With cycle sales tapering, Hero looks at new growth avenues7 min read . Updated: 11 Aug 2013, 11:53 PM IST
Growth rates have been in single digits for five of the past 10 years, and the market actually shrank 3.24% in 2012-13
New Delhi: It isn’t just fish, even people don’t seem to need bicycles any more and that’s a source of great worry for Pankaj Munjal, whose company was recognized by the Guinness Book of World Records in 1986 as being the world’s largest maker of bicycles.
Munjal’s company, Hero Cycles Ltd, India’s largest bicycle maker, has since lost ground to several Chinese and Taiwanese manufacturers. Now that it is clear the Indian market for bicycles is plateauing—growth rates have been in single digits for five of the past 10 years, and the market actually shrank 3.24% in 2012-13—Munjal and fellow bicycle makers are lobbying for government incentives and against an excise duty that will make bicycles more expensive.
The All India Cycle Manufacturers’ Association (Aicma), headed by Vikram Kapur, president of Atlas Cycles, is conducting a study in collaboration with The Energy and Resources Institute (Teri), a think tank that focuses on issues related to transport and energy, to identify measures to revive momentum in bicycle sales.
And Munjal is seriously exploring options to diversify into other businesses.
Sales at Hero Cycles have declined from 5.5 million bicycles in 2010-11 to 5.2 million in 2012-13. The company didn’t provide net profit figures as it’s privately owned. Aicma, the industry lobby, did not provide data on the number of cycles produced and sold in India every year. Industry estimates put the market at 15 million bicycles a year, worth around $1.2 billion.
“There is something incorrect. Something is improper. We are hit from the bottom as well as from the top. We are into a very narrow tunnel," said Munjal, referring to the newly introduced excise duty and declining sales.
Indeed, the data seems to suggest that the bicycle may have become what is called an “inferior good", said an economist.
“It means that even if income is rising, people are not buying cycles," said Laveesh Bhandari, director at New Delhi-based Indicus Analytics, an economics research firm. An inferior good is one for which demand declines as income rises.
According to the bicycle makers lobby, only 90 out of 1,000 people in India own bicycles, compared with 149 out of every 1,000 in China and 400 out of every 1,000 in the US. Aicma further claims that when juxtaposed with per-capita income, the price of a bicycle in India is twice that in countries such as Brazil and China—one reason why it wants the 2% excise duty scrapped. The Union government introduced excise duty of 1% in 2009-10 and increased it by a percentage point in 2010-11.
Munjal said that the tax has so far added ₹ 69 crore to the government’s coffers, but that it has resulted in 52 small and medium enterprises associated with the bicycle industry closing, with the consequent loss of around 10,000 jobs. Mint couldn’t independently verify this. “Taxes on essential commodities like bicycles are impacting the affordability of the BPL (below poverty line) section of society," Munjal said.
There may be other reasons for the bicycle’s decline than tax, said an expert.
Saibal Gupta, chairperson of the Patna-based Asian Development Research Institute, said one reason for the slump could be the social status attached to cycling. “There is no dishonour associated with bicycles in developed markets, but bicycles still have a marginal stigma attached to them (in India)," Gupta said.
The industry’s claim of a shrinking market is surprising, though, he added.
“The bicycle is the most important mode of transport, and with the growth in road connectivity, there is no reason for a decline," he said. “I think the data has been manipulated."
India added 441,680km of rural roads between 2006 and 2011, according to the latest data available with the ministry of statistics and programme implementation.
The absence of a leisure biking market could be another reason, said Indicus’ Bhandari.
“A new segment of leisure or fun biking has not really emerged that could offset the decline in traditional buyers," he said.
India does have its share of local cycling clubs, but there are significant problems riders face.
“There is a lack of avenues to take up cycling...no infrastructure, bad roads. You don’t want your kids to go cycling," added Bhandari.
In China, bicycle sales have picked up in recent years, with the government promoting cycling events such as the Tour of Beijing. In 2010, production of bicycles in China declined 13.2% to 76.06 million bicycles. By 2012, the rot had been stemmed and production declined a mere 0.8% to 82.7 million. To be sure, much of China’s production—close to 60 million bicycles a year—is exported, according to Aicma. In contrast, India exports less than two million bicycles a year.
Not many cities have dedicated cycling lanes. Delhi, which boasts the best infrastructure in the country, has 14.5km of cycling lanes.
Despite the lack of infrastructure, which he said is a “genuine problem", Munjal is preparing to push into the niche segment.
“High end is where the money is going to come from," he said. This month, the company will launch Sprint, a high-end brand, with prices starting at ₹ 20,000, Munjal said.
Hero Cycles already has a premium bicycle range branded Urban Trail, priced at ₹ 40,000-150,000. As many as 55,000 Urban Trail cycles have been sold since the launch in December 2011, the company said.
Bicycle makers such as Hero Cycles also depend on the munificence of local governments. Bihar, for instance, has a scheme that seeks to put more girls in schools. Since transport is a problem, it has sought to overcome this by giving free bicycles or a grant of ₹ 2,000 to all girls in classes IX and X. Hero has set up a factory around 30km from state capital Patna to cater to the demand. Other states have similar schemes.
Yet, there’s only so much that such schemes and sales of high-end bicycles can help.
Which is why Munjal is diversifying.
“It is always good to diversify given the times that we live in," Munjal said. “Having said that, we will not enter into a business where we don’t own customers or don’t have a position in the top three."
In some ways, Munjal has always flirted with new businesses. His wife Charu runs a chain of home decor stores known as Oma (the first opened in 2007) and he owns a restaurant, Auma, in Delhi luxury mall DLF Emporio. He also has a ₹ 800 crore hotel project in Gurgaon that will open by 2015.
Munjal has also had an auto components business for some time—he supplies motorcycle transmissions to BMW—and is looking at ways to expand this. In 2010, Hero MotoCorp Ltd, promoted by his uncle Brij Mohanlal Munjal and run by cousins Pawan Kant and Sunil Kant Munjal, split with long-time partner Honda Motor Co. Pankaj Munjal is the son of O.P. Munjal, the brother of Brij Mohanlal Munjal.
Until 2011, the larger Munjal family had cross-holdings in each others companies, but a settlement that year saw these being unwound. Pankaj Munjal nows owns most of Hero Cycles.
His auto component company Hero Motors Ltd will shortly enter the car transmission business—prototypes are being tested in Munich—and hopes to start production in early 2014. “We used to make transmissions for BMW bikes, only but now we want to start for cars," Munjal said.
Total revenue from Pankaj Munjal’s businesses—Hero Cycles, Hero Motors, Munjal Kiriu Industries Pvt. Ltd and ZF Hero Chassis Systems Pvt. Ltd—grew 10.58% to ₹ 1,975 crore in 2012-13 over a year ago. However, the contribution of the bicycle business to total revenue declined from 81.62% in 2008-09 to 73.26% last fiscal, even as revenue contribution from the non-cycle businesses grew from 18.37% to 26.78% in the same period.
The O.P. Munjal family has tried its hand at the automotive sector but with little success. In 1996, Hero Motors partnered with BMW to manufacture motorcycles in India, but the deal fell through as the Hero Group had a non-compete agreement with Honda. A partnership with Italy’s Aprilia to make and sell scooters was called off after Piaggio and Co. SpA acquired the Italian manufacturer in 2005.
As he diversifies, Pankaj Munjal doesn’t rule out trying something like this again, but says there will be no clash with his uncle and cousins. “There is no obligation on entering each other’s business. They can make bicycles and we can make motorcycles. There is an understanding on the branding. There is a thick agreement on that," he said.
His major bet, though, will remain bicycles. Despite the negativity surrounding the cycle industry, Munjal said he will pump in another ₹ 1,450 crore by 2015 as Hero Cycles seeks to double sales in the next five years and increase market share by 12 percentage points.
“We plan to sell 7.5% of the world’s bicycle production by 2018," he said. “Bicycle penetration in India is very low as compared with China. We need to reach out 400 million people who can’t afford to buy one," he said. “There is enough potential."