TWO WHEELER

INDUSTRY ANALYSIS
INDUSTRIAL WORK OUT

TEAM MEMBERS
AZHAR K.P

SHABEEB

HARSHINA S

AJAS MON

FAHAD ABOOBAKER

ASIF

INTRODUCTION
The Indian automotive industry consists of five segments:
commercial vehicles; multi-utility vehicles & passenger cars;
two-wheelers; three-wheelers; and tractors. With 7,822,963
units sold in the domestic market and 753,591 units exported
during the first nine months of FY2007, the industry (excluding
tractors) marked a growth of 43% over the corresponding
previous. The two-wheeler sales have witnessed a spectacular
growth trend since the mid nineties.

India is the second largest producer and manufacturer of two-

wheelers in the world. Indian two-wheeler industry has got
spectacular growth in the last few years. Indian two-wheeler
industry had a small beginning in the early 50's. The
Automobile Products of India (API) started manufacturing
scooters in the country.

Bikes are a major segment of Indian two wheeler industry, the

other two being scooters and mopeds. Indian companies are
among the largest two-wheeler manufacturers in the world.
Hero Honda and Bajaj Auto are two of the Indian companies
that top the list of world companies manufacturing two-
wheelers.

The two-wheeler market was opened to foreign companies in

the mid 1980s. The openness of Indian market to foreign
companies lead to the arrival of new models of two-wheelers
into India. Easy availability of loans from the banks, relatively
low rate of interest and the discount of prices offered by the
dealers and manufacturers lead to the increasing demand for
two-wheeler vehicles in India. This lead to the strong growth of
Indian automobile industry.
HISTORY

motorcycles have made their debut around the 1950s; this

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

say without much of a doubt that the 1955 Bullet was one of
the initial hits of the Indian two-wheeler industry and till
today it continues to be a darling of the motorcycle
enthusiasts.

Enfield Bullet had a close competition with another sturdy bike

named Rajdoot; as the bike was strong enough to handle the
rough Indian roads. The company had roped in Indian He-
man Dharmendra for the promotion of the bike. With more
than 1.6 million vehicles on the road the Rajdoot motorcycle
was one of the initial hits of the earlier years of two-wheeler
history in the country.

When heavy motorcycles were the order of the day, a

relatively lighter bike had caught on the imagination of the
Indian two wheeler user. Ind- Suzukia bike launched by the
then TVS Suzukigroup was an instant hit; however the bike
could not sustain it's initial success due to the high import
content in the vehicle and less of localization.

In scooters Bajaj Chetak has been hugely responsible for

adding momentum to the transport system of the country, till
today it remains one of the most successful brands to have
come out of the Bajaj stable.

The scooter is named after the horse of legendary Rana

Pratap Singh. These sets of two wheels have become a part of
the Indian milieu and are often considered a representative of
the Indian middle class aspiration. Very few two-wheelers
have been able to emulate the success, which Bajaj Chetak
has achieved over the years.

Similarly LML Motors enjoyed a reasonable success with the

launch of LML Select which came with new age technology
and improved performance.

Today newer models of two-wheeler are entering the market

everyday, slowly pushing these names down the memory
lane. However names like Chetak, Rajdoot and Bullet will
always find a mention in the history of two-wheelers in the
country.

Two-wheelers: Market Size & Growth

In terms of volume, 7,613,436 units of two-wheelers were sold

in the country in FY2005 with 456,765 units exported. The total
two-wheeler sales of the Indian industry accounted for around
87.5% of the total vehicles sold in the period mentioned.

After facing its worst recession during the early 1990s, the
industry bounced back with a 25% increase in volume sales in
FY1995. However, the momentum could not be sustained and
sales growth dipped to 20% in FY1996 and further down to
12% in FY1997. The economic slowdown in FY1998 took a
heavy toll of two-wheeler sales, with the year-on-year sales
(volume) growth rate declining to 3% that year. However, sales
picked up thereafter mainly on the strength of an increase in
the disposable income of middle-income salaried people
(following the implementation of the Fifth Pay Commission's
recommendations), higher access to relatively inexpensive
financing, and increasing availability of fuel efficient 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 industry began to grow in a drastic way after FY2005 new

technologies were introduced by Indian companies.
Technologies were brought in from foreign companies. As a
result technically efficient products were launched in the
market. The demand for highly fuel efficient vehicles also
increased. As a result competition between companies also
started to tighten. After FY 2006 demand for scooters and
mopeds were decreased. But the need for non gear scooters
increased very much. In the year FY2007 the introduction of
high CC bikes made a boom in the industry. In the current
situation high CC bikes are becoming trendy and companies are
competing each other to capture the market.

Demand Drivers

The demand for two-wheelers has been influenced by a number

of factors over the past five years. The key demand drivers for
the growth of the two-wheeler industry are as follows:

▪ Inadequate public transportation system, especially in the

semi-urban and rural areas;
▪ Increased availability of cheap consumer financing in the past
3-4 years;
▪ Increasing availability of fuel-efficient and low-maintenance
models;
▪ Increasing urbanisation, which creates a need for personal
transportation;
▪ Changes in the demographic profile;
▪ Difference between two-wheeler and passenger car prices,
which makes two-wheelers the entrylevel vehicle;
▪ Steady increase in per capita income over the past five
years; and
▪ Increasing number of models with different features to
satisfy diverse consumer needs.

While the demand drivers listed here operate at the broad

level, segmental demand is influenced by segment-specific
factors.

MARKET CHARACTERISTICS

Demand

Segmental Classification and Characteristics

The three main product segments in the two-wheeler category

are scooters, motorcycles and mopeds. However, in response to
evolving demographics and various other factors, other
subsegments emerged, viz. scooterettes, gearless scooters,
and 4-stroke scooters. While the first two emerged as a
response to demographic changes, the introduction of 4-stroke
scooters has followed the imposition of stringent pollution
control norms in the early 2000. Besides, these prominent 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.
 Table 1
Two-Wheelers: Comparative Characteristics
Scooter Motorcycle Moped
Price*(Rs.
as in
> 22,000 > 30,000 > 12,000
January
2005)
2-stroke, 4- Mainly 4-
Stroke 2-stroke
stroke stroke
Engine
100, 125, >
Capacity 90-150 50, 60
125
(cc)
Ignition Kick/Electronic Kick/Electronic Kick/Electronic
Engine
Power 6.5-9 7-8 and above 2-3
(bhp)
Weight
90-100 > 100 60-70
(kg)
Fuel
Efficiency
50-75 50-80+ 70-80
(kms per
litre)
Load
High Highest Low
Carrying

Segmental Market Share

The Indian two-wheeler industry has undergone a significant

change over the past 10 years with the preference changing
from scooters and mopeds to motorcycles. The scooters
segment was the largest till FY1998, accounting for around
42% of the two-wheeler sales (motorcycles and mopeds
accounted for 37% and 21 % of the market respectively, that
year). However, the motorcycles segment that had witnessed
high growth (since FY1994) became larger than the scooter
segment in terms of market share for the first time in FY1999.
Between FY1996 and 9MFY2005, the motorcycles segment
more than doubled its share of the two-wheeler industry to
79% even as the market shares of scooters and mopeds stood
lower at 16% and 5%, respectively. After FY 2005 the market
share of motor bikes had a boom and the market share of
motor bikes came to 86% and the scooters came to 12 % and
the mopeds to 2%.

The marketing pitch of scooters has typically emphasised

reliability, price, comfort and utility across various applications.
Motorcycles, on the other hand, have been traditionally
positioned as vehicles of power and style, which are rugged
and more durable. These features have now been
complemented by the availability of new designs and
technological innovations. Moreover, higher mileage offered by
the executive and entry-level models has also attracted interest
of two-wheeler customer. Given this market positioning of
scooters and motorcycles, it is not surprising that the new set
of customers has preferred motorcycles to scooters. With
better ground clearance, larger wheels and better suspension
offered by motorcycles, they are well positioned to capture the
rising demand in rural areas where these characteristics matter
most.

Scooters are perceived to be family vehicles, which offer more

functional value such as broader seat, bigger storage space and
easier ride. However, with the second-hand car market
developing, a preference for used cars to new two-wheelers
among vehicle buyers cannot be ruled out. Nevertheless, the
past few years have witnessed a shift in preference towards
gearless scooters (that are popular among women) within the
scooters segment. Motorcycles, offer higher fuel efficiency,
greater acceleration and more environment-friendliness. Given
the declining difference in prices of scooters and motorcycles in
the past few years, the preference has shifted towards
motorcycles. Besides a change in demographic profile,
technology and reduction in the price difference between
motorcycles and scooters, another factor that has weighed in
favour of motorcycles is the high re-sale value they offer. Thus,
the customer is willing to pay an up-front premium while
purchasing a motorcycle in exchange for lower maintenance
and a relatively higher resale value.

Suppliers & Manufacturers

As the following graph indicates, the Indian two-wheeler

industry is highly concentrated, with three players-Hero Honda
Motors Ltd (HHML), Bajaj Auto Ltd (Bajaj Auto) and TVS Motor
Company Ltd (TVS) - accounting for over 80% of the industry
sales as in 9MFY2005. The other key players in the 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), Suzuki motors (P) Ltd.

KEY PLAYERS IN THE MARKET

BAJAJ AUTO LTD

HERO HONDA CO. LTD

TVS MOTORS CO LTD

YAMAHA MOTORS INDIA LTD

HONDA INDIA (P) LTD

ROYAL ENFIELD LTD

MARKET SHARE OF TOP PLAYERS

Technology

Two-wheeler is one of the rare industries, which is capital as

well as labor intensive. The setting up of a green field venture
and ancillary network require enormous capital investment. The
assembly operation is highly labor intensive.
The capital requirement for a venture varies from segment to
segment and based on amount of outsourcing. For eg setting
up of 0.1mn capacity plant for manufacturing scooter requires
approximately Rs1bn and motorcycles Rs1.7bn.
Two-wheeler production entails an assembly of over 700
components, including those sourced from vendors /
independent manufacturers(about 60-70%). In the press shop,
sheet metal components like body frame, fuel tank, front
fender and rear fender, muffler etc are pressed, welded,
painted / plated in respective shops. In the engine plant,
engine components (cast/ forged parts) are machined and
assembled along-with other components. The engine is then
transferred to the main plant and assembled with the body and
bought out components.
Due to the peculiar characteristic of high ancillarisation,
balance sheet does not reveal the complete picture. The
material cost which is understood as fully variable, has in-built
overheads of ancillaries. Typically, when volumes are
expanding, raw material cost escalations are not passed on, as
ancillaries are able to spread their overheads over larger
volumes. Ancillaries add as much as 50-300% value on the
basic raw material. While steel and aluminum account for 5%
each, of the material cost, 60-70% of the cost is incurred on
components sourced from outside.
Engine is the heart of an automobile. The function of an
automobile engine is to convert chemical energy of the fuel into
mechanical energy, to power the vehicle. In the engine, petrol
and air mixture is burnt from the spark ignited by a spark plug
in a cylinder. The combustion builds up pressure, which pushes
the piston. The reciprocal movement of the piston (riveted to a
crankshaft) is converted in rotating motion. The power is
transmitted from the crankshaft to the wheels by a mechanism
of gears.
The engines can be broadly classified as two and four stroke
engines based on number of strokes used to produce a single
power stoke. In a four-stroke engine - suction, compression,
power and exhaust operations are carried out by four different
strokes of the piston. Therefore four-stroke engine produces
one power stoke out of every four strokes of the piston. In a
two-stroke engine one power stroke is produced out of every
two strokes of the piston.
In a 2-stroke engine, during the emission of the exhaust gases,
fresh fuel/air mixture comes from transfer port to the main
cylinder. This leads to emission of some unburnt gasses along
with exhaust gases leading to drop in fuel efficiency and
increase in pollution through emission. However, a two-stroke
engine generates twice as much power as four stroke, engine
size and speed being the same. A four-stroke engine is heavier,
complex in design and expensive.
Gears determine the ratio between engine speed and wheel
speed, using a mechanism of gear wheels of different
diameters. In a geared drive, the driver manually shifts the
gears to change the torque supplied to the wheels. Whereas in
a variometric drive, the torque is transmitted by a belt running
between variable diameter pulleys, providing infinite number of
gear ratios.
Scooters originated in Italy and were designed for ladies,
particularly nuns. It has no bar in the front and the engine and
wheels are covered for the convenience of women riders. The
scooter engine is shaft driven.
In India, scooter manufacturing was started in 1972 by Bajaj
Auto in collaboration with Piaggio, Italy. With the passage of
time, scooters have taken considerable position in domestic
transport as they are considered as rugged yet safe family
vehicle. This perception was due to a larger board area, which
can be used to carry groceries and a better carrying capacity,
which helps in driving three adults on the vehicle. But the
scooters suffered from poor aesthetics, low fuel efficiency and
difficulty in driving.
The introduction of ABS body along with variometric
transmission by Kinetic Honda changed the perception leading
to a shift in demand from moped users like youngsters and
working women.
Motorcycle - the name is evolved from motorised cycle. A
motorcycle has an engine, wheels and chain exposed.
Moreover, it is chain driven. Two-stroke motorcycles are
positioned as power bikes by making use of their high power
delivery to cater the young generation. Four-stroke motorcycle
is positioned as fuel-efficient and environment friendly vehicle.
The Indo-Japanese motorcycles have advantage of better fuel
efficiency, more power, better road grip, low emissions and
lightweight compared to scooters. Usually, motorcycles are the
costliest among two-wheelers.
Mopeds - the motorcycle with pedals is the entry level two-
wheeler. Mopeds are the cheapest category of two wheelers,
having low power compared to scooters and motorcycles.
Mopeds are most popular amongst college students, ladies and
low income house holds. These vehicles cost in the range of
Rs12,000 and onwards. Mopeds are predominantly used for
small distance transportation. Mopeds are also used as the
second vehicle in the family along with car or
scooter/motorcycle.
Autorickshaw, as the name indicates is a motorised cycle
rikshaw, a three-wheeler. The shortage of personal and mass
commute transport in the country, easy maneuverability on
narrow and crowded roads and low operation costs gave rise to
exponential growth for three-wheeler industry in the country.
Three-wheelers are also used as goods transport vehicles for
small distance transportation within the city limits.
The Indian three-wheeler industry is dominated with petrol
engine vehicles. But the dominance was threatened to an
extent with the introduction of diesel engines from Crompton
Greaves, which provides a benefit of low operating cost. But
higher vibration and maintenance cost lead to drop in sales of
diesel engine three-wheelers.
All the two-wheeler manufacturers are regulated by emission
levels.
INDUSTRY COMPARISON

According to the Society of Indian Automobile Manufacturers'

latest data for May, two-wheeler sales during the month at
6.06 lakh units, dropped 9.88 per cent below the 6.73 lakh sold
in the same month last year. Cumulative sales of two-wheeler
at 11.77 lakh units during April-May 2007, too, were lower than
the 12.79 lakh units of April-May 2006.
The same story of declining sales has been seen in the case of
medium and heavy commercial vehicles: 17,697 units in May
(19,575 units) and 35,375 during April-May (37,688 units).
Within this segment, it is the sales of goods carriers that have
really plunged to 14,993 in May (17,866) and 30,374 units in
April-May(34,552).
Roughly 70 per cent of two-wheeler and truck sales are
financed. The rise in interest rates have clearly impacted these
segments.

TRENDS IN THE TWO-WHEELER INDUSTRY

Companies raising capacity to meet the growing demand

All the major two-wheeler manufacturers, viz. Bajaj Auto,

HHML, TYS, HMSI and others, have increased their
manufacturing capacities in the recent past. The total capacity
of these players stood at 7.8 million units per annum (FY2007)
as against total market sales of 3.8 million units in FY2006.
Most of the players have either expanded capacity, or
converted their existing capacities for scooters and mopeds into
those for manufacturing motorcycles. The move has been
prompted by the rapid growth reported by the motorcycles
segment since FY1995.

HHML increased the capacity of its plants from 1.8 million units
in FY2003 to 2.25 million in FY2006 and has been able to
achieve 92% capacity utilisation. In light of the increase in
demand for motorcycles, the company plans to set up a new
plant. Since its entry in the Indian market during FY2002, HMSI
has aggressively expanded its capacity.

Increasing focus on exports

For the first nine months of FY2007, two-wheeler exports

increased by 37% over the corresponding previous, led mainly
by motorcycles even as exports of other two-wheelers were
healthy. While motorcycle exports increased by 40%, scooter
and moped exports increased by 29% and 27% respectively.

Motorcycle exports by Bajaj Auto, HHML and TVS have reported

a tobust growth in FY2008 and are expected to increase further
in the medium term.
 Two-Wheeler Exports from India (in numbers)
FY FY FY FY FY
CAGR 9
(FY200 MFY
2 2004 2005 2006 2007
7)
003 2008
Scooters 20,1 25,62 2833 3011 5314 27.4 4483
88 5 2 6 8 2
Motorcyc 35,2 41,33 56,88 1261 1872 51.4 1888
les 95 9 0 22 87 07
Mopeds 27,7 44,17 18,97 2333 2423 -3.3 2273
54 4 1 0 4 9
Total 83,2 111,1 1041 1795 2646 33.5 2563
37 38 83 68 69 78

RECENT DEVOLPMENTS

The fanfare of biennial Auto Expo and the grand plans for new
launches backed by handsome sales to start with were followed
by pressures of rising input costs, lack of retail finance and a
nosedive in demand--it was a roller-coaster ride for the two-
wheeler industry in 2008.
The irony that encapsulated the sector was reflected in the fact
that when all the manufacturers were crying hoarse about
difficulties in selling products, sales during the January-
November actually grew. When some companies were finding it
difficult to sell motorcycles in the price range of Rs 35,000 to
Rs 65,000, some others thought of launching bikes priced
around Rs 50 lakh.
The year also saw the home grown companies seeking to
assert themselves in terms of technological development, albeit
it leading to a court battle over patent between Bajaj Auto Ltd
and TVS Motor Co.On other hand, four-wheeler major
Mahindra& Mahindra saw an opportunity to test waters in two-
wheeler space by forming a joint venture with Kinetic Motor.
Italian superbike maker Ducati's launch of a range of bikes,
priced between Rs 15 lakh and Rs 50 lakh, and arrival of
Suzuki's Hyabusa tagged at Rs 12.5 lakh were undoubtedly
talking points, but the industry talk for most of the year
revolved around sliding sales, triggered by high interest rates
and lack of retail financing.
The industry was unanimous that the decision by a majority of
banks and financial institutions to either stay away from two-
wheeler financing or tighten the norms has resulted in
slowdown in retail uptake, hurting the sector.

Munjals-promoted Hero Group, better known for their two-

wheeler prowess, announced plans to foray into aviation sector
with Rs 500-crore investment that will see it manufacturing of
light sports aircraft and applications for aerospace, besides
setting up aviation training institutes and colleges.
As for the country's biggest two-wheeler maker Hero Honda
Motors, 2008 was a year that it will look back with a sense of
satisfaction on being able to not only withstand the intense
pressure of market slump but also expand its market share.
The company announced in the beginning of the year that it
would launch 12 models in 18 months, and commissioned its
third facility at Haridwar, which has a capacity of producing 10
lakh units a year.
While Hero Honda was busy planning to strengthen its position,
its rivals Bajaj Auto and TVS Motor had to fight it out, literally
in the courts carrying over last year';s legal battle over usage
of twin spark plug technology.
Bajaj Auto had accused TVS of violating its patent of twin spark
technology, which the latter had planned to use in its 125 cc
bike'Flame'. After doing rounds of various courts and
defamation suits, TVS had to launch a modified single spark
ignition engine-based'Flame'.
A corporate battle was also seen in the electric vehicle segment
with Hero Group and Ultra Motors breaking off their joint
venture and deciding to walk separate ways. On the contrary,
Mahindra& Mahindra announced its entry into the two-wheeler
segment by forming a joint venture with Kinetic Motor
Company (KMC)in which it held 80 per cent stake. M&M had
bought operating assets of KMC for Rs 120 crore.

Fiscal Policy

The Union Budget for 2001-02 had lowered the excise duty on
two-wheelers (with engine capacity in excess of 75 cc) from
24% to 16%. The manufacturers responded to this by passing
on a relatively large part of the excise cut to customers. The
Union Budget thereafter have left the excise duty on two-
wheelers unchanged. But the Union Budget 2007-08 provides
for a weighted deduction of 150% for investments in R&D. This
may facilitate increasing R&D allocations and allow for
improvement in the technical as well as product development
skills of the Indian companies.

Indian Auto Policy 2002

The Government of India approved a comprehensive

automotive policy in March 2002, the main proposals of which
are as under:

Foreign direct investment : Automatic approval is proposed

to be granted to foreign equity investment up to 100% for
manufacture of automobiles and components.

Import tariff : Import tariffs are proposed to be fixed at a

level such that they facilitate the development of
manufacturing capabilities as opposed to mere assembly.
Incentives for R&D : The weighted average tax deduction
under the Income Tax Act, 1961 for automotive companies is
proposed to be increased from current level of 125% (The
weighted average deduction for R&D was increased to 150% in
the Union Budget 2007-08). Further, the policy proposes to
include vehicle manufacturers for a rebate on the applicable
excise duty for every 1% of the gross turnover of the company
expended during the year on R&D.

Environmental aspects : Adequate fiscal incentives are

proposed to promote the use of low-emission auto fuel
technology (in line with the Auto Fuel Policy). The auto policy
states the Government's intent to align domestic policy with
the international practice of imposing higher road tax on old
vehicles so as to discourage their use.

TWO WHEELER SALES

Two-wheeler sales ended the financial year with a bang with
the three biggest industry players — Hero Honda, Bajaj Auto
and TVS Motors whose combined marketshare exceeds 85% —
recording double digit growth in March, finishing 2005-06 at a
record high.
Other industry players like Honda Motorcycles, Kinetic and LML
are still to declare their numbers.
New model launches, booming economy, strong GDP growth,
easy availability of finance and oil price hikes which pushed the
buying population towards fuel efficient modes of commuting
saw the industry continue its growth momentum of the past
couple of years.
Industry No 2 Bajaj Auto registered the fastest growth among
the big three at 26%. In fiscal 2005-06, it recorded sales of
20.2 lakh units, against 16.04 lakh units the previous year.
Motorcycles were the main growth drivers for the company with
category bestsellers like the CT100 and Pulsar pushing growth
32% from 19.12 lakh motorcycles to 14.5 lakh units, easily the
highest growth in the industry.
In comparison, market leader Hero Honda grew 14.59% as its
sales crossed 30 lakh units for the first time, up from 26. 2
lakh units sold in 2004-05. Its growth was led by new models
like the Pleasure scooter, Achiever and Super Splendor
motorcycle.
TVS Motors registered 15% growth in two-wheeler sales
clocking 13.42 lakh units in 2005-06 as against 11.67 vehicles
in 2004-05. Launch of new models like the Apache, Star and
new variants of existing models like Victor saw motorcycles
push growth for the company with sales of 8.06 lakh units for
2007-08 as against 6.79 lakh units in 2005-06.