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Hike in duty to benefit two wheelers? - Views on News from Equitymaster
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  • Apr 26, 2001

    Hike in duty to benefit two wheelers?

    The government's decision to hike the customs duty on two wheeler CBU's from 35% to 60%, is a welcome move for two wheeler companies in India. These companies have been lobbying with the government as they were not happy with a 35% customs duty on new two wheeler imports mainly due to the threat from cheaper Chinese imports.

    The major sector in two wheelers to benefit is going to be the motorcycle industry. The reason being that it contributes to 56% of total two wheeler demand and is the fastest growing segment of the two wheeler market. In the past five years volumes in this segment have grown by 176%. Scooters have been out of favour for some time now due to change in consumer preferences towards motorcycles. Hence the threat of imports was mainly focused on the motorcycle segment.

    Hero Honda, which currently manufactures only motorcycles is going to be a beneficiary of this increase in duty. Bajaj Auto too will benefit from this move, as its share in the motorcycle market has gone up. As Bajaj Auto's products are priced lower as compared to Hero Honda's the price difference between their motorcycles and Chinese counterparts will now only be marginally different after this hike in import duty. This will be beneficial for Bajaj, as it will gain from a strong distribution network and after sales services which Chinese products lack.

    The effective duty on an imported CBU will now be in the range of approximately 95% (excluding distribution charges). However this will not totally protect the industry from cheaper Chinese imports. It will protect companies like Hero Honda, Bajaj Auto and TVS Suzuki only to some extent.

    The reason being that a 100-125 cc bike from China, which on average costs Rs 15,000 - Rs 16,000 adding 60% customs duty and other duties the landed cost works out to approximately Rs 29,000-Rs 31,000. This is still cheaper than Hero Honda's 100 cc models which are close to Rs 40,000 and more. However, Bajaj Auto's products are priced lower and hence it will benefit to a larger extent.

    The consolation for domestic companies is that they have a strong brand image in the Indian market, coupled with a large distribution network and rural penetration, unlike most Chinese bikes available in the market currently. The fear of Chinese motorcycles flooding the Indian market however is still not totally done away with, as they may bring in cheaper products to counter the domestic competition and hence capture market share through their price advantage. They have done this in Indonesia.

    The prospects for the motorcycle industry do not look bright in the current year as higher competition in the domestic industry is going to affect volumes of existing manufacturers. TVS Suzuki, Bajaj Auto, LML, and Kinetic are planning to come out with new models in the 4 stroke 100 cc segment, which is market leader Hero Honda's forte.

    The slowdown in agriculture in FY01, has resulted in lower demand for two wheelers in the past couple of months. The government needs to take up efforts towards the agricultural sector in a bid to increase demand over the next couple of years. It also needs to keep an eye on imports and propose an anti-dumping duty if required.



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