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Automobile Industry Two WheelersDRIVERS Report

2010

Anip A. Shah Flame School of Business 11/13/2010

Two Wheeler Industry 2

Sr. No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Particulars Two wheeler Industry Intro & Growth Key Drivers of the Indian Two Wheelers Industry Present and Future Trends Contribution of the automotive industry to the economy Two-Wheeler sales at a glance& Market share Production trends Challenges in the Indian automotive industry Human resource development Sentiments of the Indian vehicle buyer Technical Regulations Income estimates Segmentation, Pricing Strategies of major players Critical Success factors of major players TRENDS IN TWO WHEELER INDUSTRY Growth drivers for the Indian automotive industry Government regulations & policy India Advantage and business opportunities SWOT Analysis New Segment Opportunities E Bikes

Page No. 3 6 8 17 19 28 30 34 38 40 44 47 48 51 56 58 62 63 65

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Growth of Two Wheeler IndustryTwo-wheeler segment is one of the most important components of the automobile sector that has undergone significant changes due to shift in policy environment. The two-wheeler industry has been in existence in the country since 1955. It consists of three segments viz. scooters, motorcycles and mopeds. According to the figures published by SIAM, the share of two-wheelers in automobile sector in terms of units sold was about 80 per cent during 200304. This high figure itself is suggestive of the importance of the sector. In the initial years, entry of firms, capacity expansion, choice of products including capacity mix and technology, all critical areas of functioning of an industry, were effectively controlled by the State machinery. The lapses in the system had invited fresh policy options that came into being in late sixties. Amongst these policies, Monopolies and Restrictive Trade Practices (MRTP) and Foreign Exchange Regulation Act (FERA) were aimed at regulating monopoly and foreign investment respectively. This controlling mechanism over the industry resulted in: (a) several firms operating below minimum scale of efficiency; (b) under-utilisation of capacity; and (c) usage of outdated technology. Recognition of the damaging effects of licensing and fettering policies led to initiation of reforms which ultimately took more prominent shape with the introduction of the New Economic Policy in 1985. However, the major set of reforms was launched in the year 1991 in response to the major macroeconomic crisis faced by the economy. The industrial policies shifted from a regime of regulation and tight control to a more liberalised and competitive era. Two major results of policy changes during these years in two-wheeler industry were that the, weaker players died out giving way to the new entrants and superior products and a sizeable increase in number of brands entered the market that compelled the firms to compete on the basis of product attributes. Finally, the two-wheeler industry in the country has been able to witness a proliferation of brands with introduction of new technology as well as increase in number of players. However, with various policy measures undertaken in order to increase the competition, though the degree of concentration has been lessened over time, deregulation of the industry has not really resulted in higher level of competition. Indian two wheeler contributes the largest volumes amongst all the segments in automobile industry. Though the segment can be broadly categorized into 3 sub-segments viz.; scooters, motorcycles and mopeds; some categoriesTwo Wheeler Industry 4

introduced in the market are a combination of two or more segments e.g. scooterettes and step-thru's . In the last four to five years, the two-wheeler market has witnessed a marked shift towards motorcycles at the expense of scooters. In the rural areas, consumers have come to prefer sturdier bikes to withstand the bad road conditions. In the process the share of motorcycle segment has grown from 48% to 58%, the share of scooters declined drastically from 33% to 25% , while that of mopeds declined by 2% from 19% to 17% during the year 2000-01. The Euro emission norms effective from April 2000 led to the existing players in the two- stroke segment to install catalytic converters. Excise duty on motorcycles has been reduced from 32% to 24%, resulting in price reduction, which has aided in propelling the demand for motorcycles. The competition has strengthened though there are hardly any new entrants into the industry. There is an increasing emphasis on price and this has led to cost cutting efforts all across the industry, thereby, making the customer an ultimate beneficiary. The trend also saw introduction of new motorcycles with capacity ranging from 100 to 180cc bikes. We anticipate that many more new models will be launched during the year and provide customers plenty of choice at competitive prices. Two wheelers in India are the second largest producer and manufacturer of two-wheelers in the world. It stands next only to Japan and China in terms of the number of two-wheelers produced and domestic sales respectively. Indian two-wheeler industry has got spectacular growth in the last few years. The two-wheeler market was opened to foreign competition in the mid-80s. And the then market leaders - Escorts and Enfield - were caught unaware by the onslaught of the 100cc bikes of the four Indo-Japanese joint ventures. With the availability of fuel efficient low power bikes, demand swelled, resulting in Hero Honda - then the only producer of four stroke bikes (100cc category), gaining a top slot. The first Japanese motorcycles were introduced in the early eighties. TVS Suzuki and Hero Honda brought in the first two-stroke and four-stroke engine motorcycles respectively. These two players initially started with assembly of CKD kits, and later on progressed to indigenous manufacturing. In the 90s the major growth for motorcycle segment was brought in by Japanese motorcycles, which grew at a rate of nearly 25% CAGR in the last five years.

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In 1990, the entire automobile industry saw a drastic fall in demand. This resulted in a decline of 15% in 1991 and 8% in 1992, resulting in a production loss of 0.4mn vehicles. Barring Hero Honda, all the major producers suffered from recession in FY93 and FY94. Hero Honda showed a marginal decline in 1992. The reasons for recession in the sector were the incessant rise in fuel prices, high input costs and reduced purchasing power due to significant rise in general price level and credit crunch in consumer financing. Factors like increased production in 1992, due to new entrants coupled with the recession in the industry resulted in company either reporting losses or a fall in profits.

Promising growth of the two-wheeler segment in India two-wheeler sales have grown at a CAGR of 11 per cent over the last decade and are expected to maintain strong growth rates as more and more people rise from poverty in India. Most of the population lives in rural and semi-urban areas where most people use cycles as a mode of transport. So when income levels increase in those areas, the first vehicle purchased is the two-wheeler. Hence, at its current growth rate, with increasing incomes, the number of two-wheelers being purchased will increase manifold. Rapid urbanization of semi-urban and rural areas, easy availability of finance, and new innovations in manufacturing of two-wheelers is resulting in a large number of new models being introduced each year, which will facilitate growth in this segment. Production trends show maximum growth in the motorcycles sub-segment Between the years 20052006 and 20062007, production of scooters has decreased whereas production of motorcycles has increased. In fact, motorcycles make up 84 per cent of twowheeler production and have displayed the highest increase in growth rates. There have been no changes in the production figures of mopeds and production of electric two-wheelers has begun recently in India. The auto component industry has come of age and now forms an important component of the Indian economy. In recent years, it has grown more impressively, fetch double digit growth.Two Wheeler Industry 6

More interestingly, it has captured attention as well as business from leading auto makers of the world. The industry plays a crucial role in the automobile sector. Manufacturing vehicles typically involve assembling a large number of components out-sourced from number of ancillaries or component manufacturers. Competitiveness with quality as a theme has been the watchword for the Indian industry and especially the auto component industry ever since the Indian economy was opened up to the world in the early 1990s. While economic revival, lower interest rates and better road infrastructure are driving domestic demand for automobiles and, therefore, components, increasing outsourcing by global automobile majors is creating a huge export opportunity for Indian component manufacturers.

Growth Prospects and Key Drivers of the Indian Two Wheelers Industry

The growth witnessed by the Indian two wheeler industry indicates the growing demand for low cost personal transportation solutions amongst the 300 million Indian middle class consumers. Despite this spectacular growth rate, the two wheeler penetration (number of two wheelers per 1000 inhabitants) in India remains lower than other Asian countries. This fact provides an opportunity for continued growth in the market. India has the lowest Penetration of two wheelers as compared to countries like Taiwan, Thailand, Malaysia, Vietnam, Indonesia and China. In the present scenario, growth in the two wheeler industry will be driven by several factors:

Rise in Indias Young Working Population With the rising le