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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 lot of 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 incremental unit comes down when demand recovers. 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 7.9 m two-wheelers were sold in India in FY07, growth of 11% over the previous year. Traditionally, volumes remain low during the first half of the year and pick up in the second half with the onset of festive season. Motorcycles accounted for 83% of the total two wheelers sold. Strong economic growth and attractive finance schemes continued to drive volumes. The motorcycle segment continued to eat into the market share of geared scooters, mopeds and step-thrus. This segment registered a growth of 13%. The scooters (geared & ungeared) improved by 4% largely due to improved performance of the ungeared scooter segment. Mopeds and step-thrus too registered an impressive 7% increase in sales. Manufacturers continued to shift focus from this segment, realising its limited growth potential. The 3-wheeler segment clocked an impressive growth of 12% backed by 14% rise in demand for goods carrier. The passenger segment on the other hand grew by 11%.
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The medium and heavy commercial vehicles (M/HCVs) grew by an impressive 33%. For the sixth year in a row, this segment notched up robust growth in volumes, led by multi-axle vehicles, tractor-trailers and tippers. Availability of freight and low cost retail finance continued to fuel growth. LCVs on the other hand, outperformed their HCV peers marginally as volumes grew 34%. The growth in the segment was largely propelled by ‘Ace’, the sub one tonner from Tata Motors, whose volumes stood at nearly 75,000 units.
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The tractor industry registered a growth of 17% YoY. Riding on the wave of structural changes, the industry continued on the growth path during the year. Favorable monsoon, higher farm support prices and greater disbursal of micro finance loans drove tractor sales in the country. The utility and multi-purpose vehicles combined registered a 16% growth. After growing at a single-digit rate in FY06, sales of passenger vehicles grew at a more aggressive rate in FY07. Passenger car demand grew by a delectable 22%, once again led by 31% growth in the B-segment. However, A-segment sales (Maruti 800) continued to decline due to shift in preference towards the B-segment.
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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 6% to 8% 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. Bajaj has also re-entered this segment with superior technology products, and to that extent, competition is likely to increase.
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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. This was after three years in the wilderness. 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 fall in the demand due to a bad monsoon. 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 6% to 8% from FY08 onwards. Also adding to the positives are higher crop output, industrial sector growth and favorable interest rate environment. While the industry is cyclical in nature, we expect this factor to weaken in the medium term arising out of structural changes in the industry. The privatisation of select state transport undertakings and hiking of bus fares bodes well for the bus segment.
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