New Delhi: Honda Motor Co.’s fully owned two-wheeler making unit has decided to defer building a new factory, citing excess capacity in the world’s second largest two-wheeler market and signalling that automakers will continue to pull back expansion as the Indian economy cools.
“Total capacity far exceeds demand,” said Shinji Aoyama, president and chief executive officer of Honda Motorcycles and Scooters India Pvt. Ltd, or HMSI. “One must be careful about expansion.”
India’s total two-wheeler production capacity is 12.35 million units a year and all major two-wheeler companies, except HMSI, which mainly sells scooters, cut production last year.
TOO MUCH TO HANDLE (Graphic)
“These (last) five-six years the industry has grown at (double) digits (growth rate),” said Aoyama. “We should expect some single-digit growth now.”
Interest rates, which are at six-year highs, and the reluctance of financiers to lend to two-wheeler buyers due to a high default rate, have hit the sector the hardest among all automobile categories. Sales of two-wheelers, the entry level for motor transport in the country and the main mode of commuting, fell nearly 8% in last fiscal year to 7.25 million units.
Worse, earlier this month, the Indian government raised the prices of fuel, which would force more people to look at public transport to cut back on fuel bills.
“Although we have seen signs of revival in May, we may see some slackness in two-wheeler demand in the months ahead,” said K.K. Mital, head, portfolio management services at Globe Capital Markets Ltd. “Inflation is very high, which will leave little money in the hands of people to pay EMI (equated monthly instalments) and lending rates may move up further.”
Inflation in India is at a seven-year high, steadily increasing for the past two years, and the country’s central bank has raised benchmark interest rates 12 times in the past 18 months to control rising prices. Last week, the Reserve Bank of India raised the repo rate by 25 basis points (0.25 percentage points) and retail financiers are saying they may pass on this rate hike to housing and automobile loans.
HMSI, which sold around 907,117 units last fiscal in both the domestic and overseas markets, has a capacity of one million units per annum at its factory in Manesar, Haryana. The company, which had been considering a second factory, has put it on the back burner saying it could hike capacity at its current factory. The company did not say what new factory’s capacity was planned at.
“There is still enough capacity and it may reach 1.3-1.4 million units” if needed, Aoyama said.
The company is also proposing to introduce a new motorcycle in the next two months to boost its presence in the premium motorcycle segment.