a market place optimizes the return of invested resources through higher utilization?
2. In the scenario 6, income generation is highest for every 1 Re spent by the households. So maybe hoarding is a good strategy when domestic income generation is important. On the contrary imagine if we do this in categories where we import the products – we might be supporting Chinese economy more than we ever wanted to.

Not knowing fully well what these ratios meant, I spoke to my Professor friend Dr Dash who gave some very interesting path of analysis. Essentially what he mentioned was that I should look at this top down rather than at a micro level. He also mentioned about ICOR – Incremental Capital Output Ratio – how much additional capital do we require for each unit of GDP increase. E.g. an ICOR of 3 means we need 3 Rs for every 1 Re contribution in GDP.

• Assume a market size of 75 Bn USD and lets say one third of this is from private cars. Hence a market of 25 Bn USD
• Now assume that 5% of all cars produced in a year lie idle, which means about 1.25 Bn USD worth of cars remain idle. (and this is incremental value of locked capital every year)
• So with an ICOR of 5 , these un-utilized cars translate into 6.25 Bn USD worth of capital that is “wasted” every year.
• But where it became tricky for me was that whether the asset is utilized or not, the GDP is impacted depending on ICOR. So is this a case of smarter capital allocation? Would this “wasted capital” helped us in producing some other more needed product or service?
• A very interesting and probably extreme case of this top-down analysis would be the scenario where the asset is imported. In such a case, a reduction in “wasted capital” would result in better trade-balance
• With a marketplace, if 40% of these cars are sold in the second-hand market, then we free up that much capital.
• Moreover with cars available at a lower price, many category shifts might happen. E.g. say a Maruti Alto being sold in the second hand market might attract a person who was in the market for a 2 wheeler earlier.