<India> Sector analysis- Two Wheelers (Motor Cycles & Scooters)
Stock Quote Feb.15,99
Company closing price
HeroHonda EQ N Rs.665.00
TVS Suzuki EQ N Rs.483.00
Bajaj EQ N Rs.525.00
LML EQ N Rs. 71.70
Eicher EQ N Rs. 32.00
Two wheelers
India, with sales of over 3 million two wheelers in FY98, is the second largest market for two wheelers after China. India along with China accounts for around 50% of the global demand for two wheelers. This has been the most outstanding segment of the Indian automobile sector, providing the silver lining in an otherwise gloomy scenario. The segment has consistently posted a strong, but declining growth rate through the past three years. During FY98, sales of two wheelers increased by 3%.
Population of two-wheeler vehicles in India at the end of FY98 was in the region of 26 million. Given an estimated 175 million households in the country, this amounts to a penetration rate of approx. 15%.
Structure
This two wheeler market can be segregated into three segments:
Scooters
Motorcycles
Mopeds
There are in all, eleven companies operating in this market - seven companies in scooters, six in motorcycles and five in mopeds. Only two companies viz., Bajaj Auto and TVS Suzuki have a presence in all three segments.
Significant attributes for determining product segmentation in the two wheeler market include, price, fuel efficiency, maintenance costs, power, load carrying capacity and versatility as a luggage carrier, manoeuverability, durability, sturdiness, after-sales service, design and styling.
The drivers for two wheeler sales are;
A desire for cost effective personal transport
A rise in per capita and disposable incomes
Easy availability of finance
Increasing urbanisation
Low pricing policies
Improvement in products and technology
Replacement of old two wheelers (i.e. more than 10 years old)
Of the above, an increase in per capita income level of households is the key driver of long term demand for two wheelers. The buoyant GDP growth witnessed during the latter half of eighties and mid nineties supported an increase in per capita income and growth of the two wheeler segment.
According to a NCAER study on Indian market demographics, between FY88 and FY94, the number of households in the top two high income categories went up from 4.0 million to 10.1 million. The NCAER survey indicated that the rural share in purchase of scooters and motorcycles rose during the early nineties. Rural share in scooter purchase hovers between 25% to 30%, while the share for motorcycle purchase is much higher at 50% to 55%.
The growth in the motorcycle segment in the rural area is supported by the rising prosperity of the upper income strata of rural society. Regular increases in the support prices of agricultural products, tax free income at higher income levels and a relatively lower cost of living in the village left higher disposable income in the hands of people at mid and upper income levels.
Moreover, finance companies of late, have started catering to this segment of the population, which in their view is very lucrative.
Also two-wheeler price rises have been moderate, over the last few years. Moreover, financing for purchase of two-wheeler vehicles have become affordable for the urban as well as the rural middle-lower income consumer, as finance, organised as well unorganised, is easily available.
Over the past few years with the rise in competition, manufacturers have increased prices in line with increasing costs. Even when demand has been strong, manufacturers have raised prices in proportion with the increase in costs. Most of the time the price rises have been at a level lower than the rate of inflation.
Scooters
Scooters account for the largest chunk of the two wheeler market. They are portrayed, and hence perceived as a 'family' vehicle. Scooters are also relatively more comfortable than motorcycles. They are largely urban products. However, for the past three years, popularity of scooters has been waning, with its share declining from 48% in FY94 to 42% in FY98.
Indian scooters are the cheapest in the world. Even Japanese and Italian producers despite their efficiency and technological excellence can not match Indian manufacturers in producing cheaper models. Therein lies tremendous potential for exports of scooters.
Close to 70% of domestic scooter sales is accounted for by customers interested in a 'value for money' product. They are unwilling to pay more for features that do not significantly enhance vehicular performance. Scooter retail prices range between Rs 27,000 to Rs 35,000.
The main impetus for sales growth of scooters will come from lower-middle and middle-income groups. However, since the last 2-3 years scooters have witnessed an erosion in their share of the two wheeler market by motorcycles. At the same time with the price difference between scooters and mopeds gradually declining, there has been a shift in demand from the latter to the former.
Bajaj Auto enjoys the lion's share of the scooter market with a 61% market share. The company is the largest producer of two wheelers in the world. However, for the past few years it has faced stiff competition from other producers like LML and has seen its market share decline considerably.
Motorcycles
At 37%, motorcycles account for the second largest share of the two wheeler market. Motorcycles are positioned by most producers as a lifestyle product. More and more consumers see it as an attractive alternative to the scooter, more so the youth. And this accounts for the increasing popularity of motorcycles. Since FY92, share of motorcycles as a percentage of the two wheeler market has risen from 27% to 37% to FY98. This growth has come mostly at the expense of scooters.
Motorcycles are more popular in western India (approx. 46% sales) and southern India (approx. 28%). It is not a very popular mode of transport in the northern parts of the country accounting for only 11% sales. Motorcycle retail prices range between Rs 43,000 to Rs 51,000.
Demand for motorcycles will come mostly from middle and upper-middle income levels. The emergence of a strong semi-urban and rural market implies high potential for motorcycles. In FY98, around 60% of motorcycles are estimated to be sold in rural and semi-urban areas. By FY2000, motorcycles are projected to corner 39% of the market. Again most of this growth will come at the expense of scooters.
Hero Honda with a 36% market share and Bajaj Auto (28%) dominate the motorcycle market
Mopeds
Two wheelers of 75 cc and below, constitute the Mopeds segment of the two wheeler market. At 21%, it accounts for the smallest segment of the two wheeler market.
In urban areas, mopeds are mainly targeted as a woman's personal vehicle. Mopeds find little use in rural areas, except in the southern parts of the country. Scooterettes are a relatively recent introduction in the country, and combine features of a moped and a scooter. Moped and scooterettes prices range between Rs 15,000 to Rs 21,000.
In the recent past, Mopeds have seen their market share dwindle considerably. This is indicative of its diminishing significance vis-à-vis scooters and motorcycles. This slippage to an extent reflects the stiffer competition from low-cost products like Bajaj Auto's M80. Moreover, wider availability of credit has also reduced buyers' resistance to purchasing slightly higher priced products. In fact, there is likely to be further erosion from the current level to around 18% by FY2000.
TVS Suzuki dominates the Mopeds market with a 36% share followed by Kinetic Engg. (22%) and Majestic Auto (22%).
The main entry barrier for setting up two-wheeler manufacturing unit is technology. The large global manufacturers, Suzuki, Piaggio and Honda are already present in the country through JVs. Hence this segment is unlikely to witness any more competition from other manufacturers.
The next 2-3 years are likely to witness a spate of launches, mostly of the four-stroke variant. The importance of the four-stroke technology lies in its ability to meet the stringent exhaust emission norms by the year 2000 and its ability to provide high fuel efficiency. This will prove to be key competitive strength for manufacturers in the future.
At present only Hero Honda's products meet the current 2000 emission norms. All other manufacturers claim that they will upgrade their products or supply catalytic converters to meet the norms. Catalytic converters cost approx. Rs 2,000 and need to be replaced after every 8,000 to 10,000 kms. Catalytic converters are therefore an expensive proposition, and a technology upgrade seems to be the only feasible option, at least in the long term. The ability to comply with the emission norms will be the single largest issue that will affect the two-wheeler segment over the next 12-15 months.
The current slowdown in the last two years, has had mixed results for the two-wheeler segment. Urban demand for two-wheelers has declined, however, rural demand continues to remain strong. Over the next couple years also, rural demand is expected to be stronger than urban demand, with the motorcycles segment leading the spurt in growth.
Outlook
As this segment matures, there is a perceptible shift from a buyers market to a sellers market. Manufacturers will have to be competitive on various fronts viz., pricing, technology, product design, productivity, after sale service, marketing and distribution. In the short term, market shares of individual manufacturers are going to be sensitive to capacity, product acceptance, pricing and competitive pressures from other manufacturers.
All three segments, motorcycles, scooters and mopeds, will witness new capacities over the next 2 years. Over this period, only the motorcycle segment is expected witness higher demand vis-à-vis supply, while the scooters and mopeds supply will outstrip demand. With practically all manufacturers looking to increase capacities this sector will get very competitive.
Two-wheeler penetration is expected to increase to approx. 18% by 2000 (currently 15%), and more than 25% by 2005. Taking into consideration fresh demand coupled with replacement demand, the two-wheeler sector is likely to witness CAGR of 10% to 12% over the next 5-7 years.
(Courtsey:EquityMaster-India) |
