A 40% jump in costs in three years coupled with the Covid-19 disruptions has pushed back India’s two-wheeler industry by a decade, leaving it with the burden of overcapacity and an uncertain recovery.
New regulatory norms, high insurance costs, fuel price hike and the run up in commodity prices, have pushed up vehicle prices beyond the buying capacity of the rural buyer, especially for the entry-level two-wheelers, which account for more than one-third of the industry.
After hitting an all-time high of 21.17 million in FY19, the two-wheeler market witnessed a freefall in demand, pushing it down to 13.46 million in FY22, which is at par with the FY12 level when the industry had clocked sales of 13.40 million.
Motorcycles have been the worst hit with volumes pushed back to FY10 levels while scooters have been relatively better with volumes hitting an eight-year low.
This difference has highlighted the price sensitivity of the targeted buyer between the two segments as motorcycles are reliant on rural and semi-urban markets whereas scooters are largely sold in the urban markets.
The steep increase in prices has pinched the cost-sensitive buyer. The Hero HF 100 is now sold at Rs 55,000 whereas its price was Rs 40,000 five years ago. The Honda Activa 125 was priced at Rs 60,000 in 2018 but is now priced at Rs 78,000.
The meltdown in demand has led to the issue of massive overcapacity in the two-wheeler industry. Estimates say that at least 50% capacity is lying idle with the two-wheeler makers as per the production run disclosed as of December end.
Hero MotoCorp, India’s biggest two-wheeler maker has an installed capacity of 9.3 million units per annum spread across six plants but going by the December production rate, the company is using less than half of this capacity.
Bajaj Auto, the country’s third largest two-wheeler manufacturer, which has a total installed capacity of 5.7 million, is keeping half of its production capacity idle. The Pune-based company does not participate in the scooter (petrol) segment and is dependent on exports for half of its volumes.
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Honda Motorcycle and Scooter India (HMSI), the second largest two-wheeler brand in India has a capacity of 5.8 million units per annum but it is utilising less than half of it currently. More than half of HMSI’s volume comes from scooters led by the Activa.
The current financial year, though, has brought some recovery in volumes till December but the industry at best could finish the year at par with FY16 sales, say experts.
K N Radhakrishnan, president and CEO, TVS Motor Company said in a post earning analyst call, “There is a problem in the affordability of entry level two-wheelers primarily because there has been a significant rise in product costs. Last 12 quarters prices have gone up by 40% but the incomes have not gone up by that much. We have to be patient with the current situation.”
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“We remain optimistic of demand recovery in FY2023, amid multiple headwinds (elevated ownership cost, persisting inflationary pressures and increase in financing rates). As erratic monsoons and floods in many regions have impacted kharif yields, rural demand may remain dampened. Dealer check, however, indicates that sentiments have started improving at the rural level; the sustenance of the same remains key for the industry,” Icra stated in a recent report.