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Two-wheelers: Transition all the way - Views on News from Equitymaster
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  • Dec 29, 2001

    Two-wheelers: Transition all the way

    It is a well-known fact that the domestic two-wheeler industry is in a transition phase. If recent trend is any indication, in the hierarchy of customer preferences, the ‘boxy’ scooters and ‘steely’ mopeds are losing ground to ‘sleeky and power-packed’ motorcycles. And the change is apparent. Here in this article we take a brief look at the transition in the Indian two-wheeler industry and how domestic majors are gearing up to cope up with competition and changing consumer preferences.

    First a brief look at the Indian two-wheeler industry. In FY94, scooter segment accounted for as high as 48% share of total two-wheeler volumes. This has been gradually and steadily on the decline since then. On the other hand, motorcycle sales as a percentage of total two-wheeler industry volumes has touched 57% in FY01 as compared to 29% in FY94. The transition happened at such a rapid pace that barring Hero Honda, others major players like Bajaj Auto, TVS Suzuki and LML were caught napping. The decline was more pronounced in FY01, when scooter sales fell by a sharp 29%. Apart from changing aspirations of consumers, sales tax rationalisation in Budget 2001 resulted in a sharp fall in geared scooter sales in FY01. This effectively increased duties on geared scooters in the Western region, which accounts for a key portion of industry volumes. Added to the woes, environmental norms also became stringent forcing manufacturers to install catalytic converters. This added to the costs of scooters in FY01.

    And the trend continued in the first half of the current fiscal as well. While moped and scooter sales continue to languish, motorcycle production and sales were up by around 20% and 25% respectively in 1HFY02. Hero Honda once again extended its lead in the motorcycle segment by registering a 33% growth in sales in 1HFY02. Sale of motorcycles for Bajaj Auto and TVS were up 14% and 1% respectively during the same period.

    Even within the scooter segment, the ungeared scooter segment comprising models like ‘Bajaj Sunny’ and ‘TVS Scooty’ grew by around 8% in FY01. The buying interest also seems to changing in the lower end of the industry as well. Slowly moped buyers are shifting to ungeared scooter segment, as scooterettes are available at a marginal premium to mopeds. In the motorcycle segment, the 100 cc category accounts for a significant portion of volumes. But after the stellar performance of Hero Honda’s ‘CBZ’, all major players have introduced models in the 110 cc to 180 cc category. And the response has been remarkable.

    Recognizing the growth prospects of motorcycle industry, domestic majors are aggressively ramping up capacity. Hero Honda has plans to increase capacity to around 1.5 m per annum by FY02 from 1 m per annum in FY01, TVS is increasing capacity to 600,000 units per annum (350,000) and Bajaj Auto’s manufacturing capacity is expected to touch 720,000 per annum. Against the current average volume of around 60,000 units per month, Bajaj Auto has plans to increase motorcycle volumes by around 0.1 m units per month by FY03. Apart from the major players, there are other smaller players like Yamaha and LML who also have big capacity expansion plans for motorcycles.

    But the latest buzzword in the Indian two-wheeler segment is transition. Not surprisingly, the 2000 management discussion and analysis of Bajaj Auto concentrated on ‘change’. The process of transition does not only end in gaining market share but also in becoming more competitive (cost-wise as well as product-wise), innovative and global. Already companies led by Bajaj Auto along with its technology partner Kawasaki have plans to manufacture a ‘world bike’ wherein the Indian manufacturing unit would act as a global export base. Exports are one area where Indian manufacturers have failed to concentrate hitherto. If Honda Motors intends to use India as one of its global export base, why not Indian companies do the same?

        Exports: Long way to go…
    (Rs m) FY00 FY01
    Hero Honda 322 396
    % of sales 1.4% 1.2%
    Bajaj Auto 1,378 1,351
    % of sales 4.4% 4.5%
    TVS 164 159
    % of sales 1.1% 0.9%

    On the competitiveness front, though imports have not made any significant impact on Indian manufacturers in the last one-year, one is sure that imports are going to cheaper as India moves in line with WTO norms. Following the lobbying by the domestic two-wheeler majors, the government hiked the customs duty on two-wheelers from 35% to 60% in FY01. The effective duty on an imported CBU will now be in the range of approximately 95% (excluding distribution charges). Though this would give some breather space for the domestic majors, this will not totally protect the industry from cheaper Chinese imports.

    Be it under-invoicing or imports through semi/completely knocked down units, domestic manufacturers have to contend with imports at some point of time. So becoming competitive, on a global scale, is inevitable. If domestic players view this as just a compulsion and not an on-going process, then they might bite the dust at some point of time in the near future. The value engineering initiatives taken by two-wheeler majors to increase production rates and per-capita output are a step in this direction.

    At the same time, some domestic majors have to be credited for development of in-house models. Bajaj Auto’s ‘Pulsar’ and TVS’s ‘Victor’ are indigenously developed models without any sort of assistance from multinational majors. This is a big leap forward for Indian manufacturers and a welcome sign not only for the auto industry but also for Corporate India as a whole. Instead of sourcing technology, which hitherto we were expert at, we are now capable of developing technology indigenously and successfully. This in itself is a sea change in mindset. One only hopes that the domestic majors would continue to channel more funds towards research and development, which is one of the key determinants of survival in the long run.



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