report on two wheeler automobile

8/3/2019 Report on Two Wheeler Automobile

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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


Kinetic Motor


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

report on two wheeler automobile

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