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ACOMPREHENSIVE PROJECT 1
Entitled On
AUTOMOBILE INDUSTRY (TWO - WHEELER)
Submitted to
Anand Institute of Management
Affiliated toSARDAR PATEL UNIVERSITY, V.V.NAGAR
In Partial Fulfillment of the
Requirement of the Award for the Degree ofMASTER OF BUSINESS ADMINISTRATION
Under the Guidance of
Dr. N.N.PatelShri G.B.Dave
Presented byStudents of M.B.A Semester-III
Patel Jigar R. 32Samtani Manoj 43Parmar Sunil 66Patel Urvesh 70
ANAND INSTITUTE OF MANAGEMENTM.B.A PROGRAMME
OPP. TOWN HALL, NR.GRID, ANAND
December 2005
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PREFACE
As a part of the curriculum of the second Year of MBA Programme of the Sardar
Patel University, the students are required to undergo project work in addition to
their theoretical study so as to enable them to have the knowledge of the
practical aspect of the Business Administration.
As students of management it is learning experience to analysis an industry. It is
the most essentials tools for us to expose our skill as a future responsible
managerial post. So, we decided to Automobile Industry (Two - Wheeler). It
helps us to develop our skill & confidence to do better in all respect in
management fields.
The project work is required to be undertaking where we get the opportunity to
know about the real information of the area we have selected, which altogether
different from theory. The report contains the detail information about Two-
Wheeler and all the information, which is important for management student.
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ACKOWLEDGEMENT
This report has been submitting in partial fulfillment of the requirement of the
award of MBA (Full Time Programme) from Anand Institute of Management,
Anand.
It is a universal fact that for study of a project in depth, we need the support of
many people right from the stage of conceiving the idea to completion of report. It
is difficult for a single person to do the job efficiently without interaction &
involvement of others.
We take this opportunity to thank Anand Institute of Management, Anand and
Dr N. N. Patel Sir (Hon. Director, AIM) and Mr. Govind B. Dave for giving us
Valuable Guidance and providing facilities to successfully complete our CP-I. We
are highly indebted to Mrs. Kunjal A. Sinha for her valuable help and support.
We are also grateful to other faculty members of Anand Institute of Management
for their support whenever required. Discussions with friends also have served to
provide sought after information. We are thankful to all our batch mates.
Finally we are thankful to our parents and Lord Almighty without whose blessings
tasks are incomplete.
Patel Jigar R.
Samtani Manoj
Parmar Sunil
Patel Urvesh
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DECLARATION
We, PATEL JIGAR, SAMTANI MANOJ, PARMAR SUNIL, PATEL URVESH
hereby declare that the report on Comprehensive Project - I entitled on
Automobile Industry (Two - Wheeler) is a result of our own work and
indebtedness to other work publications, if any, have been duly acknowledged.
Place: Anand Patel JigarDate: 05/01/2006 Samtani Manoj
Parmar SunilPatel Urvesh
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TABLE OF CONTENT
Preface
Acknowledgement
Declaration
Executive summary
Objectives of the Study
Sr.
No.Particulars Page No.
1 Evolution and Growth of Industry in India 012 Product Profile 093 Demand Determinants in the Industry 144 Players in the Industry 225 Distribution Channel in the Industry 286 Key Issues and Trends 407 PESTEL Analysis 54
8Industry Analysis using Porters Five Force
Model77
9 Future outlook 8910 Conclusions/Suggestions 95
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Annexure
Bibliography
LIST OF TABLES
SR.NO. PARTICULARS TABLE
NO.
PAGE
NO.
1 Two-Wheelers: Comparative Characteristics 1 92 Production report 2 103 Income of target customer 3 154 Existing Duty Structure 4 205 Domestic Sales Flash Report 5 236 Delivery time for different region 6 397 Cost Structure of Two Wheeler Industry 7 468 Two-Wheeler Exports from India 8 519 Company wise two-wheeler exports 9 5210 Growing Prosperity 10 6811 Economic Highlights of India 11 7012 Demand Forecast for Motorcycles and Scooters 12 9113 Projected Export Turnover 13 94
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LIST OF GRAPHS
SR.NO. PARTICULARS GRAPH
NO.
PAGE
NO.
1 Gross Turnover of Automobile Industry 1 12 Segmentation of Automobile Industry 2 23 Segmental Growth of the Indian Two Wheeler
Industry
3 6
4 Demand for Motorcycles, Mopeds & Scooters 4 85 Change in status within Two-wheeler Industry 5 86 Annual Growth in Demand for Motorcycles, Mopeds
& Scooters
6 8
7 Changing Scenario In Two Wheeler Industry 7 13
8 Shares of Two-Wheeler Manufacturers in IndustrySales
8 22
9 2003 India Dealer Satisfaction Study 9 3310 2004 DSS Ranking 10 3511 TCS Study Ranking Chart 11 4312 Segmental Classification and Characteristics 12 4713 Trends in Segmental Share in Industry Sales 13 4814 Regional Two Wheeler Market Share 14 66
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LIST OF DIAGRAMS
SR.NO. PARTICULARS DIAGRAM
NO.
PAGE
NO.
1 A three-wheeled business 1 292 Channel Structure 2 303 Competitive Model for Automobile Dealer 3 314 Grid Analysis 4 375 Regulatory Framework 5 72
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CHAPTER 1CHAPTER 1
EVOLUTION AND GROWTHEVOLUTION AND GROWTH
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AUTOMOBILE INDUSTRY
In India, as in many other countries, the auto industry is one of the largest
industries. It is one of the key sectors of the economy. The industry comprises of
automobile and the auto component sectors and encompasses commercial
vehicles, multi utility vehicles, passenger cars, two-wheelers, three-wheelers,
tractors and related auto components. The industry has shown great advances
since deli censing and opening up of the sector to foreign direct investment (FDI)
in 1993. It has deep forward and backward linkages with the rest of the economy,
and hence, has a strong multiplier effect. This results in the auto industry being
the driver of economic growth and India is keen to use it as a lever of accelerated
growth in the country. There are in place 15 manufacturers of cars and multiutility vehicles, 9 of commercial vehicles, 14 of Two/Three Wheelers and 10 of
Tractors besides 5 of engines. With an investment of Rs.50,000 crores, the
turnover was Rs. 59,500 crores in Automotive Sector during 1999-2000. It
employs 4,50,000 people directly and 100,00,000 people indirectly
Gross Turnover of Automobile Industry
Graph: 1
Gross Turnover of Automobile
Industry
0
200000
400000
600000
800000
1996-
97
1997-
98
1998-
99
1999-
00
2000-
01
2001-
02
2002-
03
YEAR
Rs.
(inmillion
Source: SIAM
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This graph shows last few years scenario of Indian automobile industry
with considering the gross turnover. Here we can see the rapid increment from
the year 2000-01.
Segmentation of Automobile Industry
Graph: 2
Market Share 2004-05
4.03%
78.63%
3.90%
13.44% Commercial
VehicleTwo-Wheeler
Three-Wheeler
PassengerVehicle
Source: SIAM
This graph shows the segmentation of Indian Automobile industry. There
are mainly four segments Two-wheeler, Passenger Vehicles, Commercial
Vehicles and Three Wheelers. Two-wheeler has maximum market share (78.63),
Passenger vehicles is at second place with market share (13.44), commercialvehicles is at third place with market share (4.03) and three Wheeler are at last
with market share (3.90).
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HISTORICAL DEVELOPMENT: EVOLUTION OF TWO-
WHEELER INDUSTRY IN INDIA.
India is the second largest manufacturer and producer of two-wheelers in
the world. India manufactures about 38, 00,000 2-wheelers. It stands next only to
Japan and China in terms of the number of two-wheelers produced and domestic
sales respectively. This distinction was achieved due to variety of reasons like
restrictive policy followed by the Government of India towards the passenger car
industry, rising demand for personal transport, inefficiency in the public
transportation system etc.
The Indian two-wheeler industry made a small beginning in the early 50swhen Automobile Products of India (API) started manufacturing scooters in the
country. The two-wheeler industry (henceforth TWI) in India has been in
existence since 1955. It consists of three segments viz., scooters, motorcycles,
and mopeds. Until 1958, API and Enfield were the sole producers. In 1948, Bajaj
Auto began trading in imported Vespa scooters and three-wheelers. Finally, in
1960, it set up a shop to manufacture them in technical collaboration with Piaggio
of Italy. The agreement expired in 1971.
In the initial stages, API dominated the scooter segment; Bajaj Auto later
overtook it. Although various government and private enterprises entered the fray
for scooters, the only new player that has lasted till today is LML. Under the
regulated regime, foreign companies were not allowed to operate in India. It was
a complete seller market with the waiting period for getting a scooter from Bajaj
Auto being as high as 12 years.
The motorcycles segment was no different, with only three manufacturers
viz Enfield, Ideal Jawa and Escorts. While Enfield bullet was a four-stroke bike,
Jawa and the Rajdoot were two-stroke bikes. Enfield 350cc bikes and Escorts
175cc bike initially dominated the motorcycle segment.
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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. The industry had a smooth ride in the
50s, 60s and 70s when the Government prohibited new entries and strictly
controlled capacity expansion. The industry saw a sudden growth in the 80s. The
industry witnessed a steady growth of 14% leading to a peak volume of 1.9mn
vehicles in 1990.
The entry of Kinetic Honda in mid-eighties with a variometric scooter
helped in providing ease of use to the scooter owners. This helped in inducing
youngsters and working women, towards buying scooters, who were earlier
inclined towards moped purchases. In the 90s, this trend was reversed with the
introduction of scooters. In line with this, the scooter segment has consistently
lost its part of the market share in the two-wheeler market.
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.
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The share of two-wheelers in automobile sector in terms of units sold was
about 80 per cent during 2003-04. 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, the State machinery,
effectively controlled all critical areas of functioning of an industry. 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-utilization 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 a more prominent shape with the
introduction of the New Economic Policy (NEP) 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
liberalized 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.
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people, higher access to relatively inexpensive financing, and increasing
availability of fuel efficient two-wheeler models. Nevertheless, this phenomenon
proved short-lived 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 composition of the two-wheeler industry has witnessed sea changesin the post-reform period. In 1991, the share of scooters was about 50 per cent of
the total 2-wheeler demand in the Indian market. Motorcycle and moped had
been experiencing almost equal level of shares in the total number of two-
wheelers. In 2003-04, the share of motorcycles increased to 78 per cent of the
total two-wheelers while the shares of scooters and mopeds declined to the level
of 16 and 6 per cent respectively. A clear picture of the motorcycle segment's
gaining importance during this period is exhibited by the Graph 4,5,6 depicting
total sales, share and annual growth during the period 1993-94 through 2003-04.
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CHAPTER 2CHAPTER 2
PRODUCT PROFILEPRODUCT PROFILE
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PRODUCT PROFILE
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 sub segments 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 sub-segments, 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.
Two-Wheelers: Comparative Characteristics
Table 1
Scooter Motorcycle Moped
Price (Rs. as in January
2005)> 22,000 > 30,000 > 12,000
Stroke 2-stroke, 4-stroke Mainly 4-stroke 2-stroke
Engine Capacity (cc) 90-150 100, 125, > 125 50, 60
Ignition Kick/Electronic Kick/Electronic Kick/Electronic
Engine Power (bhp) 6.5-9 7-8 and above 2-3
Weight (kg) 90-100 > 100 60-70
Fuel Efficiency (kms per litre) 50-75 50-80+ 70-80
Load Carrying High Highest Low
Source: ICRA Sectoral Analysis - Jan 2005
PRODUCTION OF DIFFERENT COMPANIES DURING MAY-2004 TO JAN-
2005
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The table given below shows the production of different companies during
May-2004 to Jan-2005 according to different engine capacity for motorcycle,
scooter and moped segments.
Production report
Table: 2
CategorySegment/Subsegment Manufacturer.
May2004
Jun2004
Jul2004
Aug2004
Sep2004
Oct2004
Nov2004
Dec2004
Jan2005
Two Wheelers
A:Scooter/Scooterette
Wheelsize not over12"
A1: Engine capacity
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Total C 29690 30684 33584 32676 31204 800656 25580 30840 23315
Total of TW category 486164 487870 516416 499057 562507 562507 731419 530409 58300
Source: SIAM
Please Refer Annexure 2 for Product Profile of Companies
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Changing Scenario in Two wheeler industry
GRAPH: 7
Source: Analyst meets 2003 of TVS motor company
From the above graph we can see the changing scenario of Indian Two
wheeler industry. There is rapid increment in the demand of the motorcycle from
35% to 77% between 1998-99 to2003-04. Similarly there is increment in themarket share of ungeared scooters from 7% to 12%. And the remaining has
decrease in the market share.
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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 urbanization, 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 entry level 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.
Price of different company
Price of different model of different manufacturers is shown in Annexure1.
Price factor is main determinant of the demand.
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INCOME OF TARGET CUSTOMER
Different companies target their target customer group according to their
income group and thus the total demand is determine according to income group.
The table: 4 show, that just two per cent of those with a family income of
less than Rs. 90,000 p.a. owned a motorcycle in 2001-02.
In the income group above this, that is those earning between Rs. 90,000
and Rs. 2 lakh a year, the number owning motorcycles is as high as 15 per cent.
And in the Rs. 2-5 lakh income earning households, around 29 per cent owned
motorcycles.
Income of target customer
Table: 3
Rapid rise in incomes
Per cent of Two-wheeler in each income group that
own product
Income in Rs. '000 Scooters Motor-cycles
Less than 90 3 2
90-200 20 15
200-500 30 29
500-1000 32 34
1000-2000 24 35
2000-5000 23 44
5000 and above 22 56
All India 8 7
Source: NCAER
The same is true of most other categories. Naturally, then, as families
move up the income ladder, their consumption habits change dramatically, giving
rise to a more than expected (based on the usual GDP growth figures, that is)
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surge in demand. In 1995-96, 80 per cent of Indian families earned less than Rs
90,000 per annum, this fell to 72 per cent in 2001-02 and will further fall to 51 per
cent by the end of the decade.
Just three per cent of families earned between Rs. 2-10 lakh in 1995-96,
this doubled by 2001-02 and is forecast to rise to 13 per cent by the end of the
decade. Those earning over Rs. 10 lakh, around 0.2 per cent of the population in
2001-02, will rise to 1.7 per cent by the end of the decade.
PENETRATION OF TWO-WHEELERS
On a base of around 28mn vehicles on Indian roads and around 175mn
households, there were only 160 motorized two-wheelers per thousand
households in FY98. This compares poorly with countries like Thailand where it
is around 600 per thousand households. Also with a household size of 5.5
persons and more than one wage earner in about 60% of the households, the
potential for a second vehicle demand is also good. Post-liberalization (ie FY92
to FY96) Indian households have graduated to higher income groups, so there is
good market for two-wheeler in India.
PROMOTIONAL SCHEME
Different companies provide different promotional scheme to push-up their
sales and attract the customer. In case of some special schemes like the 0%
interest and low down payment scheme, (one such was run by Bajaj Auto where
the down payment was only Rs999) sales of two-wheelers increased by up to
70% of total sales
Support services provided to the customers by various companies
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Hero Honda
6 free after sales services, 1-year warranty of engine in case for 'Splendor'
and 'CBZ'
3 free services, 1-year warranty for engine in case of 'CD 100'.
Bajaj Auto
3 free services, 1-year warranty for engine in case of 'Caliber'.
3 free services, 1-year warranty for engine in case of scooters.
Escorts Yamaha
3 free services, 1-year warranty for engine.
TVS Suzuki
3 free services, 1-year warranty for engine.
Kinetic Motor
3 free services, 1-year warranty for engine.
LML
3 free services, 3 paid services and 1-year warranty for engine.
Today almost all dealers have the facility of a mobile service in case of a
breakdown on the road.
Sales pattern through out the year
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There was consent at the opinion that there is a slump in June, July and
August and also during the second half of December. At the time of festivals,
especially Dusshera and Diwali or at the time of the marriage season, the sales
are high. The reason given for slump were -
a) In summers, people generally go for summer tours and spend a lot of
money so they postpone their purchases.
b) Because of religious reasons (Shraddh) in the month of August.
c) People dont prefer to purchase vehicles during the rainy season.
New policies launched by different companies
A Company has launched a new policy "Passport Programme" for its
customers. In this policy, customers have to pay Rs95 as registration charges.
He can avail of several benefits like -
One-year free Accident Insurance cover worth Rs100, 000.
Exclusive rewards and surprise gifts from Hero Honda Motors Ltd.
Special service discounts at all authorized Hero HondaDealerships/Service Centers.
Special discounts on the purchase of the spares.
Invitation to events such as movie shows, musical nights and carnivals.
"Crorepati Hungama" a sales promotion scheme started by a company.
Diwali special offer
Navratri special offer etc.
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KEY EARNING DRIVERS THAT AFFECT THE DEMAND OF TWO
WHEELER INDUSTRIES
Government policy impact on petrol prices: Petrol prices determine the
running cost of two wheelers expressed in Rupees per kilometer. Petrol prices
are the highest in India as GOI subsidies kerosene and diesel. But with the
recent change in GOI policy to reduce the subsidy, the prices of petrol will remain
constant at the current prices. This will have a positive effect on purchases on
two wheelers.
Improvement in disposable income: With the increase in salary levels,
due to entry of multinationals following liberalization process and fifth paycommission, the disposable income has improved exponentially over the years.
This will have multiplier effect on demand for consumer durables including two-
wheelers. This is already witnessed in improved demand for 2-wheelers in FY99
compared to a meager growth in FY98.
Changes in prices of second hand cars: The second hand car prices of
small cars have come down sharply in the recent past. This will shift the demand
from higher end two-wheelers to cars and affect the demand for two-wheelers
negatively. A further drop in second hand car prices will lead to pressure on the
two-wheeler majors who plan to release higher end scooters and motorcycles.
Implementation of mass transport system: Many states have planned
to implement mass transport systems in state capitals in the future. This will have
negative impact on demand for two-wheelers in the long run. But taking into
account the delays involved in implementation of such large infrastructure
projects, we expect the demand to be affected only five to seven years down the
line.
Availability of credit for vehicle purchase: The availability and cost of
finance affects the demand for two-wheeler as the trend for increased credit
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purchases for consumer durables has increased over the years. Therefore any
change with respect to any of these two parameters as a result of change in RBI
policy has to be closely watched to assess the demand for two and three
wheelers.
EXCISE AND CUSTOMS DUTY STRUCTURE
Existing Duty Structure
Table: 4
Items Excise Duty
(%)
2001-02
Customs Duty
(%) 2001-02
2-wheelers Upto 75cc 16% 60%2-wheelers Above 75cc 16% 60%Secondhand Motorcycles (including
mopeds) and cycles fitted with auxiliary
motor
Upto 75cc
Above 75cc
16%
16%
105%
105%
Source:FICCI & SIAM
The table shown above describes the excise and customs duty structure
for the two-wheeler industry. For any new or old two-wheeler the excise duty is
remain same, means16% and the customs duty for new two-wheeler is 60%andfor secondhand 105%. Thus this will make effect on the price of the vehicle.
Changing Income Demographics will Drive Changes in Demand
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The rapid rise in the country's middle and upper income classes, more
than overall GDP growth per se, is likely to lead to a dramatic hike in the demand
for big-ticket items like motorcycles, cars/jeeps etc.
As a result, the number of households owning cars will more than double
from around 4 per cent right now to over 9 per cent by the end of the decade,
that for scooters will remain stagnant at around 8 per cent, will double for
motorcycles to over 28 per cent. In terms of demand motorcycles will nearly
touch the 8.5 million mark.
Much of the increased demand is not so much demand from existing
households in various income groups as it is the one emanating from the
migration of households into upper income groups.
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CHAPTER 4CHAPTER 4
MAJOR PLAYERSMAJOR PLAYERS
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MARKET SHARE OF VARIOUS FIRMS OR BRANDS
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 two-wheeler
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).
Shares of Two-Wheeler Manufacturers in Industry Sales(FY2000-9MFY2005)
Graph: 8
Source: ICRA Sectoral Analysis - Jan 2005
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Although the three players have dominated the market for a relative long period
of time, their individual market shares have undergone a major change. Bajaj
Auto was the undisputed market leader till FY2000, accounting for 32% of the
two-wheeler industry volumes in the country that year. Bajaj Auto dominance
arose from its complete hold over the scooter market. However, as the demand
started shifting towards motorcycles, the company witnessed a gradual erosion
of its market share. HHML, which had concentrated on the motorcycle segment,
was the main beneficiary, and almost doubled its market share from 20% in
FY2000 to 40% in 9MFY2005 to emerge as the market leader. TVS, on the other
hand, witnessed an overall decline in market share from 22% in FY2000 to 18%
in 9MFY2005. The share of TVS in industry sales fluctuated on a year on year
basis till FY2003 as it changed its product mix but has declined since then.
SALES OF DIFFERENT COMPANIES DURING MAY-2004 TO JAN-
2005
The table given below shows theSales of different companies during May-
2004 to Jan-2005 according to different engine capacity for motorcycle, scooter
and moped segments
Domestic Sales flash report for September 2004
Table: 5
CategorySegment/Subsegme
nt Manufacturer.
May
2004
Jun
2004
Jul
2004
Aug
2004
Sept
2004
Oct
2004
Nov
2004
Dec
2004
Jan
2005
Two Wheelers
A:
Scooter/Scooterette
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Wheelsize not over
12"
A1: Engine capacity
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Hero Honda sold 2,31,593 bikes in March, up 20.5 per cent from 1,92,181
units in the same month a year earlier. The bike market leader said sales in the
year ending March rose 26.6 per cent to 2,621,400 units from 2,070,157 a year
ago.
Indias second-biggest motor cycle maker Bajaj Auto Ltd today said its
March sales rose 17.8 per cent to 1,63,530 units from 1,38,819 a year ago. Bajaj
said sales of motorcycles rose 42.9 per cent to 1,34,670 units. In the past month,
exports rose 79.1 per cent to 24,404 units, the two-wheeler firm added.
During 2004-05, Bajajs motorcycle sales grew at a scorching rate of 41.6
per cent in an industry growing by 21 per cent. In the past fiscal, almost 1,25,000
motor cycles were sold in international markets, establishing significant presence
in Sri Lanka, Bangladesh, Colombia, Guatemala and other Central American
countries.
TVS Motor Co Ltd said its March vehicle sales rose 5.6 per cent to
1,06,218 from 1,00,591 a year earlier. Indias third-largest two-wheeler maker
said motorcycle sales rose 3.6 per cent to 64,273 units in March from 62,060 a
year earlier. Its scooterettes sales recorded 17 per cent growth to 18,135 units inthe last month against 15,512 units in the year-ago month. On the export front,
TVS Motor saw 101 per cent growth at 6,662 units.
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CHAPTER 5CHAPTER 5
DISTRIBUTION CHANNELDISTRIBUTION CHANNEL
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DISTRIBUTION CHANNEL
In Automobile industry, the basic distribution channel prevailing includes 3
major steps, like Manufacturer: who has the finished products with him. State
wise Authorised dealer: State-wise Authorised Dealers are appointed by the
manufacturers on certain conditions and criterias - Customer: The customer
then can buy the product from the Dealers.
Automobile industry in India has evolved over the last few decades into a
thriving industry with a host of new challenges emerging along. While managing
product development and manufacturing is critical in the supply chain, the key to
market success lies in the successful customer acquisition and more importantly
retention.
Automobile dealers are the most significant part of any brand
representation in the market place. A company or brand is as good as its
representation in the market. Establishing a well-planned dealership network is abare essential to market products successfully. Importance of sustaining quality
of 'customer touch points' was never felt so relevant before. Hence, in the current
scenario, performance of dealers is an indication of performance of brand itself
and vice versa.
41
MANUFACTURER(Finished Product)
STATEWISEAUTHORISED
DEALER
CUSTOMER
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A three-wheeled business: How does it balance?
Diagram: 1
Automobile dealers business can be compared to a three-wheeler. The
three wheels of the business are sales, after-sales service and spares. A sale is
like front wheel. A dealer principal on the driving seat always likes to steer this
wheel to give direction to his/her business. However, many a time, the following
two wheels are ignored: the rear two wheels are the ones, which take the
maximum load of passengers (customers) who ultimately pay for the ride while
sales give direction. These are the changing rules of the automobile dealership
business with the change in the distribution channel structure over period of time.
Chart 1 below indicates how automotive distribution structure has changed in the
past few decades.
The distribution has changed from a single channel to multiple channel of
contact, for both sales and after-sales services offered to the customer. With the
multiplying of channels, the competition has also grown multifold. Multi-brand
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showrooms are emerging to offer convenience to the customer in comparing and
evaluating various brands under single roof and take faster decisions
Channel Structure
Diagram : 2
The earlier competition, only from small time local garages, is evolving into
a larger organised independent service provider.
In the given situation, the business model of automotive dealers is clearly
under tremendous pressure from all the business angles. The forces acting on
the dealer business are indicated in the Chart given below.
Bargaining power of OEMs is making dealers increasingly invest into the
infrastructure to enhance the customer experience. On the other hand,
customers are getting savvier and the bar of minimum service expectation is
rising day by day. There is increasing threat of new entrants as OEMs are
appointing more and more distribution points to enhance reach and penetration
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Competitive Model for Automobile Dealer
Diagram : 3
Source: SIAM
The competition amongst dealers of competing brands as well as within
same brand is crossing boundaries. Discounts and freebies are not a seasonal
affair anymore. All this has lead to drastic shrinking of margins in the new vehicle
sales business. Some progressive dealers confronted these challenges and
worked their way to sustain bottom lines through increased focus on after-sales
business.
However, the sole support of after-sales service business itself is under
threat of substitutes in the form of organised (branded) franchised service
network. Companies supplying automotive related products in the aftermarket
like oil, lubricants, auto components and auto accessories are entering the
lucrative automotive service business. This will be the biggest ever challenge
faced by the automotive dealers in India. The automotive dealer's business was
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redefined from selling vehicles to servicing customers in the late nineties with the
entry of multinationals in India. However, this new definition of the business itself
is under threat with the newly emerging competition.
A word of caution
Well-known brands in the market like TVS, Cummins, Bosch, Castrol, Gulf
Oil, and Reliance have already forayed into the after sales business in some way
and many more are on the verge of entry. With fast pace of new vehicle sales,
dealers cannot ignore the sales function (even though it may not add much to
bottom line or sometimes negatively impact it). However, if the focus of
dealership remains only on sales, the opportunity to earn from growing after-
sales service business would be exploited by the independent service providers.
Any two-wheeler owner evaluates a type of service center on 4 Ps of
service channel selection. The 4 Ps is:
Price of Parts
Price of Labour
Proximity and
Promptness of service
Authorised dealer workshops are always likely to have higher price of
parts and labour than the independent after-market, given the higher overhead
costs. However, proximity and promptness of service are the two key criteria on
which they need to work in order to retain the customer within their fold and earn
their lifetime value. There are very few options left with the automotive dealers of
this era. They either change themselves and their systems to be more customers
focused or concede the business to others.
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Dealer Satisfaction
2003 India Dealer Satisfaction Study
Graph: 9
Source : ICRA
The 2003 DSS examines the automotive dealer's satisfaction with the
vehicle manufacturer on the following parameters:
Satisfaction with product
Order & delivery,
Pricing & margins
Sales & marketing
After-sales service & parts
Warranty
Sales representatives,
Service representatives,
Training, and manufacturer relationship.
The DSS study is based on TRI*M, NFO's proprietary stakeholder
management system. The TRI*M index score provides a measure of the
relationship strength that a given manufacturer enjoys with its dealers.
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The industry average score of 64 reflects a relatively low level of
satisfaction and indicates that dealers are vulnerable to defections. The study
reveals that there are more 'uninvolved' (neither satisfied nor committed) dealers
than 'partners' (both satisfied and committed) in the automotive industry.
The key to building partners is to focus on the most critical areas that
impact dealer satisfaction and commitment to the manufacturer. They are:
effectiveness of brand positioning, builds high quality products, builds products
according to customer's needs, and concern for dealer profitability.
Honda Scooters and Toyota Kirloskar lead their respective segments with
an identical score of 102, which is significantly higher than the second-ranked
manufacturers. At this level of performance, both these manufacturers have been
able to develop strong relationships with their dealers.
Meeting dealer expectations on issues related to product, branding, and
after-sales support are among the common strengths for both these
manufacturers, Honda Scooters enjoy a high degree of commitment from their
dealers."
TVS Motor rank second in the two-wheeler segments. These
manufacturers have also developed strong relationships with their dealers.
According to its dealers, TVS excels in the areas of product quality and service
support.
The DSS study is based on responses from 966 two -wheeler dealers
from over 80 leading cities in India. The DSS will be conducted on an annual
basis to provide the industry with the most up-to-date information on dealer
satisfaction in the marketplace.
DSS Rankings
Rankings for the DSS study are done at the industry segment-level to
provide comparisons among similar groups of dealers. The fact that all three
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Honda affiliate companies rank among the top four manufacturers shows the
level of commitment by the manufacturer for the Indian market.
2004 DSS Ranking
Graph: 10
Source: ICRA
The chart above provides the make-level rankings. The industry average
score of 59 for two-wheeler reflects a relatively low level of satisfaction and
indicates that dealers are vulnerable to defections.
Using the score range shown earlier as a guide, three manufacturers fall
in the "highly retained/committed" zone, while eight manufacturers are in the
"retained/committed" zone. Based on the dealer evaluations that TNS received,
some of the key findings are as follows:
Honda Scooters lead the two-wheeler segment. Honda Scooters retain its
lead, with a six-point gain over 2002. Products fit with the market;
marketing & sales initiatives, market lead trade and consumer policies are
key areas that drive the segment leading scores for Honda Scooters.
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Hero Honda rank second in their segment. Hero Honda dealers rate the
company particularly highly on product quality, service & parts
representatives, and manufacturer relationship.
Bajaj Auto rank third in their segment. Bajaj's improvement in scores is
driven by improved product performance, investments in branding, and a
high dealer confidence on overall marketing strength of the company
Dealer Typology
Dealers are segmented into four groups based on their satisfaction with
and commitment to the manufacturer. These groups are defined as follows:
Partners: Dealers that are both satisfied and committed. This group is the
most dedicated.
Mercenaries: Dealers that are satisfied but not committed. This group
needs a compelling reason to stay with the brand.
Hostages: Dealers that are not satisfied but remain committed. Dealers
can become hostages due to lack of viable options or other exit barriers.
Uninvolved: Dealers that are neither satisfied nor committed.
GRID Analysis
In order to identify the unique needs and expectations of dealers for each
manufacturer, dealer evaluations were taken on 92 performance attributes. The
GRID analysis categories these attributes by examining the dealer claimed
importance (y-axis) and impact on dealer commitment (x-axis). The attributes are
categorized under four quadrants:
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Grid Analysis
Diagram: 4
Source: ICRA
Motivators: Attributes with a high stated importance and an equally high
commitment. These are the main drivers of dealer satisfaction and commitment.
Hidden Opportunities: Issues where dealer claimed importance is relatively low
but impact on commitment is high. These issues are differentiators.
Hygienic: Attributes where stated importance is high but impact on commitment
is low. These reflect the "must be" needs of dealers.
Potential Savers: Attributes with low stated importance and impact on
commitment. Dealers are currently less sensitive to these issues.
'Sales & service training support' has a greater impact on commitment among 4-
wheeler dealers as compared, to 2-wheeler dealers.
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This provides an indication of the relative strengths and weaknesses for the
two industry segments. Some of the key findings are explained below:
Two Wheeler
Manufacturer relationship related aspects like 'concern for dealer
profitability' and 'management willingness to resolve dealer problem' are
the key concern areas for the dealers. They are 'motivators' where the
manufacturers are not able to meet the expectations of the dealers. Honda
Scooters, which leads the segment, has been rated 'average' for both
these attributes.
Marketing related aspects like 'Effectiveness of brand/ product positioning'
& 'Relevance of advertising' have a high impact on dealer commitment
and are areas where the dealers want improvement from the
manufacturers.
Aspects like 'Fair Settlement of warranty claims' & 'Availability of spare
parts' are "must-be" attributes (Hygiene factors) and must definitely be
provided by the manufacturer.
The difference in expectations from the sales reps and after-sales reps
can be seen in the chart - sales reps related aspects fall in the 'motivator'
segment, while after-sales reps related aspects are 'hygiene' areas.
REGIONAL INFORMATION
The two-wheeler dealers record an average of 6 days to receive delivery
of new vehicles and 12 days for fast-moving parts. Dealers in east and south for
both segments report a relatively longer time in receiving delivery of new vehicles
and parts. Percentage of dealers recording 80% or more service capacity
utilization is similar across regions. It is critical to maintain this threshold of 80%
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capacity utilization as the profitability of a dealer records a significant decline
below this number.
Delivery time for different region
Table: 6
North East West South All India
Time for delivery ofnew vehicles (avg.days)
5 8 5 6 6
Time for delivery offast moving parts (avg.days)
10 19 12 12 12
Avg. monthly salesvolume in units
156 140 214 207 186
Avg. monthly servicevolume in units
736 448 1016 871 826
Service capacityutilization (%responding over 80%utilization)
57 60 60 60 59
Source : SIAM
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CHAPTER 6CHAPTER 6
KEY ISSUES AND TRENDSKEY ISSUES AND TRENDS
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CUSTOMER SERVICE
Creating value through customer loyalty. Acquiring a new customer and
retaining existing customers are the two channels of building a customer
base. In a competitive environment, gaining a customer by one company
is an opportunity lost for another.
While customer satisfaction is necessary for any successful business
model, there is more to building a loyal customer base. Latest research findings
suggest that high level of customer satisfaction does not necessarily translate
into repeat purchases or increased sales. About 60 to 70 per cent of them who
reported "satisfied" or "very satisfied" have switched. And what happens when
you lose those "satisfied" customers? Adding new customers is an expensive
process. Therefore, the company should strive to enhance customer experience
and relationship right at the beginning.
Thus, as we can see, customer satisfaction is only the first step towards
building a repeat and referral customer base. That is why building a loyal
customer base is important for future growth and expansion of your business. If a
marketer requires his products to appeal to this segment of customers, then hehas to build impeccable trust and customer service should be of the highest
order. This trust built over a period of time, will eventually materialize into
customer loyalty.
Building and sustaining a long-term relationship with the consumer
requires building strong brand. This necessitates:
Differentiated multiple products, better than what the customer expects. Quality: It's hard to build long-term brand loyalty, when short-term quality
is below par.
Offer differentiated, hassle free service, which should help in building trustand relationship with the customer.
Give the customer the true ownership feel of the product or service, bymaking them proud of their purchase and ownership.
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Educate employees the significance of service and it begins with them.They are the true brand ambassadors and can leave lasting impact on the
customer.
Every marketer should enable the dealers build such close relationshipwith customers so that the loyal network expands on a continuous basis.
Running a dealership is no longer a skill passed down from father to son.
Changes need to be brought in to eliminate waste and look at growth drivers. So
far, the dealers have been riding on the manufacturers for sustained business
growth. But now, they have to be competitive both on site as well as outside the
dealership. This calls for revamp of the dealerships in terms of quality of people,
leadership skills of the dealer owner, robust process, after sales service,
adoption of technology, proactively reaching out to customers, etc.
The collective bargaining power of the network can be used so as to bring
the cost of operation down for the network and increase the value proposition to
the customers.
The dealer does not sell a vehicle independently. They enable the
customers get loan through hire purchase, exchange their old two-wheelers,
sometimes, both HP and exchange together and, in the process, understandingthe customers well. On account of both sales and after sales association with
their buyers, dealers have a greater chance to build closer relationships with
them than the manufacturers.
Emergence of Information Technology has enabled efficient and smooth
process automating and standardizing the system across the dealership, thus
helping in establishing customer loyalty programmes. IT has also played a huge
role in bringing the companies closer to the dealers and customers and this
should be adopted to facilitate this relationship in long term.
From product push to customer pull, technology has vastly reshaped the
business transaction - and in turn, the customer's place in the value chain.
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Source: SIAM
A commonly observed trend is the strong performance of new models
such as Bajaj CT100, Honda Unicorn, TVS StaR, and Yamaha Fazer. The
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common differentiator for all these models is evident in their relatively higher
ratings on product performance & design.
"Among the new models, Honda Unicorn receives the best ratings to
overtake Bajaj Pulsar in the premium segment,". Product quality and cost of
ownership perception emerge as Unicorn's key strengths.
"While newness generally has a positive rub-off on customer perceptions,
this phenomenon is not universally true. "Hero Honda Splendor+ defies the
general trend with a strong performance on all measures of customer
satisfaction. Splendor's universal appeal is also evident from its consistent
ratings across regions and over time."
The Indian market is extremely sensitive to mileage/ fuel efficiency.
While this sensitivity is generally seen among all types of owners, it is particularly
relevant for 'standard' and 'executive' bikes where customers attach a high
importance to fuel efficiency.
"Bajaj CT100 benefits from its segment leading rating on fuel efficiency
with its owners also reporting industry-best mileage of 70 kilometers per liter,"
"However, it is important to diffuse focus from fuel efficiency due to the
heightened customer expectations. This is reflected by TVS Centra's
performance where satisfaction with fuel efficiency is relatively lower despite
strong mileage figures reported by its owners.
PRICING
Pricing of the product as whole for the two-wheeler industry consists of the
following factors:
Cost Structure of Indian Two Wheeler Industry
Total automotive sales in the country amounted to Rs. 480 billion inFY2004, with the two-wheeler industry accounting for around 20% of this. The
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top three two-wheeler manufacturers accounted for around 80% of total two-wheeler sales in volume terms in FY2004. Thus, the two-wheeler industrysperformance is closely linked to the performance of these three players.
Raw material costs are the largest cost head for companies in the two-
wheeler industry. Raw materials alone account for around 65% of the total
operating costs. Companies have been pursuing active cost rationalization and
vendor rationalization programmes to rein in costs and improve margins. Despite
these
Efforts, the raw material cost as a percentage of operating income has
increased, and accounted for 67% of the total operating income in FY2004. This
rise can be attributed partly to the shift towards motorcycles where the material
costs are higher. With new model launches demanding advertisement and
publicity expenses, selling expenses as a percentage of operating expenses
have also moved up. On the other hand, with companies pruning the size of their
workforce, employee expenses, as a percentage of the overall expenses, have
declined.
However, while expenses under the head other expenses declined
between FY1999 and FY2003, they increased significantly in FY2004. Whileinterest charges as a percentage of operating income came down between
FY1999 and FY2004, on account of increasing investments, depreciation
charges as a percentage of operating income went up marginally over the same
period. Overall, the burden of capital related charges in the two-wheeler industry
increased from 3.6% in FY1999 to 4.2% in FY2004.
In addition to the cost structure and manufacturing expenses, other factors
like Marketing Expenses, Administrative Expenses, Taxes and duties, R& D,
Technological Tie-ups, Safety Criterias, Sales, Distribution and After Sales
Services Expenditures are also added and the final price of the product is
obtained by adding the profit margins.
Cost Structure of Two Wheeler Industry from FY1999-FY2004
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Table: 7
FY1999 FY2000 FY2001 FY2002 FY2003
FY2004
SOURCE: ICRA
Company Specific Marketing Strategies
Big manufacturers like Bajaj Auto, Tvs, Hero Honda and various other small
players, all them have common marketing strategies. The main competition and
the winner amongst them stands out on the basis of Technological changes and
development in their products, which give total customer satisfaction.
There has been a common marketing approach in this industry, which is as
follows:
Segmenting the Market
Targeting this Market with various Marketing and Advertising strategies
Promotional Activities carried out by the manufacturers
Distribution and Sales Management of their products
After Sales Services offered by the manufacturers
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SEGMENTATION
Segmental Classification and Characteristics
Graph: 12
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.
Trends in Segmental Share in Industry Sales (FY1996-9MFY2005)
Graph:13
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While scooter sales declined sharply by 28% in FY2001, motorcycle sales
reported a healthy growth of 20%, indicating a clear shift in consumer preference.
This shift, which continues, has been prompted by two major factors: change in
the country's demographic profile, and technological advancements
Over the past 10-15 years the demographic profile of the typical two-
wheeler customer has changed. The customer is likely to be salaried and in the
first job. With a younger audience, the attributes that are sought of a two-wheeler
have also changed. Following the opening up of the economy and the increasing
exposure levels of this new target audience, power and styling are now as
important as comfort and utility.
The marketing pitch of scooters has typically emphasized 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
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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 favor 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
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 there manufacturing capacities in the recent
past. The total capacity of these players stood at 7.8 million units per annum asagainst total market sales of 3.8 million units. 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
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HHML increased the capacity of its plants from 1.8 million units in to 2.25
million in 2004 and has been able to achieve 92% capacity utilization. In light of
the increase in demand for motorcycles, the company plans to set up a new
plant.
Niche markets also witnessing intense competition
A significant trend witnessed over the past five years is the inclination of
consumers towards products with superior features and styling. Better
awareness about international models has raised expectations of consumers on
some key attributes, especially quality, styling, and performance. High
competitive intensity has prompted players to launch vehicles with improved
attributes at a price less than the competitive models.
In an effort to satisfy the distinct needs of consumers, producers are
identifying emerging consumer preferences and developing new models. For
instance, in the motorcycles segment, motorcycles with engine capacity over
150cc, is a segment that has witnessed significant new product launches and
hence, become more competitive. The indigenously launched Pulsar 150 had
met with success on its launch and thereafter, a host of models have beenlaunched in this segment by various players. While Bajaj Auto launched the
Pulsars (150 and 180 cc) with digital twin spark technology (DTSi) that offers a
powerful engine and fuel efficiency of 125 cc models, model launches by other
players include LML's Graptor/Beamer, HMSI's Unicorn besides the HHML's CBZ
and TVS' Fiero F2.
Moreover, in the recent past, the motorcycle segment has witnessed
launch of vehicles with higher engine capacity (higher than 150cc) and power
(higher than 15bhp). These include models such as Bajaj Auto Eliminator and
Royal Enfield's Thunderbird followed by HHML's Karisma. Besides these, KEL
has launched premium segment motorcycles GF 170 and GF Laser besides
launching products from the portfolio of its technology partner (Hyosung's Aquila
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and Comet 250). The products in this segment cater for style conscious
consumers.
In the scooters segment, the market for plastic-bodied variometric
scooters continues to witness growth in the scenario of overall decline in scooter
volumes. Higher volumes and growth are especially true for certain scooter
models, such as Honda Activa, that brought in new technology (besides
variometric transmission) to further differentiate them. Thus, the need to
differentiate and create a niche has led to companies strengthening their
research and development (R&D) capabilities and reducing the development
time for new models.
Increasing focus on exports
Two-Wheeler Exports from India (in numbers)
Table: 8
FY2000 FY2001 FY2002 FY2003 FY2004 CAGR 9MFY2005
Scooters 20,188 25,625 28332 30116 53148 27.4 44832
Motorcycles 35,295 41,339 56,880 126122 187287 51.4 188807
Mopeds 27,754 44,174 18,971 23330 24234 -3.3 22739
Total 83,237 111,138 104183 179568 264669 33.5 256378
Source: SIAM
For the first nine months of FY2005, 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.
Although the Indian two-wheeler manufacturers have forayed on their own
in their target export markets, there have been instances of tie-ups with the
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technology partners. Bajaj Auto's tie-up with Kawasaki to jointly market Bajaj
products in Philippines is a case in point. Under the tie-up, M/s Kawasaki Motors
Philippines Corporation has been appointed as exclusive distributors to market
select Bajaj two-wheelers that include Byk, Caliber 115 and Wind 125. These
vehicles are being sent to Philippines in the completely built unit (CBU) form.
Other strategy of expanding international presence considered by few players is
that of setting up assembly lines in select South East Asian countries either on
their own or in partnership with local players.
Company wise two-wheeler exports since FY2000
Table:9
FY2000 FY2001 FY2002 FY2003 FY2004 CAGR FY2005
Bajaj Auto 14924 16112 28527 53366 90210 56.8 87225
HHML 10061 10324 13023 21165 39254 40.5 43441
HMSI 0 0 1293 10916 31414 n.a 27734
TVS 7265 6621 7765 9636 28093 40.2 36666
Yamaha 15197 20446 20321 45546 32906 21.3 27539
Others 35790 57635 32752 39053 42792 4.6 33773
Total 83237 111138 103681 179682 264669 33.5 256378
Source: SIAM
Vehicle Emission Norms
Emission norms for all categories of petrol and diesel vehicles at the
manufacturing stage were introduced for the first time in India in 1990 and were
made stricter in 1996. When the 1996 norms were introduced, it resulted in
certain models being withdrawn from the market. With Stage I India 2000
emission norms coming into place, the cost of developing suitable technology
has remained high.
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The emission norms that are currently in force for two-wheelers and three-
wheelers are more stringent than the Euro II norms.
SFor two -wheelers the emission norms are recommended to be the same in the
entire country:
For new vehicles
Bharat Stage II norms throughout the country from April 1, 2005
Bharat Stage III norms to be applicable preferably from April 1, 2008 but not laterthan April 1, 2010
For reducing pollution from in-use vehicles
New pollution under control (PUC) checking system for all categories of
vehicles to be put in place by April 1, 2005.
Inspection & maintenance (I&M) system for all categories of vehicles to be
put place by April 1, 2010.
Performance checking system of catalytic converters and conversion kits
installed in vehicles to be put in place by April 1, 2007.
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CHAPTER 7CHAPTER 7
PESTEL ANALYSISPESTEL ANALYSIS
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Automobile is one of the largest industries in global market. Being the
leader in product and process technologies in the manufacturing sector, it has
been recognized as one of the drivers of economic growth.
During the last decade, well-directed efforts have been made to provide a
new look to the automobile policy for realizing the sector's full potential for the
economy. Steps like abolition of licensing, removal of quantitative restrictions and
initiatives to bring the policy framework in consonance with WTO requirements
have set the industry in a progressive track. Removal of the restrictive
environment has helped restructuring, and enabled industry to absorb new
technologies, aligning itself with the global development and also to realize its
potential in the country. The liberalization policies have led to continuousincrease in competition, which has ultimately resulted in modernization in line
with the global standards as well as in substantial cut in prices. Aggressive
marketing by the auto finance companies have also played a significant role in
boosting automobile demand, especially from the population in the middle
income group.
POLITCAL ENVIRONMENT
The political environment exercises great impact on industry and
business. With development on the political front affecting the economy all the
time, the economic environment often becomes a by-product of the political
environment. Industrial growth depends to a great extent on political
environment. Legislation regulating businesses is also often a product of political
configuration.
Traditionally, GOI has considered the automobile industry as a luxury
segment. But realizing the growing importance of two-wheelers with the
increasing necessity of personal transportation for the middle class in eighties,
priority was given to the sector by favorable foreign policy. This brought about
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technology revolution to the two-wheelers as Japanese majors entered in
technical and financial participation with Indian majors.
GOI has a moderate intervention in the operations of two-wheeler
industry. Excise duty structure, emission control, safety of rider, etc are all policy
decisions.
The excise duty on two-wheelers, which previously ranged between 10 to
30%, according to the engine capacity was rationalized in 1991-92 budget to only
two-categories viz 15% upto 75cc and 25% above 75cc. This mainly affected
manufacturers of 100cc category in the early nineties. Since then the excise duty
structure for two-wheelers has been left unchanged till 1999.
In the 1999-2000 budget, as a result of rationalization of duty structure the
excise duty up to 75cc vehicles was increased to 16% while for those above 75cc
decreased to 24%. As a result, scooter prices were reduced by Rs200-400 per
vehicle. The same duty regime was continued in the FY2000-01 budget too.
Automobile emissions are the major pollutants in the environment. To
control pollution from automobiles the GOI stipulates emission norms applicable
from time to time. The GOI wants the automobile industry to achieve a major
improvement in emission levels in two steps. The first milestone was achieved by
implying stringent norms applicable from April 1, 1996. This conforms to Euro I
standards. The second hurdle was set with a dead line of April 1, 2000 that
conforms to Euro II norms.
The GOI controls availability and price of petrol, the fuel for two-wheelers.
But with the dismantling of Administered Price Mechanism (APM), the cross
subsidy provided by high petrol prices is expected to come down leading to
reduction in petrol prices in the country. This will reduce the running cost per km
for two-wheelers and have positive impact on demand.
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Government Policies
Vehicle Emission Norms
Emission norms for all categories of petrol and diesel vehicles at themanufacturing stage were introduced for the first time in India in 1990 and were
made stricter in 1996. When the 1996 norms were introduced it resulted in
certain models being withdrawn from the market. With Stage I India 2000
emission norms coming into place, the cost of developing suitable technology
has remained high. The table below presents the emission norms for two-
wheelers that were in place in the past, the current India 2000 emission norms,
and the norms have been proposed for 2005 (Stage II) and 2009 (Stage III). The
emission norms that are currently in force (India 2000) for two-wheelers and
three-wheelers are more stringent than the Euro II norms. While the Stage II
(India) norms will be applicable only from April 1, 2005, the Stage (III) norms will
be implemented in 2009 after a technical feasibility review in 2005. The choice of
emission control technology has been left to the manufacturers
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 two-wheelers unchanged. But the Union Budget 2004-05 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.
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EXIM POLICY
Imports
Starting April 1, 2001 imports of all new and used vehicles have been
freed under commitments to World Trade Organisation (WTO). However, the
customs duty has been set at 60% for new vehicle imports and at 105% on the
import of used vehicles. In terms of effective duty this works out to 93% and
147% respectively. While Imports from China have been meagre till date, they
may increase in the long term, thus posing competition to the domestic
manufacturers. Given the similarity in the demographic and income conditions in
India and China, Chinese two-wheeler manufacturers are suitably placed to cater
to the Indian market.
Exports
Indian export of two-wheelers is primarily to Sri Lanka, Bangladesh, Iran, Egypt,
and the South American Nations, which have similar emission norms. In 2001, Indiaexported 111,138 two-wheelers, which marks an increase of 34% over the previous year.
Despite this impressive growth, the countrys total two-wheeler exports account for a
mere 3% its total domestic sales.
Foreign direct investment: Automatic approval is proposed to be
granted to foreign equity investment up to 100% for manufacture of automobiles
and components.
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 2004-05). 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.
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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
Budget ImpactonMajor Players
Company name Impact Impact factors
Bajaj Auto Ltd. Neutral A, B, C, D
Hero Honda Motors Ltd. Neutral A, B, C, D
TVS Motor Company Ltd. Neutral A, B, C, D
A. The reduction in the import duty on used two-wheelers will not affect the
industry.
B. The hike in the excise duty on steel will not affect the industry, as cenvat credit
can be availed for the same.
C. The extension up to March 2007 of 150 per cent deduction on R&D
expenditure will marginally benefit domestic two-wheeler players, such as TVS
Motors, Bajaj Auto and Kinetic.
D. The reduction in personal tax rates will increase household disposable
income, which is a positive for two-wheeler demand.
Improving Road Infrastructure
Traffic on roads is growing at a rate of 7 to 10% per annum while thevehicle population growth for the past few years is of the order of 12% per
annum. Poor road infrastructure and traffic congestion can be a bottleneck in the
growth of vehicle industry. A balanced and coordinated approach will be
undertaken for proper maintenance, up gradation and development of roads by
encouraging private sector participation besides public investment and
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In the short run, the Government will encourage the use of short chain
hydrocarbons along with other auto fuels of the quality necessary to meet the
vehicular emissions norms.
There is prime need to support the development and introduction of
vehicles propelled by energy sources other than hydrocarbons by promoting
appropriate automotive technology. Hybrid vehicles and vehicles operating with
batteries and fuel cells are alternatives to the conventional automobile, which in
their early beginnings, lie intreasured. As an impetus for the development of such
vehicles, an appropriate long-term fiscal structure shall be put in place to
facilitate their acceptance vis--vis vehicles based on conventional fuels.
Internationally, the practice is to levy higher road tax on older vehicles in
order to discourage their use. In India, the road tax on vehicles varies in nature
and quantum among the states. Lifetime road tax is also in vogue. The endeavor
will be to move to the international model.
In order to facilitate faster up gradation of environmental quality, the Govt.
will consider having a terminal life policy for commercial vehicles along with
incentives for replacement for such vehicles.
Two-wheelers emit harmful pollutants such as carbon monoxide and
hydrocarbons. The emission norms are becoming stringent the world over. In
India, the norms are being implemented in two phases. While the first phase
Euro 1 norms have become applicable since April 1996, even more stringent
norms Euro 2 will come into effect from April 1, 2000.
For the two-wheelers new emission norm for year 2000 will be an acid test
as none of the present models except four stroke vehicles confirm to the norms.
To full-fill emission norms the manufacturers have three options: to switch to
four-stroke engines, to fit catalytic converters for the existing models, to improve
upon the existing two-stroke engine.
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The temporary option for overcoming emission norms is to fit the catalytic
converters; this will increase the cost of vehicles. But as a long-run solution
scooter manufacturers have to opt for four-stroke engines or improvement in two
stroke engines.
The catalytic converters cost in the range of Rs1, 500 - 2,500, but have a
limited life of 10,000 km of vehicle running. Therefore catalytic converter requires
regular maintenance on behalf of the user. Also catalytic converter will be
effective only for unleaded petrol usage, which is not widely available in the
country.
Scooter manufacturers have started responding to the Y2K norms by
introducing four-stroke vehicles in H2 FY98. They plan to fit catalytic converters
to two-stroke scooters to overcome emission norms.
The Japanese motorcycle segment will be able to overcome emission
norms with the technology help of respective Japanese collaborator. The Indian
motorcycles have to either shift to four-stroke technology or make use of catalytic
converter. But this will reduce the price difference between Indian and Indo-
Japanese motorcycles, reducing the price advantage of Indian motorcycles.
The mopeds segment will be badly affected due to Y2K emission norms,
as none of the existing moped models confirm to the specifications.
Strategies for Environmental Compliance
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Road & Traffic Management
Inadequate and poor quality of road surface leads to increase Vehicle
Operation Costs and also increased pollution. It has been estimated that
improvements in roads will result in savings of about 15% of Vehicle Operation
Costs.
TECHNOLOGY ENVIRONMENT
Up till now, technology transfer to the Indian two-wheeler industry took
place mainly through: licensing and technical collaboration and joint ventures
A third form - that is, the 100% owned subsidiary route - found favors inthe early 2000s. A case in point is HMSI, a 100% subsidiary of Honda, Japan.
Table given below details the alliances of some major two-wheeler
manufacturers in India.
Technological tie-ups of Select Players
Table: 10
Nature of Alliance Company Product
Bajaj
Auto
Technological tie-upKawasaki Heavy Industries Ltd,
JapanMotorcycles
Technological tie-up Tokya R&D Co Ltd, Japan Two-wheelers
Technological tie-up Kubota Corp, Japan Diesel Engines
HHML Joint Venture Honda Motor Co, Japan Motorcycles
KEL Technological tie-upHyosung Motors & Machinery
IncMotorcycles
KEL
Tie up for
Manufacturing
and distribution
Italjet, Italy Scooters
LML Technological tie-up Daelim Motor Co Ltd Motorcycles
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Hero
Motors
Technological
tie-upAprilia of Italy Scooters
Source: INGRES
Besides the below mentioned technology alliances, Suzuki Motor
Corporation has also followed the strategy of joint ventures (SMC reportedly
acquired equity stake in Integra Overseas Limited for manufacturing and
marketing Suzuki motorcycles in India).
With the two-wheeler market, especially the motorcycle market, becoming
extremely competitive and the life cycle of products getting shorter, the ability to
offer new models to meet fast changing customer preferences has becomeimperative. In this context, the ability to deliver newer products calls for sound
technological backing and this has become one of the critical differentiating
factors among companies in the domestic market. Thus, the players have
increased their focus on research and development with some having
indigenously developed new models as well as improved technologies to cater to
the domestic market. Further, with exports being one of the thrust areas for some
Indian two-wheeler companies, the Indian original equipment manufacturers
(OEMs) have realized the need to upgrade their technical capabilities. These
relate to three main areas: fuel economy, environmental compliance, and
performance. In India, because of the cost-sensitive nature of the market, fuel
efficiency had been an interest area for manufacturers.
It is not only that the OEMs are increasing their focus on in-house R&D,
they also provide support to the vendors to upgrade the technology and also
assist them striking technological alliances.
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.
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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