Domestic two-wheeler sales for fiscal 2013 (FY13) finally settled at a sluggish 2.9%, after three years of robust sales. The moot question is: will this automotive segment ever return to the heady growth rates of 26% posted in FY10 and FY11, or even the annual average growth rate of around 15% clocked between FY08 and FY13?
Indeed, the growth rate will bounce back from the low of FY13, but there is reason to believe that it will be subdued for three to five years. Growth rates in China, the largest motorcycle market in the world, have remained stagnant for nearly six years, after a decade of strong growth touching a high of 16 million motorcycles in 2007.
India is close to this number at around 11 million motorcycles and 14 million two-wheelers. In fact, motorcycle growth rates slid last year and were overtaken by scooters, which addressed customer needs aggressively with improved design and fuel-efficiency and with an increasing population of urban and working women. Scooters alone are expected to clock higher sales growth rates of 12-14% for the next two years, while that of motorcycles is expected to be lower at around 6-8%.
According to analysts, India is getting close to peak penetration levels. “Every fifth person in the addressable market owns a two-wheeler,” says a report by Macquarie Research, whose research accounted for the age group between 15 and 59 years of age and income greater than Rs.60,000 per month.
Besides, as per FY11 data, two-wheeler penetration was high in around five states accounting for nearly 50% of total sales. Hero MotoCorp Ltd and Bajaj Auto Ltd were the key two-wheeler manufacturers. Thereafter, industry growth rates also came from sales in the other states and entry of new players that led to market expansion. Among the new entrants, Honda Motorcycle and Scooters India Pvt. Ltd has made a dent in the market share of both leaders in motorcycles and scooters.
“Going forward, as interest rates fall and economic well-being improves, two-wheelers will do better from FY13 levels. But, growth rates may not return to 15-20% CAGR (compounded annual growth rate) for some time,” says Surjit Arora, analyst, Prabhudas Lilladher Pvt. Ltd. In fact, analysts concede that growth rates would moderate to around 10% CAGR for the next four-five years.
A longer replacement cycle of nearly 7-10 years also pulls down growth rates after basic penetration levels are attained. Perhaps in the Indian scenario, the battery of new launches that are expected to flood the market may hasten replacement.
Further, sector experts say that once a threshold of adequate penetration of two-wheelers is attained, aspirations for owning a passenger car lead to slowing down of two-wheeler growth rates. “The price of an entry-level car is around eight times the low-end motorcycles in China. It is about five-six times in India,” says the Macquarie report. Of course, traffic congestion and lack of good road network are deterrents to migration.
Two distinct trends are likely to emerge going forward. One, the very high growth rates of 20-25% per year seen by the industry in the recent past are unlikely to repeat in the medium term. Two, greater competition across two-wheeler segments will lead to slower growth rates in sales and profit margins of individual companies.