New Delhi: India’s largest two-wheeler maker by volumes, Hero Honda Motors Ltd, said it is considering using excess capacity at its existing factories to make components and export motorcycle kits after a new factory at Haridwar, Uttarakhand starts production in April.
The move comes from the company’s decision to use the half-a-million-a-year capacity of the Haridwar factory to make as many motorcycles as possible because of the fiscal incentives that the facility is eligible for, and indicates that Hero Honda does not expect the trend of declining sales to change anytime soon.
“After having a decline of this kind, it’s difficult to predict numbers,” said Pawan Munjal, managing director of Hero Honda. Hero Honda is also constrained by its agreement with partner Honda Motor Co., which restricts exports of bikes to those markets where the Japanese auto firm has a presence.
Between April and December 2007, the company exported only about 60,000 units, around one-sixth of what its nearest rival Bajaj Auto Ltd sold in the overseas markets.
Vehicle sales are usually a proxy for economic growth and while India’s bike makers enjoyed a robust run for several years as the economy expanded, they have had a bumpy ride in the past few months.
With interest rates at a five-year high—most two-wheeler buyers fund their purchases through bank loans—sales of motorcycles registered their first decline in a decade.
Hero Honda’s Haridwar factory, its third overall, will increase its total installed capacity to 4.4 million units a year. Between April and December 2007, customers bought only 5.57 million motorcycles.
Apart from issues related to making the most of its investment in the plant, Hero Honda is also keen to utilize the full capacity at the Haridwar unit to make bikes because of tax incentives announced by the state government.
Under this policy, which is also followed by states such as Himachal Pradesh and Sikkim, manufacturers are exempt from excise tax for 10 years and income tax for the first five years and pay a concessional Central sales tax of 1%—levied on goods transported across states—for five years. Such fiscal concessions have also prompted rival bike makers such as Bajaj and TVS Motor Co. to build plants in these states.
“I hope the market is able to take in all of this (the extra supply of bikes),” said Munjal. “In case it doesn’t, then we’ll come up with solutions to somehow try and utilize the capacities in Dharuhera and Gurgaon (the other two places where the company has factories) also.”
Munjal said these factories were equipped to make things other than motorcycles, if needed.
“There’s going to be a whole host of ideas which will be examined,” Munjal added. “When you say components, we could possibly look at the export of components, (and) possibly (sale of) components in the after (sales) market here.”
Analysts, however, aren’t sure how the move to making components could help Hero Honda’s margins.
“Auto components is a much more tough business compared to vehicle manufacturing and sales,” said Ashutosh Goel, an analyst with Edelweiss Capital.
There is “pricing pressure from both directions—from raw material suppliers and from OEMs (original equipment makers, or vehicle companies that buy components).”
The Hero group, which owns a 26% stake in Hero Honda, is already present in the component business through some of its units such as Hero Motors Ltd and Munjal Auto Industries Ltd.
Total two-wheeler sales between April and December fell 7.7% from a year ago, according to data provided by the Society of Indian Automobile Manufacturers.
This has forced all two-wheeler manufacturers to scale back production; Hero Honda, which makes one of every two motorcycles and scooters sold in India, cut production by 1.3% to 2.45 million units last year.
The outlook isn’t getting any better.
With lending rates showing little sign of declining and new competition emerging in the form of small cars such as Tata Nano, analysts predict flat growth for the two-wheeler sector in 2008.