The Indian automotive industry consists of five segments: commercial vehicles; multi-utility vehicles & passenger cars; two-wheelers; three-wheelers; and tractors. With 7,822,963 units sold in the domestic market and 753,591 units exported during the first nine months of FY2007, the industry (excluding tractors) marked a growth of 43% over the corresponding previous. The two-wheeler sales have witnessed a spectacular growth trend since the mid nineties. India is the second largest producer and manufacturer of twowheelers in the world. Indian two-wheeler industry has got spectacular growth in the last few years. Indian two-wheeler industry had a small beginning in the early 50's. The Automobile Products of India (API) started manufacturing scooters in the country. Bikes are a major segment of Indian two wheeler industry, the other two being scooters and mopeds. Indian companies are among the largest two-wheeler manufacturers in the world. Hero Honda and Bajaj Auto are two of the Indian companies that top the list of world companies manufacturing twowheelers. The two-wheeler market was opened to foreign companies in the mid 1980s. The openness of Indian market to foreign companies lead to the arrival of new models of two-wheelers into India. Easy availability of loans from the banks, relatively low rate of interest and the discount of prices offered by the dealers and manufacturers lead to the increasing demand for two-wheeler vehicles in India. This lead to the strong growth of Indian automobile industry.

HISTORY motorcycles have made their debut around the 1950s; this section looks at the two wheelers which have over the years caught the imagination of country. It was in the year 1954 that the Indian government ordered for total number of 800 motorcycles to man the Pakistani borders. In came the Bullets which were initially launched in England as a 350cc bike and it was upgraded to 500cc a year or so later. These bikes have remained unaltered, barring some cosmetic changes which have undergone over the years. Thus one can

say without much of a doubt that the 1955 Bullet was one of the initial hits of the Indian two-wheeler industry and till today it continues to be a darling of the motorcycle enthusiasts. Enfield Bullet had a close competition with another sturdy bike named Rajdoot; as the bike was strong enough to handle the rough Indian roads. The company had roped in Indian Heman Dharmendra for the promotion of the bike. With more than 1.6 million vehicles on the road the Rajdoot motorcycle was one of the initial hits of the earlier years of two-wheeler history in the country. When heavy motorcycles were the order of the day, a relatively lighter bike had caught on the imagination of the Indian two wheeler user. Ind- Suzukia bike launched by the then TVS Suzukigroup was an instant hit; however the bike could not sustain it's initial success due to the high import content in the vehicle and less of localization. In scooters Bajaj Chetak has been hugely responsible for adding momentum to the transport system of the country, till today it remains one of the most successful brands to have

come out of the Bajaj stable. The scooter is named after the horse of legendary Rana Pratap Singh. These sets of two wheels have become a part of the Indian milieu and are often considered a representative of the Indian middle class aspiration. Very few two-wheelers have been able to emulate the success, which Bajaj Chetak has achieved over the years. Similarly LML Motors enjoyed a reasonable success with the launch of LML Select which came with new age technology and improved performance. Today newer models of two-wheeler are entering the market everyday, slowly pushing these names down the memory lane. However names like Chetak, Rajdoot and Bullet will always find a mention in the history of two-wheelers in the country.

Two-wheelers: Market Size & Growth In terms of volume, 7,613,436 units of two-wheelers were sold in the country in FY2005 with 456,765 units exported. The total two-wheeler sales of the Indian industry accounted for around 87.5% of the total vehicles sold in the period mentioned. After facing its worst recession during the early 1990s, the industry bounced back with a 25% increase in volume sales in FY1995. However, the momentum could not be sustained and sales growth dipped to 20% in FY1996 and further down to 12% in FY1997. The economic slowdown in FY1998 took a heavy toll of two-wheeler sales, with the year-on-year sales (volume) growth rate declining to 3% that year. However, sales picked up thereafter mainly on the strength of an increase in the disposable income of middle-income salaried people (following the implementation of the Fifth Pay Commission's

recommendations), higher access to relatively inexpensive financing, and increasing availability of fuel efficient twowheeler models. Nevertheless, this phenomenon proved shortlived and the two-wheeler sales declined marginally in FY2001. This was followed by a revival in sales growth for the industry in FY2002. Although, the overall two-wheeler sales increased in FY2002, the scooter and moped segments faced de-growth. FY2003 also witnessed a healthy growth in overall two-wheeler sales led by higher growth in motorcycles even as the sales of scooters and mopeds continued to decline. Healthy growth in two-wheeler sales during FY2004 was led by growth in motorcycles even as the scooters segment posted healthy growth while the mopeds continued to decline. The industry began to grow in a drastic way after FY2005 new technologies were introduced by Indian companies. Technologies were brought in from foreign companies. As a result technically efficient products were launched in the market. The demand for highly fuel efficient vehicles also increased. As a result competition between companies also started to tighten. After FY 2006 demand for scooters and mopeds were decreased. But the need for non gear scooters increased very much. In the year FY2007 the introduction of high CC bikes made a boom in the industry. In the current situation high CC bikes are becoming trendy and companies are competing each other to capture the market. Demand Drivers The demand for two-wheelers has been influenced by a number of factors over the past five years. The key demand drivers for the growth of the two-wheeler industry are as follows: ▪ Inadequate public transportation system, especially in the semi-urban and rural areas; ▪ Increased availability of cheap consumer financing in the past 3-4 years;

▪ Increasing availability of fuel-efficient and low-maintenance models; ▪ Increasing urbanisation, which creates a need for personal transportation; ▪ Changes in the demographic profile; ▪ Difference between two-wheeler and passenger car prices, which makes two-wheelers the entrylevel vehicle; ▪ Steady increase in per capita income over the past five years; and ▪ Increasing number of models with different features to satisfy diverse consumer needs. While the demand drivers listed here operate at the broad level, segmental demand is influenced by segment-specific factors. MARKET CHARACTERISTICS Demand Segmental Classification and Characteristics The three main product segments in the two-wheeler category are scooters, motorcycles and mopeds. However, in response to evolving demographics and various other factors, other subsegments emerged, viz. scooterettes, gearless scooters, and 4-stroke scooters. While the first two emerged as a response to demographic changes, the introduction of 4-stroke scooters has followed the imposition of stringent pollution control norms in the early 2000. Besides, these prominent subsegments, product groups within these sub-segments have gained importance in the recent years. Examples include 125cc motorcycles, 100-125 cc gearless scooters, etc. The characteristics of each of the three broad segments are discussed in Table 1.

Table 1 Two-Wheelers: Comparative Characteristics Scooter Price*(Rs. as in > 22,000 January 2005) Stroke Engine Capacity (cc) Ignition Engine Power (bhp) Weight (kg) 2-stroke, 4stroke 90-150 Motorcycle > 30,000 Mainly 4stroke 100, 125, > 125 Moped > 12,000

2-stroke 50, 60

Kick/Electronic Kick/Electronic Kick/Electronic 6.5-9 90-100 7-8 and above 2-3 > 100 60-70

Fuel Efficiency 50-75 (kms per litre) Load Carrying High





Segmental Market Share The Indian two-wheeler industry has undergone a significant change over the past 10 years with the preference changing from scooters and mopeds to motorcycles. The scooters segment was the largest till FY1998, accounting for around 42% of the two-wheeler sales (motorcycles and mopeds

accounted for 37% and 21 % of the market respectively, that year). However, the motorcycles segment that had witnessed high growth (since FY1994) became larger than the scooter segment in terms of market share for the first time in FY1999. Between FY1996 and 9MFY2005, the motorcycles segment more than doubled its share of the two-wheeler industry to 79% even as the market shares of scooters and mopeds stood lower at 16% and 5%, respectively. After FY 2005 the market share of motor bikes had a boom and the market share of motor bikes came to 86% and the scooters came to 12 % and the mopeds to 2%. The marketing pitch of scooters has typically emphasised reliability, price, comfort and utility across various applications. Motorcycles, on the other hand, have been traditionally positioned as vehicles of power and style, which are rugged and more durable. These features have now been complemented by the availability of new designs and technological innovations. Moreover, higher mileage offered by the executive and entry-level models has also attracted interest of two-wheeler customer. Given this market positioning of scooters and motorcycles, it is not surprising that the new set of customers has preferred motorcycles to scooters. With better ground clearance, larger wheels and better suspension offered by motorcycles, they are well positioned to capture the rising demand in rural areas where these characteristics matter most. Scooters are perceived to be family vehicles, which offer more functional value such as broader seat, bigger storage space and easier ride. However, with the second-hand car market developing, a preference for used cars to new two-wheelers among vehicle buyers cannot be ruled out. Nevertheless, the past few years have witnessed a shift in preference towards gearless scooters (that are popular among women) within the scooters segment. Motorcycles, offer higher fuel efficiency,

greater acceleration and more environment-friendliness. Given the declining difference in prices of scooters and motorcycles in the past few years, the preference has shifted towards motorcycles. Besides a change in demographic profile, technology and reduction in the price difference between motorcycles and scooters, another factor that has weighed in favour of motorcycles is the high re-sale value they offer. Thus, the customer is willing to pay an up-front premium while purchasing a motorcycle in exchange for lower maintenance and a relatively higher resale value.

Suppliers & Manufacturers As the following graph indicates, the Indian two-wheeler industry is highly concentrated, with three players-Hero Honda Motors Ltd (HHML), Bajaj Auto Ltd (Bajaj Auto) and TVS Motor Company Ltd (TVS) - accounting for over 80% of the industry sales as in 9MFY2005. The other key players in the twowheeler industry are Kinetic Motor Company Ltd (KMCL), Kinetic Engineering Ltd (KEL), LML Ltd (LML), Yamaha Motors India Ltd (Yamaha), Majestic Auto Ltd (Majestic Auto), Royal Enfield Ltd (REL) and Honda Motorcycle & Scooter India (P) Ltd (HMSI), Suzuki motors (P) Ltd. KEY PLAYERS IN THE MARKET BAJAJ AUTO LTD HERO HONDA CO. LTD


Technology Two-wheeler is one of the rare industries, which is capital as well as labor intensive. The setting up of a green field venture and ancillary network require enormous capital investment. The assembly operation is highly labor intensive. The capital requirement for a venture varies from segment to segment and based on amount of outsourcing. For eg setting up of 0.1mn capacity plant for manufacturing scooter requires approximately Rs1bn and motorcycles Rs1.7bn. Two-wheeler production entails an assembly of over 700 components, including those sourced from vendors / independent manufacturers(about 60-70%). In the press shop, sheet metal components like body frame, fuel tank, front fender and rear fender, muffler etc are pressed, welded, painted / plated in respective shops. In the engine plant, engine components (cast/ forged parts) are machined and assembled along-with other components. The engine is then transferred to the main plant and assembled with the body and bought out components. Due to the peculiar characteristic of high ancillarisation, balance sheet does not reveal the complete picture. The material cost which is understood as fully variable, has in-built

overheads of ancillaries. Typically, when volumes are expanding, raw material cost escalations are not passed on, as ancillaries are able to spread their overheads over larger volumes. Ancillaries add as much as 50-300% value on the basic raw material. While steel and aluminum account for 5% each, of the material cost, 60-70% of the cost is incurred on components sourced from outside. Engine is the heart of an automobile. The function of an automobile engine is to convert chemical energy of the fuel into mechanical energy, to power the vehicle. In the engine, petrol and air mixture is burnt from the spark ignited by a spark plug in a cylinder. The combustion builds up pressure, which pushes the piston. The reciprocal movement of the piston (riveted to a crankshaft) is converted in rotating motion. The power is transmitted from the crankshaft to the wheels by a mechanism of gears. The engines can be broadly classified as two and four stroke engines based on number of strokes used to produce a single power stoke. In a four-stroke engine - suction, compression, power and exhaust operations are carried out by four different strokes of the piston. Therefore four-stroke engine produces one power stoke out of every four strokes of the piston. In a two-stroke engine one power stroke is produced out of every two strokes of the piston. In a 2-stroke engine, during the emission of the exhaust gases, fresh fuel/air mixture comes from transfer port to the main cylinder. This leads to emission of some unburnt gasses along with exhaust gases leading to drop in fuel efficiency and increase in pollution through emission. However, a two-stroke engine generates twice as much power as four stroke, engine size and speed being the same. A four-stroke engine is heavier, complex in design and expensive. Gears determine the ratio between engine speed and wheel speed, using a mechanism of gear wheels of different diameters. In a geared drive, the driver manually shifts the

gears to change the torque supplied to the wheels. Whereas in a variometric drive, the torque is transmitted by a belt running between variable diameter pulleys, providing infinite number of gear ratios. Scooters originated in Italy and were designed for ladies, particularly nuns. It has no bar in the front and the engine and wheels are covered for the convenience of women riders. The scooter engine is shaft driven. In India, scooter manufacturing was started in 1972 by Bajaj Auto in collaboration with Piaggio, Italy. With the passage of time, scooters have taken considerable position in domestic transport as they are considered as rugged yet safe family vehicle. This perception was due to a larger board area, which can be used to carry groceries and a better carrying capacity, which helps in driving three adults on the vehicle. But the scooters suffered from poor aesthetics, low fuel efficiency and difficulty in driving. The introduction of ABS body along with variometric transmission by Kinetic Honda changed the perception leading to a shift in demand from moped users like youngsters and working women. Motorcycle - the name is evolved from motorised cycle. A motorcycle has an engine, wheels and chain exposed. Moreover, it is chain driven. Two-stroke motorcycles are positioned as power bikes by making use of their high power delivery to cater the young generation. Four-stroke motorcycle is positioned as fuel-efficient and environment friendly vehicle. The Indo-Japanese motorcycles have advantage of better fuel efficiency, more power, better road grip, low emissions and lightweight compared to scooters. Usually, motorcycles are the costliest among two-wheelers. Mopeds - the motorcycle with pedals is the entry level twowheeler. Mopeds are the cheapest category of two wheelers, having low power compared to scooters and motorcycles.

Mopeds are most popular amongst college students, ladies and low income house holds. These vehicles cost in the range of Rs12,000 and onwards. Mopeds are predominantly used for small distance transportation. Mopeds are also used as the second vehicle in the family along with car or scooter/motorcycle. Autorickshaw, as the name indicates is a motorised cycle rikshaw, a three-wheeler. The shortage of personal and mass commute transport in the country, easy maneuverability on narrow and crowded roads and low operation costs gave rise to exponential growth for three-wheeler industry in the country. Three-wheelers are also used as goods transport vehicles for small distance transportation within the city limits. The Indian three-wheeler industry is dominated with petrol engine vehicles. But the dominance was threatened to an extent with the introduction of diesel engines from Crompton Greaves, which provides a benefit of low operating cost. But higher vibration and maintenance cost lead to drop in sales of diesel engine three-wheelers. All the two-wheeler manufacturers are regulated by emission levels. INDUSTRY COMPARISON

According to the Society of Indian Automobile Manufacturers' latest data for May, two-wheeler sales during the month at 6.06 lakh units, dropped 9.88 per cent below the 6.73 lakh sold in the same month last year. Cumulative sales of two-wheeler at 11.77 lakh units during April-May 2007, too, were lower than the 12.79 lakh units of April-May 2006. The same story of declining sales has been seen in the case of medium and heavy commercial vehicles: 17,697 units in May (19,575 units) and 35,375 during April-May (37,688 units).

Within this segment, it is the sales of goods carriers that have really plunged to 14,993 in May (17,866) and 30,374 units in April-May(34,552). Roughly 70 per cent of two-wheeler and truck sales are financed. The rise in interest rates have clearly impacted these segments.

TRENDS IN THE TWO-WHEELER INDUSTRY Companies raising capacity to meet the growing demand All the major two-wheeler manufacturers, viz. Bajaj Auto, HHML, TYS, HMSI and others, have increased their manufacturing capacities in the recent past. The total capacity

of these players stood at 7.8 million units per annum (FY2007) as against total market sales of 3.8 million units in FY2006. Most of the players have either expanded capacity, or converted their existing capacities for scooters and mopeds into those for manufacturing motorcycles. The move has been prompted by the rapid growth reported by the motorcycles segment since FY1995. HHML increased the capacity of its plants from 1.8 million units in FY2003 to 2.25 million in FY2006 and has been able to achieve 92% capacity utilisation. In light of the increase in demand for motorcycles, the company plans to set up a new plant. Since its entry in the Indian market during FY2002, HMSI has aggressively expanded its capacity. Increasing focus on exports For the first nine months of FY2007, two-wheeler exports increased by 37% over the corresponding previous, led mainly by motorcycles even as exports of other two-wheelers were healthy. While motorcycle exports increased by 40%, scooter and moped exports increased by 29% and 27% respectively. Motorcycle exports by Bajaj Auto, HHML and TVS have reported a tobust growth in FY2008 and are expected to increase further in the medium term.

Two-Wheeler Exports from India (in numbers) CAGR 9 (FY200 MFY 2 2004 2005 2006 2007 7) 003 2008 Scooters 20,1 25,62 2833 3011 5314 88 5 2 6 8 Motorcyc 35,2 41,33 56,88 1261 1872 les 95 9 0 22 87 Mopeds Total 27,7 44,17 18,97 2333 2423 54 4 1 0 4 83,2 111,1 1041 1795 2646 37 38 83 68 69 27.4 51.4 -3.3 33.5 4483 2 1888 07 2273 9 2563 78 FY FY FY FY FY

RECENT DEVOLPMENTS The fanfare of biennial Auto Expo and the grand plans for new launches backed by handsome sales to start with were followed by pressures of rising input costs, lack of retail finance and a nosedive in demand--it was a roller-coaster ride for the twowheeler industry in 2008. The irony that encapsulated the sector was reflected in the fact that when all the manufacturers were crying hoarse about difficulties in selling products, sales during the JanuaryNovember actually grew. When some companies were finding it difficult to sell motorcycles in the price range of Rs 35,000 to Rs 65,000, some others thought of launching bikes priced around Rs 50 lakh. The year also saw the home grown companies seeking to assert themselves in terms of technological development, albeit it leading to a court battle over patent between Bajaj Auto Ltd and TVS Motor Co.On other hand, four-wheeler major Mahindra& Mahindra saw an opportunity to test waters in twowheeler space by forming a joint venture with Kinetic Motor.

Italian superbike maker Ducati's launch of a range of bikes, priced between Rs 15 lakh and Rs 50 lakh, and arrival of Suzuki's Hyabusa tagged at Rs 12.5 lakh were undoubtedly talking points, but the industry talk for most of the year revolved around sliding sales, triggered by high interest rates and lack of retail financing. The industry was unanimous that the decision by a majority of banks and financial institutions to either stay away from twowheeler financing or tighten the norms has resulted in slowdown in retail uptake, hurting the sector. Munjals-promoted Hero Group, better known for their twowheeler prowess, announced plans to foray into aviation sector with Rs 500-crore investment that will see it manufacturing of light sports aircraft and applications for aerospace, besides setting up aviation training institutes and colleges. As for the country's biggest two-wheeler maker Hero Honda Motors, 2008 was a year that it will look back with a sense of satisfaction on being able to not only withstand the intense pressure of market slump but also expand its market share. The company announced in the beginning of the year that it would launch 12 models in 18 months, and commissioned its third facility at Haridwar, which has a capacity of producing 10 lakh units a year. While Hero Honda was busy planning to strengthen its position, its rivals Bajaj Auto and TVS Motor had to fight it out, literally in the courts carrying over last year';s legal battle over usage of twin spark plug technology. Bajaj Auto had accused TVS of violating its patent of twin spark technology, which the latter had planned to use in its 125 cc bike'Flame'. After doing rounds of various courts and defamation suits, TVS had to launch a modified single spark ignition engine-based'Flame'.

A corporate battle was also seen in the electric vehicle segment with Hero Group and Ultra Motors breaking off their joint venture and deciding to walk separate ways. On the contrary, Mahindra& Mahindra announced its entry into the two-wheeler segment by forming a joint venture with Kinetic Motor Company (KMC)in which it held 80 per cent stake. M&M had bought operating assets of KMC for Rs 120 crore.

Fiscal Policy The Union Budget for 2001-02 had lowered the excise duty on two-wheelers (with engine capacity in excess of 75 cc) from 24% to 16%. The manufacturers responded to this by passing on a relatively large part of the excise cut to customers. The Union Budget thereafter have left the excise duty on twowheelers unchanged. But the Union Budget 2007-08 provides for a weighted deduction of 150% for investments in R&D. This may facilitate increasing R&D allocations and allow for improvement in the technical as well as product development skills of the Indian companies. Indian Auto Policy 2002 The Government of India approved a comprehensive automotive policy in March 2002, the main proposals of which are as under: Foreign direct investment : Automatic approval is proposed to be granted to foreign equity investment up to 100% for manufacture of automobiles and components. Import tariff : Import tariffs are proposed to be fixed at a level such that they facilitate the development of manufacturing capabilities as opposed to mere assembly.

Incentives for R&D : The weighted average tax deduction under the Income Tax Act, 1961 for automotive companies is proposed to be increased from current level of 125% (The weighted average deduction for R&D was increased to 150% in the Union Budget 2007-08). Further, the policy proposes to include vehicle manufacturers for a rebate on the applicable excise duty for every 1% of the gross turnover of the company expended during the year on R&D. Environmental aspects : Adequate fiscal incentives are proposed to promote the use of low-emission auto fuel technology (in line with the Auto Fuel Policy). The auto policy states the Government's intent to align domestic policy with the international practice of imposing higher road tax on old vehicles so as to discourage their use.

TWO WHEELER SALES Two-wheeler sales ended the financial year with a bang with the three biggest industry players — Hero Honda, Bajaj Auto and TVS Motors whose combined marketshare exceeds 85% — recording double digit growth in March, finishing 2005-06 at a record high. Other industry players like Honda Motorcycles, Kinetic and LML are still to declare their numbers. New model launches, booming economy, strong GDP growth, easy availability of finance and oil price hikes which pushed the buying population towards fuel efficient modes of commuting saw the industry continue its growth momentum of the past couple of years. Industry No 2 Bajaj Auto registered the fastest growth among the big three at 26%. In fiscal 2005-06, it recorded sales of 20.2 lakh units, against 16.04 lakh units the previous year. Motorcycles were the main growth drivers for the company with category bestsellers like the CT100 and Pulsar pushing growth

32% from 19.12 lakh motorcycles to 14.5 lakh units, easily the highest growth in the industry. In comparison, market leader Hero Honda grew 14.59% as its sales crossed 30 lakh units for the first time, up from 26. 2 lakh units sold in 2004-05. Its growth was led by new models like the Pleasure scooter, Achiever and Super Splendor motorcycle. TVS Motors registered 15% growth in two-wheeler sales clocking 13.42 lakh units in 2005-06 as against 11.67 vehicles in 2004-05. Launch of new models like the Apache, Star and new variants of existing models like Victor saw motorcycles push growth for the company with sales of 8.06 lakh units for 2007-08 as against 6.79 lakh units in 2005-06.

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