A COMPREHENSIVE PROJECT – 1 Entitled On “AUTOMOBILE INDUSTRY (TWO - WHEELER)” Submitted to
Anand Institute of Management Affiliated to SARDAR PATEL UNIVERSITY, V.V.NAGAR
In Partial Fulfillment of the Requirement of the Award for the Degree of
MASTER OF BUSINESS ADMINISTRATION Under the Guidance of Dr. N.N.Patel Shri G.B.Dave
Presented by Students’ of M.B.A Semester-III Patel Jigar R. Samtani Manoj Parmar Sunil Patel Urvesh
32 43 66 70
ANAND INSTITUTE OF MANAGEMENT M.B.A PROGRAMME OPP. TOWN HALL, NR.GRID, ANAND December 2005
2
2
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 help helps s us to deve develo lop p our our skil skilll & conf confid iden ence ce to do bett better er in all all resp respec ectt 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 differ different ent from from theory. theory. The report report contain contains s the detail detail inform informati ation on about about TwoTwoWheeler 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 Date: 05/01/2006
Patel Jigar Samtani Manoj Parmar Sunil Patel Urvesh
TABLE OF CONTENT Preface Acknowledgement Declaration Executive summary Objectives of the Study
Sr. No. 1 2 3 4 5 6 7
8 9 10
Particulars
Page No.
Evolution and Growth of Industry in India Product Profile Demand Determinants in the Industry Players in the Industry Distribution Channel in the Industry Key Issues and Trends PESTEL Analysis Industry Analysis using Porter’s Five Force
01 09 14 22 28 40 54
Model Future outlook Conclusions/Suggestions
6
77 89 95
Annexure Bibliography
LIST OF TABLES
SR.NO. PARTICULARS
1 2 3 4 5 6 7 8 9 10 11 12 13
Two-Wheelers: Comparative Characteristics Production report Income of target customer Existing Duty Structure Domestic Sales Flash Report Delivery time for different region Cost Structure of Two Wheeler Industry Two-Wheeler Exports from India Company wise two-wheeler exports Growing Prosperity Economic Highlights of India Demand Forecast for Motorcycles and Scooters Projected Export Turnover
7
TABLE
PAGE
NO. 1 2 3 4 5 6 7 8 9 10 11 12 13
NO. 9 10 15 20 23 39 46 51 52 68 70 91 94
LIST OF GRAPHS SR.NO.
PARTICULARS
GRAPH
PAGE
NO. 1 2 3
NO. 1 2 6
1 2 3
Gross Turnover of Automobile Industry Segmentation of Automobile Industry Segmental Growth of the Indian Two Wheeler
4 5 6
Industry Demand for Motorcycles, Mopeds & Scooters Change in status within Two-wheeler Industry Annual Growth in Demand for Motorcycles, Mopeds
4 5 6
8 8 8
7 8
& Scooters Changing Scenario In Two Wheeler Industry Shares of Two-Wheeler Manufacturers in Industry
7 8
13 22
9 10 11 12 13 14
Sales 2003 India Dealer Satisfaction Study 2004 DSS Ranking TCS Study Ranking Chart Segmental Classification and Characteristics Trends in Segmental Share in Industry Sales Regional Two Wheeler Market Share
9 10 11 12 13 14
33 35 43 47 48 66
8
LIST OF DIAGRAMS SR.NO.
1 2 3 4 5
PARTICULARS
A three-wheeled business Channel Structure Competitive Model for Automobile Dealer Grid Analysis Regulatory Framework
9
DIAGRAM
PAGE
NO. 1 2 3 4 5
NO. 29 30 31 37 72
CHAPTER 1
EVOLUTION 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 multi utility 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 n 800000 o i l l i 600000 m 400000 n i ( . 200000 s R 0
1996- 1997- 1998- 1999- 2000- 2001- 200297 98 99 00 01 02 03 YEAR 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
13.44%
4.03%
3.90%
Commercial Vehicle Two-Wheeler Three-Wheeler
78.63%
Passenger Vehicle
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), commercial vehicles 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 TWOWHEELER 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 50s when 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 mid80s. 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 fourstroke 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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GROWTH OF TWO WHEELER INDUSTRY In terms of volume, 4,613,436 units of two-wheelers were sold in the country in 9MFY2005 with 256,765 units exported. The total two-wheeler sales of the Indian industry accounted for around 77.5% of the total vehicles sold in the period mentioned. Segmental Growth of the Indian Two Wheeler Industry (FY1995-2004) Graph: 3
Source: ICRA Sectoral Analysis - Jan 2005
Graph: 3 presents the variations across various product sub-segments of the two-wheeler industry between FY1995 and FY2004. 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 16
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 changes in 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 twowheelers. 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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Source: ICRA Sectoral Analysis - Jan 2005
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CHAPTER 2
PRODUCT 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
> 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
Highest
Low
Price (Rs. as in January 2005)
High
Source: ICRA Sectoral Analysis - Jan 2005
PRODUCTION OF DIFFERENT COMPANIES DURING MAY-2004 TO JAN2005 20
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
Category May Segment/Subsegme 2004 nt Manufacturer.
Two Wheelers A: Scooter/Scooterette Wheelsize not over 12" A1: Engine capacity <75 cc Bajaj Auto 1792 Kinetic Engg 1604 LML 0 TVS Motor 6465 9861 Total A2: Engine capacity 75-125 cc Bajaj Auto 50 HMSI 28580 Kinetic Engg 4712 LML 0 Majestic Auto 157 TVS Motor 11294 44793 Total A3: Engine capacity 125-150 cc Bajaj Auto** 9316 HMSI 8250
Jun 2004
Jul 2004
Aug 2004
Sep 2004
Oct 2004
Nov Dec 2004 2004
2045 2800 0 8950 13795
5105 3635 0 9078 17827
2703 2880 0 7329 12912
2788 3650 0 6949 13387
5132 3020 0 8576 16728
2840 3200 0 6093 12133
744 2832 0 4800 8376
996 2268 0 3447 6711
1113 29690 6820 0 251 13402 51276
2031 32960 5820 0 368 14304 55483
3305 34170 6380 0 213 13710 57778
3714 34001 6890 0 152 13513 58270
3524 31681 6680 0 79 14394 56358
954 31722 6850 0 140 12586 52252
1678 31679 5682 0 66 14439 53544
1320 31851 5282 0 0 12660 51113
6687 8130
7061 8100
7496 8500
7704 8750
4849 9602
2777 9616
5568 8050
6443 9600
21
Jan 2005
LML 2080 TVS Motor 0 19646 Total 74300 Total A B: Motorcycle/StepThrough: Wheel size more than 12" B1: Engine capacity <75 cc Bajaj Auto 1640 B2: Engine capacity 75-125 cc Bajaj Auto 72802 Hero Honda 200940 Kinetic Engg 3446 LML 6638 Majestic Auto 725 TVS Motor 33654 Yamaha Motor 19155 337360 Total B3: Engine capacity 125-250 cc Bajaj Auto 20852 Hero Honda 9384 HMSI 0 LML 5051 TVS Motor 3212 Yamaha Motor 2757 41259 Total B4: Engine capacity over 250 cc Royal Enfield 1915 382174 Total B C: Mopeds: Engine capacity <75 cc, wheels over 12" Kinetic Engg 3373 Majestic Auto 6433 TVS Motor 19884
2554 0 17371 82442
2957 0 18118 91428
1929 0 17925 88615
2654 0 19108 90765
2293 0 16744 89830
1616 0 14009 78394
2850 0 16468 78388
2289 0 18332 76156
1110
1793
2077
1256
1653
1389
1202
1536
72412 76154 81654 98310 111171 103262 100833 92382 190412 197480 175785 210692 228550 220151 223595 221372 3800 2599 3256 4620 3538 3420 3280 2890 5550 5402 5223 6671 9383 5400 7136 4850 735 632 548 530 157 1 0 0 38040 38715 53458 44190 65732 49260 0 47483 13140 11373 9051 10037 12984 12574 14773 16046 324089 332355 328975 375050 431515 394068 349617 385023
23595 10655 0 3500 3778 5790 47318
27155 13666 0 598 4050 9186 54655
19440 14271 0 185 2649 7644 44189
20010 14288 3150 152 15022 9110 61732
49068 11801 5603 880 3607 7036 77995
34467 11870 8401 24 12291 5237 72290
41545 9092 9006 280 4835 2729 67487
57967 10173 11400 0 10398 4475 94413
2227 2601 2525 2500 2531 2601 2875 2565 374744 391404 377766 440538 513694 470348 421181 483537
2222 2129 2304 2820 2820 2620 2820 2350 6797 6117 5800 5157 860 3258 3699 2983 21665 25338 24572 23227 21900 26579 24321 17982
22
29690 30684 33584 32676 31204 800656 25580 30840 23315 Total C Total of TW category 486164 487870 516416 499057 562507 562507 731419 530409 583008 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 the market share of ungeared scooters from 7% to 12%. And the remaining has decrease in the market share.
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CHAPTER 3
DEMAND DETERMINANTS
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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 twowheeler 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
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
urbanization,
which
creates
a
need
for
personal
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 Less than 90 90-200 200-500 500-1000 1000-2000 2000-5000
5000 and above All India
Scooters 3 20 30 32 24 23
22 8
Motor-cycles 2 15 29 34 35 44
56 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) 27
surge in demand. In 1995-96, 80 per cent of Indian families earned less than Rs 90,000 per annum, this fell to 72 per cent in 2001-02 and will further fall to 51 per cent by the end of the decade. Just three per cent of families earned between Rs. 2-10 lakh in 1995-96, this doubled by 2001-02 and is forecast to rise to 13 per cent by the end of the decade. Those earning over Rs. 10 lakh, around 0.2 per cent of the population in 2001-02, will rise to 1.7 per cent by the end of the decade.
PENETRATION OF TWO-WHEELERS On a base of around 28mn vehicles on Indian roads and around 175mn households, there were only 160 motorized two-wheelers per thousand households in FY98. This compares poorly with countries like Thailand where it is around 600 per thousand households. Also with a household size of 5.5 persons and more than one wage earner in about 60% of the households, the potential for a second vehicle demand is also good. Post-liberalization (ie FY92 to FY96) Indian households have graduated to higher income groups, so there is good market for two-wheeler in India.
PROMOTIONAL SCHEME Different companies provide different promotional scheme to push-up their sales and attract the customer. In case of some special schemes like the 0% interest and low down payment scheme, (one such was run by Bajaj Auto where the down payment was only Rs999) sales of two-wheelers increased by up to 70% of total sales Support services provided to the customers by various companies
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Hero Honda
6 free after sales services, 1-year warranty of engine in case for 'Splendor' and 'CBZ'
3 free services, 1-year warranty for engine in case of 'CD 100'. Bajaj Auto
3 free services, 1-year warranty for engine in case of 'Caliber'.
3 free services, 1-year warranty for engine in case of scooters. Escorts Yamaha
3 free services, 1-year warranty for engine. TVS Suzuki
3 free services, 1-year warranty for engine. Kinetic Motor
3 free services, 1-year warranty for engine. LML
3 free services, 3 paid services and 1-year warranty for engine. Today almost all dealers have the facility of a mobile service in case of a
breakdown on the road.
Sales pattern through out the year
29
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 don’t 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
Honda
Dealerships/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.
30
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 pay commission, the disposable income has improved exponentially over the years. This will have multiplier effect on demand for consumer durables including twowheelers. 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
31
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 (%)
2-wheelers 2-wheelers Secondhand
Upto Above Motorcycles
75cc 75cc (including
Duty Customs
Duty
(%) 2001-02
2001-02 16% 16%
60% 60%
mopeds) and cycles fitted with auxiliary motor Upto
75cc
16%
105%
Above
75cc
16%
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%and for secondhand 105%. Thus this will make effect on the price of the vehicle.
Changing Income Demographics will Drive Changes in Demand
32
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.
33
CHAPTER 4
MAJOR PLAYERS
34
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
35
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 JAN2005 The table given below shows the Sales of different companies during May2004 to Jan-2005 according to different engine capacity for motorcycle, scooter and moped segments Domestic Sales flash report for September 2004 Table: 5 Category Segment/Subsegme nt Manufacturer. Two Wheelers A:
May
Jun
Jul
Aug
Sept
Oct
Nov
Dec
Jan
2004
2004
2004
2004
2004
2004
2004
2004
2005
Scooter/Scooterette
36
Wheelsize not over 12" A1: Engine capacity <75 cc Bajaj Auto 2145 Kinetic Engg 2600 LML 1 TVS Motor 5948 Total 10694 A2: Engine
2310 3562 2 8181 14055
4853 3682 3 7969 16507
3195 2789 1 5791 11776
2410 3366 1 9823 15600
3998 3120 0 7715 14833
2052 3388 0 7878 13318
1435 2545 0 2433 6413
1327 2280 0 3034 6641
capacity 75-125 cc Bajaj Auto 366 HMSI 24782 Kinetic Engg 5916 LML 0 Majestic Auto 102 TVS Motor 10690 Total 41856 A3: Engine
546 24772 5615 0 150 13277 44360
2389 30176 5789 0 222 14215 52791
2036 31629 6588 0 167 1226 52681
3017 2738 31888 28128 7109 6740 00 51 63 13234 13361 55299 51030
2157 30532 6992 0 28 12411 52120
1654 29584 5545 0 25 11958 48766
1455 29248 5230 0 21 11548 47502
capacity 125-150 cc Bajaj Auto** HMSI LML TVS Motor Total Total A B:
8420 8140 216 0 18729 77144
6660 7928 2144 0 16732 86030
641 8633 1840 0 16891 81348
6826 8767 2064 0 17657 88556
5496 9590 1449 0 16535 82398
6392 9595 2243 0 18230 83668
5330 8121 1479 0 14930 70109
5245 9472 163 0 16347 70490
1973
1721
1299
1990
1677
1249
1249
1386
7611 8183 2100 0 17894 70444
Motorcycle/StepThrough: Wheel
size
more than 12" B1: Engine capacity <75 cc Bajaj Auto 1622 B2: Engine capacity 75-125 cc Bajaj Auto Hero Honda
55694 67319 71609 79310 98361 91436 105151 95441 72009 198449 18586 188150 172996 198882 228434 218855 216792 214317 37
Kinetic Engg 3507 LML 4242 Majestic Auto 730 TVS Motor 36280 Yamaha Motor 18252 317154 Total B3: Engine capacity 125-250 cc Bajaj Auto 20750 Hero Honda 9058 HMSI 3748 LML 4145 TVS Motor 2702 Yamaha Motor 40403 Total B4: Engine
3514 6675 698 40282 15384 31968
2901 5121 644 45468 10857 324750
3346 3534 459 4319 12847 315685
21110 10100 2211 3999 4577
22872 13427 1465 3509 7896
20472 14269 413 2522 6841
4539 9698 398 36480 14797 361125
20728 13346 2884 345 19386 5582 41997 49169 44517 62721
3670 8022 167 57064 12712 401505
3915 7349 94 50388 14856 0060
3344 6146 94 48470 11506 381763
3080 4310 51 44094 9553 347414
41560 11483 5617 238 14584 4399 77881
38658 11327 8425 448 11163 4723 74744
41023 8458 9100 283 11791 3688 74343
49617 10276 11284 443 9490 2939 84049
capacity over 250 cc
Royal Enfield 1968 1956 Total B 361147 6560 C: Mopeds:
2259 2214 2200 2700 2611 2103 2816 37789 36371 42803 483763 47921 45945 435665
Engine capacity <75 cc, wheels over 12" Kinetic Engg 2733 Majestic Auto 3071 TVS Motor 19829 25633 Total C Total of TW 457224 category
2777 3514 21048 27339
2745 4206 24576 31527
1908 3294 21279 26481
2126 3261 22145 27532
2915 653 21273 742035
2548 2850 21739 27137
2930 2101 17931 22962
2820 2286 23721 28827
47007 495456 471544 544124 544124 730753 552529 534982
Source: SIAM Motorcycle majors Hero Honda, Bajaj Auto and TVS Motors ended the last month of the financial year 2004-05 on a rising sales note with Honda leading the race with 20.5 per cent growth in March.
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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. India’s 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, Bajaj’s 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. India’s 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 in the 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.
39
CHAPTER 5
DISTRIBUTION CHANNEL
40
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 criteria’s - Customer: The customer then can buy the product from the Dealers.
MANUFACTURER (Finished Product)
STATEWISE AUTHORISED DEALER
CUSTOMER
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 a bare 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
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 42
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 43
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
44
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 aftersales 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.
45
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.
46
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 47
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.
48
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:
49
Grid Analysis Diagram: 4
Source: ICRA
Motivators: Attributes with a high stated importance and an equally high impa
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 4wheeler 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%
51
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 of new vehicles (avg. days)
5
8
5
6
6
Time for delivery of fast moving parts (avg. days)
10
19
12
12
12
Avg. monthly volume in units
156
140
214
207
186
Avg. monthly service volume in units
736
448
1016
871
826
Service capacity utilization (% responding over 80% utilization)
57
60
60
60
59
sales
Source : SIAM
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CHAPTER 6
KEY ISSUES AND TRENDS
53
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 he has 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 trust and relationship with the customer. Give the customer the true ownership feel of the product or service, by making them proud of their purchase and ownership.
54
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 relationship with 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, understanding the 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.
55
Today, managing the customer relationship has become the single most important dimension of enterprise strategy. It is important to look at each individual walking into your showroom as a ‘Lifetime’ customer and it will be the only time before he/she becomes a proud owner of your product and services for life.
CUSTOMER SATISFACTION REPORT OF TWO WHEELERS According to the findings of the 2005 total customer satisfaction (TCS) study released on 23rd June 2005, by market information provider TNS, the newly launched Bajaj CT100 and Honda Unicorn rank highest in their respective segments, while Hero Honda Splendor + leads the competitive 'executive' bikes. Royal Enfield continues to dominate the niche 'cruiser' bikes with its Bullet 350 recording segment-best ratings. Representing the responses of more than seven thousand newmotorcycle buyers towards the performance of 40 models in the key areas of sales satisfaction, product quality, motorcycle performance and design, aftersales service, brand image, and cost-of-ownership, the 2005 Motorcycle Total Customer Satisfaction (MTCS) study conducted by TNS specialist division, TNS Automotive, is the largest syndicated motorcycle study in India. The TCS index score provides a measure of satisfaction and loyalty a given model or brand enjoys with its customers.
TCS Study Ranking Chart Graph: 11
56
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
57
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 in FY2004, with the two-wheeler industry accounting for around 20% of this. The
58
top three two-wheeler manufacturers accounted for around 80% of total twowheeler sales in volume terms in FY2004. Thus, the two-wheeler industry’s performance is closely linked to the performance of these three players. Raw material costs are the largest cost head for companies in the twowheeler 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. While interest 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 Criteria’s, 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
59
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
60
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 61
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 twowheeler 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
62
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 twowheelers 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 as against 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
63
HHML increased the capacity of its plants from 1.8 million units in to 2.25 million milli on in 2004 and has been able to achieve 92% capacity utilizatio utilization. n. 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 cons co nsum umer ers s to towa ward rds s pr prod oduc ucts ts wi with th su supe peri rior or fe feat atur ures es an and d st styl ylin ing. g. Be Bett tter er awareness awarenes s about international international models has raised expectations expectations of consume consumers rs on some so me ke key y at attr trib ibut utes es,, es espe peci cial ally ly qu qual alit ity, y, st styl ylin ing, g, an and d pe perf rfor orma manc nce. e. Hi High gh compet com petiti itive ve int intensi ensity ty has prom prompte pted d play players ers to lau launch nch veh vehicl icles es wit with h im improv proved ed 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 been launched 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. Moreove More over, r, in the recent pas past, t, the mot motorcy orcycle cle segm segment ent has wit witness nessed ed 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
64
and Co Come mett 25 250). 0). Th The e pr produ oduct cts s in th this is se segm gmen entt cat cater er fo forr st styl yle e co cons nsci ciou ous s consumers. In the the scoot scooters ers segme segment nt,, the the mark market et for for plas plasti ticc-bo bodi died ed vario variome metr tric ic scooters continues to witness growth in the scenario of overall decline in scooter volume volumes. s. Higher Higher volume volumes s and growth growth are especi especiall ally y true true for certain certain scoote scooter r mode models ls,, such such as Honda Honda Acti Activa va,, that that broug brought ht in new new tech technol nolog ogy y (besi (besides des vario variome metr tric ic tran transm smis issi sion on)) to furt further her diff differe erent ntia iate te them them.. Thus, Thus, the the need need to diff differe erent ntia iate te and and creat create e a nich niche e has led led to comp compan anie ies s stre strengt ngthen hening ing thei their r research research and develop developmen mentt (R&D) (R&D) capabil capabiliti ities es and reducin reducing g the develo developmen pmentt time for new models. Increasing focus on exports Two-Wheeler Exports from India (in numbers) Table: 8 FY2000 FY2001 FY2002 FY2003 FY20 2004 04 CAGR 9MF 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
22739
Total
83,237 111,138 104183 179568 264669 33.5
24234
-3.3
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
65
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 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 FY20 2000 00 FY200 001 1 FY2002 FY20 200 03 FY2004 CAGR FY20 FY2005 05
Bajaj Auto 14 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 manufacturin manufa cturing g 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 certa cer tain in mo model dels s be bein ing g wi with thdra drawn wn fr from om th the e ma marke rket. t. Wi With th St Stage age I In Indi dia a 200 2000 0 emission norms coming into place, the cost of developing suitable technology has remained high.
66
The emission norms that are currently in force for two-wheelers and threewheelers 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 later than 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.
67
CHAPTER 7
PESTEL ANALYSIS
68
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 continuous increase 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
69
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.
70
Government Policies 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. The table below presents the emission norms for twowheelers 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 twowheelers (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.
71
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, India exported 111,138 two-wheelers, which marks an increase of 34% over the previous year. Despite this impressive growth, the country’s 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.
72
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 Impact on Major 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 the vehicle 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
73
incorporating latest technologies and management practices to take care of increase in vehicular traffic. For the convenience of traveling public the Government shall also promote multi-modal transportation and the implementation of mass rapid transport systems The government has announced certain key initiatives like the Golden Quadrilateral Project and rationalization of excise duty to improve demands, etc. All these initiatives pave the path towards a better future for the Indian Automobile Sector.
ECOLOGICAL ENVIRONMENT ENVIRONMENTAL ASPECTS
The automotive and oil industry have to heave together to constantly fulfill environment imperatives. The Government will continue to promote the use of low emission fuel auto technology. The Government have approved a road map for implementation for the auto fuel quality consistent with the required levels of vehicular emissions norms and environmental quality. The Government will formulate a comprehensive auto fuel policy covering the other related aspects and ensure availability of appropriate auto fuel/fuel mixes at minimum social costs across the country. Suitable institutional mechanism will be put in place for certification, monitoring and enforcement of different technologies/fuel mixes. Appropriate fiscal measures will be devised to achieve milestones in the roadmap for implementation of auto fuel policy.
74
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-à-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.
75
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 IndoJapanese 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
76
Road & Traffic Management
Inadequate and poor quality of road surface leads to increase Vehicle Opera Operati tion on Cost Costs s and and also also incr increas eased ed poll pollut ution ion.. It has been been esti estima mate ted d that 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 in the early 2000s. A case in point is HMSI, a 100% subsidiary of Honda, Japan. Tabl Ta ble e
give gi ven n
belo be low w
det etai aills
the all lliian ance ces s
of so some me ma majo jorr
two wo-w -whe heel eler er
manufacturers in India. Technological tie-ups of Select Players Table: 10
Nature of Alliance Bajaj
Technological tie-up
Company Kawasaki Heavy Industries Ltd, Japan
Product Motorcycles
Technological tie-up Tokya R&D Co Ltd, Japan
Two-wheelers
Technological tie-up Kubota Corp, Japan
Diesel Engines
HHML
Joint Venture
Motorcycles
KEL
Technological tie-up
Auto
Honda Motor Co, Japan Hyosung Motors & Machinery Inc
Motorcycles
Tie up for KEL
Manufacturing
Italjet, Italy
Scooters
and distribution LML
Technological tie-up Daelim Motor Co Ltd
77
Motorcycles
Hero
Technological
Motors
tie-up
Aprilia of Italy
Scooters
Source: INGRES
Besi Be side des s th the e be belo low w me ment ntio ione ned d te tech chno nolo logy gy al allilian ance ces, s, Su Suzu zuki ki Mo Moto tor r Corporation has also followed the strategy of joint ventures (SMC reportedly acqui acq uire red d eq equi uity ty st stak ake e in In Inte tegra gra Ov Overs ersea eas s Li Limi mite ted d fo forr ma manu nufa fact cturi uring ng an and d 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 become imperative. In this context, the ability to deliver newer products calls for sound technological backing and this has become one of the critical differentiating fact fa ctors ors am amon ong g co comp mpan anies ies in th the e do dome mest stic ic ma marke rket. t. Th Thus us,, th the e pl play ayers ers ha have ve incr in crea ease sed d th thei eirr fo focu cus s on re rese sear arch ch an and d de deve velo lopm pmen entt wi with th so some me ha havi ving ng 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 Ind ian two two-wh -wheel eeler er com compani panies, es, the Ind Indian ian ori origin ginal al equ equipm ipment ent man manufa ufactu cturer rers s (OEMs) have realized the need to upgrade their technical capabilities. These relat rel ate e to th three ree ma main in ar areas eas:: fu fuel el eco econo nomy my,, en envi viro ronm nmen enta tall com compl plia ianc nce, e, an and d 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.
78
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 6070%). 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 machin machined ed and assemb assembled led along-w along-wit ith h other other compone components nts.. The engine engine is then then transferred to the main plant and assembled with the body and bought out components. Emission levels, noise levels, color, shape etc regulate all the two-wheeler manufacturers, which vary from country to country. Imports of vehicles therefore have to pass through homologation (approval process) of a sample vehicle.
Other Factors Influencing Emission From Vehicles Inspection & Maintenance (I&M) of in-use vehicles
It has been estimated that at any point of time, new vehicle comprise only 8% of the total vehicle population. population. In India currently currently only transport transport vehicles, that is, a vehicle used for hire or reward is required to undergo periodic fitness certificati certification. on. The large population population of personalized personalized vehicles is not yet covered by any such mandatory requirement. In most countries that have been able to control vehicular pollution to a substantial extent, Inspection & Maintenance of all categories of vehicles have been one of the chief tools used. Developing countries in the South East Asian
79
region, which till a few years back had severe air pollution problem have introduced an I&M system and also effective traffic management. Incentive for Research and Development
The Government shall promote Research & Development in automotive industry by strengthening the efforts of industry in this direction by providing suitable fiscal and financial incentives. The current policy allows Weighted Tax Deduction under I.T. Act, 1961 for sponsored research and in-house R&D expenditure. This will be improved further for research and development activities of vehicle and component manufacturers from the current level of 125%. In addition, Vehicle manufacturers will also be considered for a rebate on the applicable excise duty for every 1% of the gross turnover of the company expended during the year on Research and Development carried either in-house under a distinct dedicated entity, faculty or division within the company assessed as competent and qualified for the purpose or in any other R&D institution in the country. This would include R & D leading to adoption of low emission technologies and energy saving devices. Government will encourage setting up of independent auto design firms by providing them tax breaks, concessional duty on plant/equipment imports and granting automatic approval. Allocations to automotive cess fund created for R&D of automotive industry shall be increased and the scope of activities covered under it enlarged.
SOCIO-CULTURE ENVIRONMENT Geographical Distribution
80
The Western region continues to be the largest market for two-wheelers in the country, it accounted for 35% of all two-wheeler sales in 2000. The Southern is the second largest market with a 32% share in 2000. However, the regional share varies across different product segments. Graph: 14
Source: ICRA
Demographic profile
Till a decade ago, the average age at which an Indian purchased a twowheeler was 30-40 years, with the buyer having typically put in about a decade’s employment. The purchase of the scooter also marked the family’s debut into personal motorized transport. However, over the last decade the demographic profile of the typical two-wheeler customer has changed. More often than not, the customer is likely to be salaried and in first job. With a younger audience, the attributes that are sought of a two-wheeler have also changed. 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 technologically innovations. With better ground
81
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 Difference in Consumption Patterns across towns of different sizes
Just 35 per cent of households in towns with under five lakh people owned two-wheelers in 2001-02 as compared to 50 per cent for towns with 5-10 lakh persons and 63 per cent in the case of towns with 10-50 lakh persons. The figure goes down to 38 per cent in the case of towns with over 50 lakh persons. By 2009-10, such differences are likely to reduce. Difference of Consumption Patterns across Occupation Groups in Urban and Rural areas Around 41 per cent of urban households owned two wheelers in 2001-02 versus around 11 per cent for rural areas and by the end of the decade this difference will change to 71 per cent versus 31 per cent.
Country's Income Distribution - The Past & the Future
82
In 1995-96, 80 per cent of Indian families earned less than Rs. 90,000 a year, this fell to 72 per cent by 2001-02 and is projected to fall to 51 per cent by 2009-10. In contrast, those earning over Rs. 10 lakh a year rose from 0.2 per cent to 0.4 per cent and will rise to 1.7 per cent by the end of the decade. Growing Prosperity (Income figs, in Rs. '000 per annum at 2001-02 prices, households in '000s)
Table: 10
Classification Income class
1995-96 2001-02 2009-10
Deprived
<90
131,176 135,378 114,394
Aspirers
90 - 200
28,901
41,262
75,304
Seekers
200 - 500
3,881
9,034
22,268
Strivers
500 - 1000
651
1,712
6,173
Near Rich
1000 - 2000
189
546
2,373
Clear Rich
2000 - 5000
63
201
1,037
Sheer Rich
5000 - 10000
11
40
255
Super Rich
>10000
5
20
141
Total
164,876 188,192 221,945
Effect of Change in Income Distribution on Demand for various Consumer Durables in Future
While just two per cent of households who earned under Rs. 90,000 per annum owned motorcycles in 2001-02, this rose dramatically to 15 per cent in the case of households earning between Rs. 90,000 and Rs. 2 lakh and to 29 per cent in the case of the Rs. 2-5 lakh earning households. As more people come into the higher income groups, demand increases more than proportionately.
83
ECONOMICAL ANALYSIS This section is deasling with the latest information on various economics and commercial aspects governing the Indian Automobile Sector. The present economic situation of the country makes the scenario brighter for short-term demand. Real GDP growth was at a high level of 7.4 per cent during the first quarter of 2004. Both industry and the service sectors have shown high growth during this period at the rates of 8.0 and 9.5 per cent respectively. However, poor rainfall last year will pull down the GDP growth to some extent. Taking into account all these factors along with other leading indicators including government spending, foreign investment, inflation and export growth, NCAER has projected an average growth of GDP at 6.7 per cent during the tenth fiveyear plan. Its mid-term forecast suggests an expected growth of 7.4 per cent in GDP during 2004-05 to 2008-09. Very recently, IMF has portrayed a sustained global recovery in World Economic Outlook. A significant shift has also been observed in Indian households from the lower income group to the middleincome group in recent years. The finance companies are also more aggressive in their marketing compared to previous years. Combining all these factors, one may visualize a higher growth rate in two-wheeler demand, particularly for the motorcycle segment. 84
In the first section we have given the Auto Policies of Government of India to facilitate sustainable development of Indian Automobile industry. In the second section we have given the current rates of major duties and taxes applicable to vehicles in India. Excise Duty is essentially a manufacturing tax imposed on all vehicles manufactured in India. The same rate is applicable to imported vehicles in the form of Counter Vailing Duty (CVD). Custom Duty is essentially an import duty applicable on all imports. VAT has recently replaced Local Sales Tax in India. However, VAT has not yet been adopted by all states in India. Economic Highlights of India
Table:11 Population ( 2004)
1.073 billion
GDP (2003 - 04 estimates)
US$ 650 billion (approx.)
Per capita GDP
US$ 543
GDP (PPP basis)
US$ 2.86 Trillion
GDP growth rate in 2003-04 (revised)
8.5%
GDP growth rate in 2004-05 (estimated)
6.9%
GDP growth rate in 2005-06 (projected)
7-8%
Composition of GDP
Services 56%, Agriculture 22% and Industry 22%
Inflation as on July 2005 Foreign
Exchange
4.1% Reserves US$ 145.55 billion (as on 2/09/05)
( As of September 02, 2005) Exchange rate (September 12, 2005)
US$ 1 = Rs. 43.81
Food Grains Production(2004-05 Advance 204.61 million tonnes estimates) Food grains buffer stocks (October 2004)
85
20.2 million tons
Exports (April - March 2004 - 05) (April - US$ July 2005)
79.59
billion
US$ 28.13 billion
Imports (April - March 2004 - 05) (April - US$
106.12
July 2005)
US$ 42.11 billion
Foreign Debt (March 2005)
US$ 123.3 billion
billion
Foreign Debt as %ge of GDP (March 2005) 17.4% Unemployment rate
9.1%
Average literacy rate
65.4%
Life expectancy for males
63.9 yrs
Life expectancy for women
66.9 yrs
FDI
Apr
-
March
(2004
-
2005
Apr - March (2003 - 2004 )
) US$
4.67
billion
US$ 4.74 billion
FII investment Apr - March (2004 - 2005 ) US$ Apr - March (2003 - 2004 )
11.37
billion
US$ 8.90 billion
LEGAL ENVIRONMENT In India the Rules and Regulations related to driving license, registration of motor vehicles, control of traffic, construction & maintenance of motor vehicles etc are governed by the Motor Vehicles Act 1988 (MVA) and the Central Motor Vehicles rules 1989 (CMVR). The Ministry of Shipping, Road Transport & Highways
(MoSRT&H)
acts
as
a
nodal
agency
for formulation and
implementation of various provisions of the Motor Vehicle Act and CMVR. Regulatory Framework
86
Diagram: 5
In order to involve all stake holders in regulation formulation, MoSRT&H has constituted two Committees to deliberate and advise Ministry on issues relating to Safety and Emission Regulations, namely – •
•
CMVR- Technical Standing Committee (CMVR-TSC)
Standing Committee on Implementation of Emission Legislation (SCOE) •
CMVR- Technical Standing Committee (CMVR-TSC) –
This Committee advises MoSRT&H on various technical aspects related to CMVR. This Committee has representatives from various organizations namely; Ministry of Heavy Industries & Public Enterprises (MoHI&PE)), MoSRT&H, Bureau Indian Standards (BIS), Testing Agencies such as Automotive Research of India (ARAI), Vehicle Research Development & Establishment (VRDE), Central Institute of Road Transport (CIRT), industry representatives from Society of Indian Automobile Manufacturers (SIAM), Automotive Component Manufacturers Association (ACMA) and Tractor Manufacturers Association (TMA) and representatives from State Transport Departments. Major functions the Committee are:
87
To provide technical clarification and interpretation of the Central Motor Vehicles Rules having technical bearing, to MoRT&H, as and when so desired.
To recommend to the Government the International/ foreign standards that can be used in lieu of standard notified under the CMVR permit use of components/parts/assemblies complying with such standards.
To make recommendations on any other technical issues which have direct relevance in implementation of the Central Motor Vehicles Rules.
To make recommendations on the new safety standards of various components for notification and implementation under Central Motor Vehicles Rules.
To make recommendations on lead-time for implementation of such safety standards.
To recommend amendment of Central Motor Vehicles Rules having technical bearing keeping in view of Changes in automobile technologies. CMVR-TSC is assisted by another
Committee called the
Automobile Industry Standards Committee (AISC) having members from various stakeholders in drafting the technical standards related to Safety. The major functions of the committee are as follows: Preparation of new standards for automotive items related to
safety.
To review and recommend amendments to the existing standards.
Recommend adoption of such standards to CMVR Technical Standing Committee Recommend commissioning of testing facilities at appropriate
stages.
88
Recommend the necessary funding of such facilities to the CMVR
Technical Standing Committee, and Advise CMVR Technical Standing Committee on any other issues
referred to it The National Standards for Automotive Industry are prepared by Bureau of Indian Standards (BIS) . BIS also convert the standards formulated by AISC
into Indian Standards. The standards formulated by both BIS and AISC are considered by CMVR-TSC for implementation. Standing
•
Committee
on
Implementation
of
Emission
Legislation (SCOE) – This Committee deliberates the issues related to
implementation of emission regulation. Major functions of this Committee are –
To discuss the future emission norms
To recommend norms for in-use vehicles to MoSRT&H
To finalize the test procedures and the implementation strategy for emission norms
Advise MoSRT&H on any issue relating to implementation of emission regulations.
Based on the recommendations from CMVR-TSC and SCOE, MoSRT&H issues notification for necessary amendments / modifications in the in Central Motor Vehicle Rules. Vehicular Safety Standards & Regulations
Environmental imperatives and safety requirements are two critical issues facing the automotive industry, worldwide. Indian Automobile Industry in the last decade has made significant progress on the environmental front by adopting 89
stringent emission standards, and is progressively aligning technically with international safety standards. Central Motor Vehicle Rules (CMVR) came into force from 1989 and serious enforcement of regulations came into effect. Chapter V of the Central Motor Vehicle Rules, 1989 deals with construction, equipment and maintenance of vehicles and in addition to rules governing emission limits, there are several rules in this chapter requiring motor vehicles to comply with safety regulations. Vehicles being manufactured in the country have to comply with relevant Indian Standards (IS) and Automotive Industry standards (AIS). Indian Standards (IS) have been issued since the late 1960s and these standards for Automotive Components were based on EEC/ISO/DIN/BSAU/FMVSS etc at that time. Regulations are reviewed periodically by the Technical standing Committee on MCVR (CMVR-TSC). States also have their State Motor Vehicle Rules Since 2000 ECE Regulations have been used as basis for Indian regulations and since 2003, increased efforts are being made to technically align with ECE. Variance from ECE exists on formatting phraseology and administration related issues. Alignment of Indian regulations (AIS/ BIS) with ECE is being attempted as per the broad roadmap drafted by SIAM. The current traffic conditions, driving habits, traffic density and road user behavior necessitate that maximum safety be built into the vehicles. Progressive tightening of safety standards taking into account unique India requirements has been addressed by the Road Map with a view to reducing the impact of accidents and thereby improving safety of the vehicle occupants and vulnerable road users.
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CHAPTER 8
PORTER’S FIVE FORCE MODEL
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Renowned management writer Peter Drucker called the automobile industry as "the industry of industries". The statement in itself is exhaustive, particularly considering the sector's vast areas of concern. Therefore, the management practices of such a vast and inter-meshed sector attain prime substance. To understand the growing pulse of the Indian Automobile market, one has to look at its historical developments. Till the early 80's, the government policies influenced by socialism, central planning and bureaucracy controlled the Indian Automobile Market. All production capacities were licensed and import duties were maintained high to protect the domestic industry from foreign invasion. It was a sellers market dominated by a handful of manufacturers. The Indian government has switched over its role from a controller to an enabler as they continue to focus on better infrastructure, growth oriented economic policies and creating the right environment to attract investments in the country and sectors. Over the last few years, the production and management systems have revolutionized in the automobile industry. We have witnessed a sea change from Henry Ford's traditional moving assembly line to the present day leanmanufacturing techniques. But the challenges in the globalize environment are far more severe, necessitating an apt eye on the best practices to eliminate nonvalue added activities and streamlining the value-added activities with a consumer-oriented approach.
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This can be explained best with the help of Porter Five-Force Model. Profit potential of an industry depends on the combined strength of the following five basic competitive forces:
Threat of new entrants.
Rivalry among existing firms.
Threat of substitute products.
Bargaining power of Suppliers.
Bargaining power of Buyers.
Figure below dramatically shows the forces that drive competition and determine industry profit potential. Factors are shown in the diagram which when are increased or are high results in high competition and threats in an industry.
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Threat of New Entrants
New entrants add capacity, inflate costs, push prices down, and reduce profitability. Hence, if an industry faces the threat of new entrants, its profit potential would be limited. The threat from new entrants is low if the entry barriers confer an advantage on existing firms and deter new entrants. Some barriers are discussed as below:
Large Investments: One of the factors is Large Investments
needed for set-up of a two-wheeler manufacturing unit. Costs related to manufacturing or production cost of producing 80,000 units per month on an average needs a huge initial investment.
Costs related to Research and
Development, Marketing of the product like Advertising and Promotion cost, Sales and Distribution cost and after sales services cost included to the total investments. Thus, large investment is a big barrier to the new entrant.
Economies of Scale: Many of the established companies in the
industry in pursue of decreasing their manufacturing cost have tried to produce or increased their production capacity. Presently, on an average the established player like BAJAJ, TVS, HERO HONDA produce about 80,000 units per month. To produce such large amount of units for the new players is very difficult and would require huge investments also.
Product Differentiation: New entrants do not have good product
differentiation as that of the other established players in the industry. That also matters about the looks, styles and the different product features. Product differentiation in terms of engine capacity likes that of 50 cc, 75 cc, 100cc, 125 cc, and 150 cc and above. Depending on the wheel sizes and also on geared and non-geared two wheelers. Thus, new entrants have a hard time coping up with the different variety of products available in the market.
Distribution Channels: Established players have high market
penetration in terms of distribution system. They have their dealers appointed in 95
almost all the possible cities or towns of India. More deep and good is the distribution channel system more good is the service provided and in turn increases the image of a particular company. Now days, companies are increasing their efforts to enhance and upgrade their distribution channel system to provide good customer service in time.
So, the new entrants have to
establish a good and an efficient distribution channel to serve it customers in time, which will again require a high amount of investment.
Industry Growth Rate: This is also a barrier to the new entrants if
the over-all industry growth rate is declining. If there is a negative growth rate in the two-wheeler industry then the new entrants would not like to enter into this industry but this is also vice-versa that if the industry growth rate is high than this would favor the new entrants with good sales and good profit.
Experience: Early entrants into the market gain experience sooner
than others. This can give them advantage in terms of cost and/or customer/supplier loyalty. It is difficult for a competitor to break into a market if there is an established player which knows the market well, has good relationships with the key buyer and suppliers and knows how to over come market and operating problems.
Government Policies: Legal restraints on competition vary from
patent protection, to regulation of markets, through to direct government action. If the policies are stringent and not industry friendly then this would act as barriers for the new entrants and vice-versa.
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Threat of Substitutes
Substitution reduces demand for a particular ‘class’ of products as customers switch to the alternatives- even to the extent that this class of products or services becomes obsolete. This depends on whether a substitute provides a higher perceived benefit or value. Performing the same function as the original product, substitute products may limit the profit potential of the industry by imposing a ceiling on the prices that can be charged by the firms in the industry. Two wheeler industries have got Medium or Moderate threat from substitutes. Some of the different forms of substitutes that might affect the industry are:
Product-for-product Substitution : This means a substitute of the
original product that is having same basic functions. In two wheeler industries, there is no as such product for product substitution present. The only substitute possible is cycle or public transport or cars. Cycle has got its limitations that it cannot be used for long distance traveling. Cars prove to be expensive and public transport has got its mobility limitations. Thus, there is no as such product substitute possible for a two wheeler and so threat from product substitute is decreased a lot.
Relative Price Substitute : In this type of substitute price is
compared. Substitute products, which have the same functions but not the same good quality like that of the original product but very near to it, are available at cheaper prices than that of the original product. Than in this case the substitute becomes threats to the original products or company and if substitutes like cars, in two wheeler market, does not pose threat to them as the functions are not same and there is much of price difference between them.
Substitution of Need : Substitution of need by a new product or
service, rendering as existing product or service redundant. In this the customer wants more reliable, cheaper and maintenance free products to use. His/her
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need to use user-friendly products, which are cheaper in rates and have good quality and gives years or service. A classic example for this is the two-wheeler industry specially the scooter segment. Earlier scooters were used a lot and motorcycles were less used, but now more of motorcycles are used and less scooters. The reason behind this is that technically motorcycles are more stable and easy to control while scooters have engines on right hand side, which causes imbalance. Motorcycle gives more fuel mileage than scooters and motorcycles give less maintenance than scooters. Also, motorcycles are available almost at same price as that of scooters or with little price difference. In this way substitution of need can cause threat to a particular product. Bargaining Power of the Buyers
Buyers are a competitive force. They can bargain for price cut, ask for superior quality and better service, and induce rivalry among competitors. If they are powerful, they can depress the profitability of the supplier industry. Buyer power is likely to be high when some of the following conditions prevail:
When there is concentration of buyers particularly if the volume
purchases of the buyers are high.
Supplying industry comprises of large number of small operators.
There are alternative sources of supply, perhaps because the
product required is undifferentiated between suppliers.
Component or material cost is a high percentage of total cost, since
buyers will be likely to ‘shop around’ to get the best price and therefore ‘squeeze’ suppliers.
The cost of switching a supplier is low or involves little risk.
There is threat of backward integration by the buyer if satisfactory
prices or quality from suppliers cannot be obtained. The two-wheeler industry is concentrated with buyers presently. Suppliers are moderate in that comparison. Though there are not volume purchases but
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there are large numbers of buyers present. Supplier industry has less number of large suppliers. There are about 9-10 odd suppliers in the market. As there are large amount of buyers and moderate amount of suppliers, choices left are moderate. The market was mainly dominated by big players like BAJAJ, TVS, HERO HONDA but now the scenario is changing and we have more players in the market like KINETIC MOTOR COMPANY LTD, HONDA MOTORCYCLE AND SCOOTER INDIA (P) LTD, LML, YAMAHA etc and so the market is now becoming a buyers market. This has led to more competition and buyers will likely to shop around to the best price and service and so squeeze the suppliers. Cost of switching here is more, as the price of a unit is more. Bargaining Power of Suppliers
Suppliers, like buyers, can exert a competitive force in an industry as they can raise prices, lower quality, and curtail the range of free services that they provide. Powerful suppliers can hurt the profitability of the buyer industry. Suppliers have strong bargaining power when:
Few suppliers dominate and the supplier group is more
concentrated than the buyer group.
There are hardly any viable substitutes for the products supplied.
The switching cost for the buyers is high.
Suppliers do present a real threat of forward integration.
The Indian two-wheeler industry was passing through a phase when the bargaining power suppliers were high. There were fewer suppliers who dominated the market and the switching cost for the buyers were high. There were no substitutes present. But this scenario is changing now as the suppliers have increased and more substitutes are available like easy financing of cars which might tempt a customer to switch to a four wheeler rather than going for a two wheeler.
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Bargaining power of the buyer is increasing as now days:
Many choices are available now
Easy availability of finance
This leads to low switching cost.
Information is easily available now days.
Thus, these two forces are considered together because they are linked. The relationship with buyers and sellers can have similar effects in constraining the strategic freedom of an organization and in influencing the margins of those organizations. Rivalry Among Exisiting Firms
Competitive Rivals are organizations with similar aimed at the same customer group. Firms in an industry compete on the basis of price, quality, promotion, service, warranties and so on. Generally, a firms attempt to improve its competitive position provoke retaliatory actions from others. If the rivalry between the firms in an industry is strong, competitive moves and counter moves dampen the average profitability of the industry. These wider competitive forces will impinge on the direct competitive rivalry between an organization and its most immediate competitors. There are number of factors that affect competitive rivalry:
Market Growth Rates : The idea of the life cycle suggests that
conditions in markets, primarily between growth stages and maturity, are important, not least in terms of competitive behavior. Supposing, in situations of market growth, an organization might expect to achieve, its own growth through the growth in the marketplace; whereas when markets are mature, this has to be achieved by taking market share from competitor. Earlier the two wheeler market growth rates were low because of the economic recession which increased the
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competition between the rivals to strive for higher market share. 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. But, presently the market growth rates have increased and 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 which has relaxed competition to some extent between the rivals. The share of two-wheelers in automobile sector in terms of units sold was about 80 per cent during 2003-04. The total two-wheeler sales of the Indian industry accounted for around 77.5% of the total vehicles sold.
Number of Competitors in the Industry: If number of Competitors
in the industry are less than the competitive rivalry will be less and conversely if there are more competitors in an industry, more will be the competitive rivalry between them so as to acquire high market share. Where competitors are roughly of equal size, there is danger of intense competition as one competitor attempts to gain dominance over another. While the less competitive markets tend to be those with dominant organizations within them and the smaller players have accommodated them to this situation. Earlier in 80’s, the two-wheeler market was dominated by BAJAJ Auto in scooter segment and other was LML and motorcycle segment with only three manufacturers viz Enfield, Ideal Jawa and Escorts. Thus the rivalry between the competitors was less in comparison with today’s market wherein there are many manufactures viz Hero Honda Motors Ltd (HHML), Bajaj Auto Ltd (Bajaj Auto), TVS Motor Company Ltd (TVS), 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) which has increased the competitive rivalry amongst them.
Product Differentiation: Here product differentiation is related to
the different kinds of product of the same category available in the market. If there is less product differentiation than there would more competition between the manufactures and if there is more product differentiation then there would be
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less competition present between the players. Earlier, in two wheeler market, there was more product differentiation as there were less players in the market with limited limited products. products. So there was less competition competition between the players where as today, there are more players in the market with more products. Thus the produ product ct diff differe erent ntia iati tion on is decre decrease ased d whic which h has incre increas ased ed the the comp compet etit itio ion n between the existing players.
Exit Barriers: The Indian two wheeler industries has got high exist
barriers. One of the main reasons is the high initial capital investment required for starting up a manufacturing unit. Shutting down and switching over to other industry may cost fortunes. Thus Thus in this this way, ay, wit with the the hel help of Port Porter er Fiv Five Forc Force e Mode Modell the Competetive Analysis of two wheeler industry is done. In regard to this some impo import rtan antt succ succes ess s fact factor ors s are are also also cons consis isdr dred ed whic which h are are help helpfu full for for the the development of two wheeler industry in India.
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CRITICAL SUCCESS FACTORS FOR TWO WHEELER INDUSTRY IN INDIA
Acces Access s to tech techno nolog logy y : mode models ls usin using g Japa Japane nese se tech techno nolo logy gy
dominate dominate the two-wheeler two-wheeler industry in India. With increasing increasing competition competition,, access to technology through collaboration or in-house research would emerge as a crucial enabling factor for a company to retain market share.
Introduction of new products : The rate of introduction of new
produ product cts s is an impo import rtant ant crit criteri erion on for for sust sustai ained ned grow growth th in the the two-w two-whe heel eler er industry. With the change in the user profile, models need to be constantly upgraded to cater to all consumer segments and their changing needs.
two-wheeler eler indust industry ry Diversi Diversifica ficatio tion n of product product portfol portfolio io : The two-whe
has witnessed a shift towards motorcycles, with the segment experiencing a higher growth than any other within the industry. Consequently, it has become impo import rtant ant for for comp compan anie ies s to diver diversi sify fy and and gain gain a share share in the the fast fast growi growing ng motorcycles segment.
agains nstt a one-s one-siz ize-f e-fit its-a s-allll Need Need for for focus focused ed marke marketin ting g : As agai
approach adopted during the 1980s, it is imperative for manufacturers manufacturers to clearly define target segments and cater to their needs with specific offerings.
Economies of scale : Volume turnover is considerably important
for compan companies ies in the two-wh two-wheel eeler er indust industry. ry. As most most compan companies ies signif significa icantl ntly y expanded capacities, it has become imperative for players to increase volumes to optimize their asset utilization rate. This factor is expected to have a strong bearing on the level of returns for all players.
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CHAPTER 9
FUTURE OUTLOOK
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With consumerism on an upswing in India, demand for two-wheelers is on the rise.Two wheelers in India are considered as a very efficient means of transport. With consumerism on an upswing in India, demand for two-wheelers is on the rise for a long time to come. It’s boom time for the Indian two-wheeler industry. Market leader Hero Honda Motors Ltd (HHML), Bajaj Auto Ltd (BAL) and TVS Motors Ltd (TVS) reported their highest monthly sales in October. HHML dispatched over 3 lakh vehicles in the month; BAL 2.05 lakh motorcycles and TVS reported a 17% rise in two-wheeler sales to 1.38 lakh units. This surge may have been due to the traditional spike in demand as the festival and marriage season begins at this time of the year. But then the industry has recorded double-digit hike in sales during the first six-months of the current fiscal. Total sales during the period rose 15% to 33 lakh units riding on motorcycle sales, which increased 20% to 27 lakh units. This is primarily a reflection of the galloping 8.1% Q1 GDP growth leading to higher disposable incomes and also the monsoons, which drove up rural demand. Hero Honda Motors, Bajaj Auto and TVS Motor, which together constitute over 86% of the domestic two-wheeler market, have reported an average growth rate of 20% as they sustained the excitement by a slew of new launches like Hero Honda Glamour, TVS Star and Bajaj Avenger. However, it is interesting to see consolidation in the motorcycle segment as the big three, especially HHML and BAL, leave the other players behind. In 2002-03, HHML's marketshare in the motorcycle stood at 44.56%, BAL's at 24.03% and TVS' at 18.71%. By the first half of 2005-06, the former two increased it to 50.9% and 29.5% respectively. All the other smaller players have seen shares skidding during the period with even TVS's marketshare falling to 12.4%. National Council of Applied Economic Research (NCAER) had forecast two-wheeler demand during the period 2002-03 through 2011-12. The forecasts had been made using econometric technique along with inputs obtained from a
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primary survey conducted at 14 prime cities in the country. Estimations were based on Panel Regression, which takes into account both time series and cross section variation in data. A panel data of 16 major states over a period of 5 years ending 1999 was used for the estimation of parameters. The models considered a large number of macro-economic, demographic and socio-economic variables to arrive at the best estimations for different two-wheeler segments. The projections have been made at all India and regional levels. Different scenarios have been presented based on different assumptions regarding the demand drivers of the two-wheeler industry. The most likely scenario assumed annual growth rate of Gross Domestic Product (GDP) to be 5.5 per cent during 2002-03 and was anticipated to increase gradually to 6.5 per cent during 2011-12. The allIndia and region-wise projected growth trends for the motorcycles and scooters are presented in Table 1. The demand for mopeds is not presented in this analysis due to its already shrinking status compared to' motorcycles and scooters. It is important to remember that the above-mentioned forecast presents a long-term growth for a period of 10 years. The high growth rate in motorcycle segment at present will stabilize after a certain point beyond which a condition of equilibrium will set the growth path. Another important thing to keep in mind while interpreting these growth rates is that the forecast could consider the trend till 1999 and the model could not capture the recent developments that have taken place in last few years. However, this will not alter the regional distribution to a significant extent.
Table suggests two important dimensions for the two-¬wheeler industry. The region-wise numbers of motorcycle and scooter suggest the future market for these segments. At the all India level, the demand for motorcycles will be almost 10 times of that of the scooters. The same in the western region will be
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almost 20 times. It is also evident from the table that motorcycle will find its major market in the western region of the country, which will account for more than 40 per cent of its total demand. The south and the north-central region will follow this. The demand for scooters will be the maximum in the northern region, which will account for more than 50 per cent of the demand for scooters in 2011-12. Demand Forecast for Motorcycles and Scooters for 2011-12 (in ‘000) Table: 12
Regions
2-Wheeler Segment Motorcycle Scooter
North-
East &
Central
North-East
South
West
All India
2835
4327
2624
883
10669
203
219
602
99
1124
Source: NCAER
There is a large untapped market in semi-urban and rural areas of the country. Any strategic planning for the two-wheeler industry needs to identify these markets with the help of available statistical techniques. Potential markets can be identified as well as prioritized using these techniques with the help of secondary data on socio-economic parameters. For the two-wheeler industry, it is also important to identify the target groups for various categories of motorcycles and scooters. With the formal introduction of secondhand car market by the reputed car manufacturers and easy loan availability for new as well as used cars, the two-wheeler industry needs to upgrade its market information system to capture the new market and to maintain its already existing markets. Availability of easy credit for two-wheelers in rural and smaller urban areas also
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requires more focused attention. It is also imperative to initiate measures to make the presence of Indian two-wheeler industry felt in the global market. Adequate incentives for promoting exports and setting up of institutional mechanism such as Automobile Export Promotion Council would be of great help for further surge in demand for the Indian two-wheeler industry. Operating margins of two-wheeler companies and consequently net profit margins are expected to stabilize at current levels as steel prices are easing up and companies pursue aggressive cost cutting measures. What's more HHML and BAL can also derive benefits from economies of scale as volumes grow robustly and companies increase capacity. If the present sales trend is any indication, growth is likely to be even better in the second half due to a spate of festivals and a slew of promotions launched by companies as they scramble to beat sales targets at end of the fiscal. In 2004-05, for instance, H2 sales were 54% of total volumes. Manufacturers, too, are boosting capacity to meet increased demand. Bajaj Auto is raising its production capacity to reach 2 lakh vehicles per month from around 1.5 lakh per month at present. TVS Motor is raising capacity from 1lakh units to 1.6 lakh units per month. Hero Honda, which is lining up a 150-cc model called the Achiever besides a scooter called Pleasure, is hiking capacity at its existing plant from around 2 lakh vehicles a month to 2.5 lakh units a month. In other industries too, sheer numbers will turn India into an economy that can't be ignored. The auto industry, for instance, is behind target but it should touch 1 million vehicles a year by 2005/06 according to SIAM (the Society of Indian Automotive Manufacturers). And by 2011/12 the production of motorcycles should climb to over 10 million from the current 3.2 million today, according to another research company. Companies like Bajaj and TVS are already exploring fast-moving markets in south-east Asia and even Latin America. TVS, for example is already studying
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the possibility of setting up factories in countries like Vietnam and the Philippines and Bajaj is even looking as far a field as Brazil. Projected growth of exports
The Two Wheelers also crossed three hundred thousand mark for the first time clocking around 366,724 numbers and recorded a growth rate of plus 38% over the last year. As mentioned earlier, the Indian economy is now increasingly in step with the world environment of free trade and liberal movement of goods and services cutting across intercountry barriers. In such environment, Indian exports in sectors such as automobile and auto components are expected to grow faster than many other sectors. This is also due to India’s competitiveness and qualityconsciousness now finding increasing acceptability across the world. Keeping these in view, India’s export turnover is expected to move in the following manner in next few years. Main export destinations for Two-wheelers are African countries; Bangladesh; Sri Lanka; Turkey; United Arab Emirates; Paraguay; United Kingdom; Germany; Argentina; Mexico; Australia; Hong Kong, China.
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Projected Export Turnover Table: 13
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CHAPTER 10
CONCLUSION AND SUGGESTIONS
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CONCLUSION The business and economic environment is favorable. The market is dynamic and is becoming more and more customer centric. The customer is open to novel products, services and concepts and has the money and the knowledge to rightly invest in products and service they desire. Two Wheeler segment as a whole during the year 2004-05 grew by over 15%. Backed by Government’s initiative on rural roads and better connectivity with major towns and cities, improved agricultural performance, upward trend of purchasing power in the hands of rural people, the two wheeler industry was able to achieve the record performance of crossing 6 million two wheelers with exact sales standing at 6,208,860 during the year 2004-05. The two-wheelers market has had a perceptible shift from a buyers market to a sellers market with a variety of choices. Players will have to compete on various fronts viz pricing, technology, product design, productivity, after sale service, marketing and distribution. In the short term, market shares of individual manufacturers are going to be sensitive to capacity, product acceptance, and pricing and competitive pressures from other manufacturers. All the three segments, motorcycles, scooters and mopeds have witnessed capacity additions in previous years and it will continue in the upcoming period after the openening of Honda as a local subsidiary. Over this period, only the motorcycle segment is expected witness higher demand vis-à-vis supply, while the scooters and mopeds supplies have outstrip demand. As incomes grow and people feel the need to own a private means of transport, sales of two-wheelers will rise. Penetration is expected to increase to approximately to more than 40% by 2008 The motorcycle segment will continue to lead the demand for twowheelers in the coming years. Motorcycle sales is expected to increase by
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20%yoy as compared to 1% growth in the scooter market and 3% by moped sales respectively for the next coming years. The Indian market is a very interesting market, because it is defying global trends. But for how long? And if it aligns with global trends, many an apple cart would be upset. On the other hand, we may find a new way. Firstly, we are a two-wheeler market rather than a car market, as befits our per capita income. And, for the next 10 years we may remain so. But cars will gain in importance even in this period. This is aided by the skewed development of the Indian economy, wherein IT jobs are growing faster than manufacturing jobs. There were 30 million 2-wheelers sold in the world. Of these over 70% were sold in Asia. Large markets were China-10 million, India-5 million, Indonesia & Vietnam - 2 million, Thailand, Japan, Taiwan- 1 million each and EU2 million. The SE Asian market is essentially a step-through motorcycle, like Street, market, which has failed in India. Unless Indian producers make this animal for export, they will not be able to make any significant dent in Asian markets. In 2-wheelers; two major events happened. Suzuki re-entered into the market and Honda has arrived via HMSI into the motorcycle market. Dealership Networks
The profitability of auto dealerships has always been an issue. The issue was obfuscated by the premia earlier and the eagerness of those in building trade to get into auto dealerships. Now, however, given the stark realities, we are witnessing a churn first amongst weaker company's dealerships. A number of 2W & CV companies are unable to attract or retain good dealerships. There is a throughput required in each dealership. For example, unless you are selling 300 2-wheelers a month, you are not viable. That means that a company selling less than 90,000 2Ws a month is not going to be viable from purely a dealership angle. The number also ties up with 113
the volumes required to generate profits to develop new products in pace with the market. Will this lead to multi brand outlets? In most countries of the world, for brands other than Honda, 2-wheelers are sold through multi brand outlets. In India, legally, there is no bar, but in practice there is. For companies not able to provide economical volumes to their dealers, there may be no other way forward. In Mumbai and elsewhere, "informal" multi-brand outlets have started to take roots. Lower interest rates, (compared to earlier; in my view, they are unlikely to go down further; a risk of interest rates going up is quite likely), better finance availability in smaller towns and a more open economy will continue to generate a decent growth rate in the industry. Attendant hazards would be that competition will intensify further and company and dealer performances will get increasingly uneven as unviable players get squeezed. Dealers would have to be both - lucky to be with the right producer(s) and be first-rate operators to be profitable. Honda is playing the end game of its India strategy and, like an efficient chess player, squeezing the opposition into a corner. Today, the automobile sector is the epitome of mass production, mass marketing and mass consumption, with some of the strongest brands in the world. Therefore, companies are in an obligation to respond rapidly to customers, deliver what customers need and provide increasingly diverse products. The fast changing business environment makes urgent necessity of product innovation and strategic management awareness. Firms can no longer produce and market huge amounts of standard products with a relatively stable market and technological climate. Instead, they have to grapple with unstable, rapidly changing markets and technologies in order to run their organizations and be able to sell their brands. Today, there are various parameters on which a dealership is adjudged like convenience of location, hours of operation, appearance of the facility, the neighborhood, comfort of transactions, ease of viewing and selecting vehicles, availability of information, inviting & friendly layout. Product ownership
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experience will not be restricted to purchase alone but would span the complete ownership cycle of the car. It would begin from enquiry management to vehicle selection. Also, work like vehicle documentation & processing and delivery would be important components of customer satisfaction. This would also spill over to after-sales service and spare parts support. This clearly proves that with the evolution of the Auto Industry in India, the auto dealership has also evolved.
The Market Both 'Value Conscious' and 'Price Conscious' customer segments co-exist in the Indian market today. The latter is losing its share rapidly. Any potential entrant could consider launching the products targeted at the Value Conscious segment in the country. However, an in-depth analysis of the value perception of the target segment needs to be conducted. The 'feature - price' package should ensure
an
attractive
value
proposition
appealing
to
the
increasingly
knowledgeable Indian Customer. A successful brand is widely recognized by the customer; however, building the brand successfully is complex, expensive and time taking. It includes core issues like:
Matching brand image with consumer expectations
Developing a future "brand oriented" product strategy
Developing "Piggyback" products which can create revenue, building on the image of the core product range
Selecting and managing the right distribution channels
Selecting marketing media and advertising
Continuously "understanding the customer" and managing feedback. Thus, strategies that determine the direction of product innovation and
cost management have become more crucial to corporate management today than ever before. To satisfy the customers and to remain competitive, a firm
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needs to maximize its efficiency throughout its entire value chain. If efficiency is not maximized throughout the entire value chain, costs can rise above those of rivals, thereby losing the battle even before it is actually fought. As the average disposable income continues to grow amongst the Indian consumers and they grow to become more lifestyle and brand conscious, it has lead to the completion of the Automobile evolution from Products to Brands. The intangible offerings have gained as much importance as the tangible product features itself. Any new entrant therefore needs to have a specialized focus on Brand Building in the market. With the recent strides in communication technologies, there has been effortless flow of information enabling consumers to compare quality, durability and prices of products. The consumers today are a highly informed mass and therefore, the marketing war presently revolves round the brands and the image as perceived by the potential customer. Products don't sell themselves but if producers can understand market demand and consumer needs, through market research, it would be better to plan how to make the products get to them. It is also helpful to look out for lessons that can be learnt from other brands inside and outside the automotive industry. Such benchmarks, however, should be well selected and meaningful to understand a complete turn around or a distinct positioning. Pursuing perfection is the only mantra to success in the highly competitive market of the present times, particularly because the competition is only bound to increase. This entails strengthening the company's most valuable resource - its people. The changing automobile industry in India has also given rise to a new business opportunity where dealerships are not just selling two-wheelers but
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providing Mobility Solutions. The idea has evolved to reduce the burden on the customer by making the right investments in infrastructure and HR, to ensure that the dealership becomes a landmark, which the customers will reckon with. The ones who do not make the investment are likely to lose out in this race. Robust Demand to Continue
After an 11.4 per cent growth in 2003-04, two-wheeler sales surged by over 17 per cent year-on-year (Y-o-Y) for the first 10 months of 2004-05. Sales growth, led by the sales of motorcycles, escalated consistently during the April to January period due to increasing household incomes, easy availability of finance, and the success of certain new models launched during the period.
Two-wheeler demand is expected to grow at a healthy rate of 11-12 per cent from 2004-05 to 2005-06. Rising household incomes, frequent new model launches and the increasing penetration of finance and distribution will act as key growth drivers.
The motorcycle segment witnessed stupendous growth in 2004-05 (20.3 per cent Y-o-Y) after a moderate performance (growth of 13.7 per cent Yo-Y) in 2003-04. The buoyant growth in this segment will be maintained on account of the entry of global players like Honda Motors and Suzuki and the domestic players' growing focus on motorcycles. The segment is expected to grow by 12-13 per cent in 2005-06.
Led by the ungeared segment, scooter sales are likely to grow by 8 per cent, while moped sales are expected to stagnate or decline marginally in 2005-06.
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Suggestions SUGGESTED MEASURES FOR MORE CONDUCIVE GROWTH OF TWO WHEELER AUTOMOBILE INDUSTRY IN INDIA
The automobile industry across the world has great potential to trigger sustained employment, mobility, and inter-Sectoral industrial growth and thus conduce conditions for general economic and social well being. However, there is need to promote and sustain international cooperation between Governments and industry. There is need for coordinated research and development, standardization of designs and broader technologies, effective cost cutting to enhance affordability and loosening of trade barriers across the globe. There are separate measures, which require addressing at the national and international levels. Some suggested steps at both levels are listed below.
SUGGESTIONS AT THE NATIONAL LEVEL
As products get complicated, one can expect that there will be greater drive-ins at the dealers' workshops. Fuel Injection on 2-wheelers is round the corner. My educated guess about the Honda bikes in future will be fuel injected, because, Honda has already announced that all its scooters would be fuel injected by 2010. So, dealers who are services oriented - most dealers in the country are not-should stand to gain. Or, dealers should work hard to improve the service end of their operations; and that is largely a matter of attitude & culture. The Indian two wheeler market is increasingly becoming a price warfield. Everyone and their competitor wants to win the title of the 'World's cheapest bike' and the cutsomer has become the King, actually more like God! But there is always a doubt if this price based competition is good for the health of the industry. Everyone eating their own margins in the quest for greater marketshare and farther market expansion. And where does this leave smaller players like LML (going through some very tough times as of now), Kinetic (good
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scooters, questionable field network, trying hard in motorcycles) and even Yamaha,TVS and Hero Motors. Big Manufacturers like Hero Honda or Bajaj Auto can arm twist suppliers to deliver parts cheaper, which the suppliers won't mind doing considering the volumes that these offer. Without volumes, one is not in a position to get the best prices and without the best component prices, the price of the final product goes up. Fighting with Bajaj Auto will require reduction in the selling price of the bike thus decreasing the profit margins. This is like a vicious circle : Low volumes > High component prices > High final price > Still lower volumes > Low profitability or another way
forward may be Low volumes > High component prices > Low final prices > Compromise on margins > Low profitability .
Still another way forward may be like this Low volumes > Low component prices (by compromising on component quality) > Low final product price > High volumes > Low dependability > Low customer satisfaction > Low volumes > Low profitability . Thus the fat gets fatter while
the small gets smaller and may eventually get wiped out. The only way out seems to be technical innovation which can give a low volumes company advantage over a high volume one. Unfortunately low volumes > low profitability also means that less investment in R&D. Or in some cases, like TVS, where R&D does get a priority, it is mostly copied very quickly by rivals as most of the R&D is supplier driven. So a Centra loses its technical advantage to a CT 100 very quickly. The other way out of this vicious circle is by concentrating on niches. Indian bike manufacturers till now have focussed on street commuters only. A high percentage of the market is shifting to a low margin, high volume game and smaller manufacturers need to get out of this rut to survive. So Kinetic should not be doing a Boss and TVS should not be putting its energies into a Star or even a
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Centra. Small companies should be focussing on 150cc + niches and experiment with new bodystyles. Performance and quality should be the marketing weapons rather than price Rural Market Rise
Thanks to the rapid rise projected in rural incomes over the next few years, especially in the upper income groups, the share of demand from the rural areas is projected to rise steadily - by the end of the decade. While some part of this is clearly due to the fact that rural areas are home to the majority of the country's population, the gap between rural and urban usage patterns is also projected to decline significantly. In the case of scooters, this difference is projected to fall from 5.9 to 4.7, from 2.5 to 1.8 in the case of motorcycles and from 3.4 to 2.5 in the case of mopeds. In the case of the upper income groups (those who earn more than Rs 180,000 per annum), the change is even starker. As a result, while roughly 2 per cent of 1995-96 demand came from rural areas and this rose to 9 per cent in 2003-04, this is expected to rise to just under 12 per cent in 2009-10. Need for a Comprehensive Automotive Policy
The extant policy has drawn many overseas companies into India but needs to be more investor friendly, address emerging problems and be WTO compatible. The Indian car market is full of possibilities; but present demand profile inhibits volume production, save by a few, and conduces contention rather than competition. World over, the majors have consolidated to elevate technology, enlarge product range, access new markets, cut costs and engraft versatility. They have resorted to common platforms, modular assemblies and systems integration by component suppliers and E-Commerce.
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The automotive industry is in the midst of a major structural transformation in today's globalized scenario. "System Supply" of integrated components and sub-systems is becoming the order of the day, with individual small components being supplied to the system integrators instead of the vehicle manufacturers. In this process, most of the SSI units manufacturing smaller individual components are on their way to become tier 2 and tier 3 suppliers, while the larger companies including most MNC’s are being transformed into tier 1 companies, which purchase from tier 2 & 3, and sell to the auto manufacturers. Indian auto sector needs to grow collaterally and in harmony with world industry. India has the potential to be a global automotive power. However, concerted efforts will be required to take auto manufacturing to a self-sustaining level where they shall have volumes, generate requisite technology and meet evolving emission requirements. Volume is important for any manufacturing enterprise. However, it is more important for automobile sector, both for the manufacture of vehicles as well as auto components. Lack of volume will not only inhibit efficient manufacture but also R&D and introduction of new models. The investment and fiscal policies should create an environment for volume production and indigenous capability for innovation for small cars and auto components. Auto components manufacturers have been slowly gaining global recognition and maintaining a certain level of exports despite the recent downturn. It should be possible to achieve an export target of US $ 1 billion by 2005 and US $ 2.7 billion by 2010. This would require three pronged marketing strategy: exports through OEMs for their global sourcing requirements, export to tier I manufacturers as a part of their international supply chain and direct exports to aftermarket. The main challenges are lower volume – low scale, fragmentation, inadequate R&D/technology support, lower productivity levels, limited resources for international marketing and establishment of an efficient supply chain.
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VAT in all States
VAT system of taxation required to be implemented simultaneously throughout the country in all States and Union Territories at the same time. This will avoid serious market distortions and enhances industry's competitiveness. Homogeneity is the essence of VAT and all States should come together to accept a common law under VAT. All forms, returns & declarations should be common to avoid artificial barriers and complexities. State VAT Rate and Classification of goods
Uniform rate structure across the country helps in avoiding diversion of trade from one State to another, checks unhealthy competition and reduces tax evasion. It helps automobile industry to plan and commit long-term investments. Basic rationale needs to be developed for generation of revenue from industrial products. This should be long term and the share of taxation in the total value of the ultimate customer needs to be defined. SIAM recommends such a policy in taxing goods and services under VAT. Total taxes from both Center and State as proposed by SIAM not to exceed 25%. Considering Cenvat at 16%, Designated rate should not exceed 9%. The classification of goods should be aligned to central taxes to reduce litigation. Uniform classification across all States and central taxes would create favorable environment for growth of industry. No separate classification of Capital Goods Multiple levies and Industrial input
One of the stated objectives of VAT is to reduce multiple levies. Number of rates under VAT should be 0%, 4% & RNR in addition to 1% on precious metal
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and 20% on petroleum products. All other levies like Octroi, Entry Tax should be abolished. Further when interstate transactions are zero rated, manufacturer selling predominantly in interstate ends up having huge input tax credit without set-off. Automobile manufacturers having one manufacturing facility in the country sells more than 80% of the production outside the Sate and forced to seek refund from the State Government for excess input tax credit. SIAM suggests VAT rate of 4% on all industrial input to mitigate the refund issue. All interstate transactions should be at zero rate. Further automobile manufacturers 'Stock Transfer' goods by setting up huge facilities to strengthen distribution network in order to reach the product to the customer at the earliest and at least cost. This mechanism should not be affected even under VAT. Sales Tax Incentives
Automobile manufacturers have made huge investments, which are in phases in unviable locations. These location disadvantages are partially offset by fiscal incentives. Any detrimental variations or withdrawal will affect the viability of such investments. This may adversely impact the country's image as an attractive investment destination. It is heartening to note that all states have agreed in principle to honor all existing incentives under vat.
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ANNEXURES
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Detailed list of product profile of different manufacturers with their prices
Contd… On next page
Source : Auto India, Jan , 2006
BIBLIOGRAPHY
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BIBLIOGRAPHY Books 1. Kazmi Azhar, “Business Policy & Strategic Management”, 2 nd Edition,
Tata McGraw Hill Publishing Company Limited, New Delhi, 2000. 2. Johnson Gerry & Scholes Kevan, “Exploring Corporate Strategy – Text &
Cases”, 6th Edition, Pearson Education (Singapore) Pte. Ltd., Delhi, India. 3. Ramaswamy V S & Namakumari S, “ Strategic Planning – Formulation Of
Corporate Strategy – Text & Cases” , 1st Edition, MACMILLAN Business Books, New Delhi, India. Magazine
1. Business Today Published By India Today Group
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