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The Indian automobile segment can be divided into several segments viz. two-wheelers (motorcycles, geared and ungeared scooters and mopeds), three wheelers, commercial vehicles (light, medium and heavy), passenger cars, utility vehicles (UVs) and tractors.
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Demand is linked to economic growth and rise in income levels. Per capita penetration at seven cars per thousand people is among the lowest in the world (including other developing economies like Pakistan in segments like cars).
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While the industry is highly capital intensive in nature in case of four-wheelers, capital intensity is a lot less for two-wheelers. Though three-wheelers and tractors have low barriers to entry in terms of technology, four wheelers is technology intensive. Costs involved in branding, distribution network and spare parts availability increase entry barriers. With the Indian market moving towards complying with global standards, capital expenditure will rise to take into account future safety regulations.
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As compared to their global counterparts, both the two-wheeler as well as four wheeler segments are relatively lesser fragmented. However, things are changing, especially on the passenger cars front as many foreign majors are eyeing the Indian market. As a result, pricing power is likely to diminish going forward.
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Automobile majors increase profitability by selling more units. As number of units sold increases, average cost of selling an incremental unit comes down. This is because the industry has a high fixed cost component. This is the key reason why operating efficiency through increased localization of components and maximizing output per employee is of significance.
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| Supply |
The Indian automobile market has some amount of excess capacity. |
| Demand |
Largely cyclical in nature and dependent upon economic growth and per capita income. Seasonality is also a vital factor.
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| Barriers to entry |
High capital costs, technology, distribution network, and availability of auto components. |
| Bargaining power of suppliers |
Low, due to stiff competition. |
| Bargaining power of customers |
Very high, due to availability of options. |
| Competition |
High. Expected to increase even further. |
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A total of 7.4 m two-wheelers were sold in India in FY09, a growth of 2.6% over the previous year. Motorcycles accounted for 81% of the total two wheelers sold. Although economic growth remained decent at 7%, lack of financing, especially in the semi urban and rural areas impeded volume growth. Also, as a result of credit squeeze, motorcycle sales were driven largely by growth in cash sales. The scooters (geared & ungeared) improved their sales considerably, largely due to improved performance of the ungeared scooter segment. The 3-wheeler segment performed poorly as overall volumes (domestic and exports) declined 2% YoY, led by 37% fall in goods carriers. The passenger segment on the other hand grew by 11%.
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The medium and heavy commercial vehicles (M/HCVs) segment saw its volumes drop by a huge 37%. This came on the back of 2% drop in volumes in the previous year, the industry’s first in seven years. High cost of borrowings and economic slowdown affected growth. LCVs on the other hand, outperformed their HCV peers as volumes declined at a lower rate of 8% but declined nevertheless. The growth in the segment was largely propelled by low tonnage vehicles of the likes of ‘Ace’, the sub one tonner from Tata Motors.
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The tractor industry stood fairly resilient in the face of a slowdown. Domestic volumes grew marginally during the year as opposed to a 2% drop in the previous year. After growing at a double-digit rate in FY08, sales of passenger vehicles declined by 1% in FY09, primarily due to unavailability of finance, and high interest rates and high fuel prices. Utility Vehicles suffered the most, declining by 8.2% as the ad-hoc duty imposed on this segment in July impacted sales.
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The government spending on infrastructure in roads and airports and higher GDP growth in the future will benefit the auto sector in general. We expect a slew of launches in the Segment 'B' and Segment 'C' of passenger cars. Utility vehicle segment is expected to grow at around 8% to 9% in the long-term.
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In the 2-wheeler segment, motorcycles are expected to witness a flurry of new model launches. Though the market size is expected to grow by 10% to 12%, competitive pressure could keep prices and margins under control. TVS, Honda and Hero Honda are poised to benefit from higher demand for ungeared scooters in the urban and rural markets.
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Riding the wave of structural changes taking place in the country, the tractor industry has registered growth for three consecutive years until FY08. However, while fiscal FY08 saw volumes drop marginally, the same inched back into positive territory, witnessing a growth of 1%. While good monsoon is a positive for the sector, given the fact that the country has had erratic rainfall in the past, there is a risk of further fall in demand if rain gods play spoilsport. But the longer-term picture is impressive in light of poor mechanisation levels in the country’s farm sector and the thrust of the government on improving the rural infrastructure.
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With an estimated 40% of CVs plying on the roads 10 years old, demand for HCVs is expected to grow by 7% to 8% over the long term. While the industry is going through cyclical hiccups currently, we expect this factor to weaken in the future on account of strong structural tailwinds. The privatisation of select state transport undertakings bodes well for the bus segment.
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