Honda Motor Co. Ltd of Japan has said it wants to be the leading motorcycle maker in India. It aims to get to that position by introducing mass-market products and increasing capacity.

Honda hasn’t been able to introduce entry-level vehicles with 100cc engine capacity because of its joint venture with the Hero Group. But with the two groups parting ways, it is now free to do so, and Honda has said that it will soon enter the space. The auto maker also said it will spend 2,000 crore to expand capacity and boost production.

All this just provides further weight to the hypothesis that the competitive intensity in the two-wheeler industry is about to increase significantly.

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As the head of research at one foreign brokerage puts it: “It’s pretty obvious. We used to have two 400-pound gorillas in the room. Now we have a third." A recent report by Citigroup Inc. puts it more accurately, “Two large players splitting into three is a 50% increase in competitive intensity."

One saving grace is that Honda’s current manufacturing capacity isn’t high, and as a result, it would be a while before the competitive landscape changes dramatically. In the interim, Hero Honda Motors Ltd and Bajaj Auto Ltd would continue to be the main beneficiaries of the steady growth in the two-wheeler market.

But it would be imprudent for investors to make much of near-term results, considering that prospects in the long-term are far from bright.

And this won’t be too far out in the future. In about six months, Honda Motorcycle and Scooter India Pvt. Ltd will increase capacity by 600,000 units. As Citigroup analysts point out, “Historically, Hero Honda has been a strong aggressor, but a weak defender, and its margins are vulnerable when competitive intensity escalates."

Besides, volume growth is expected to taper off in fiscal 2012-13 after three years of steady growth. For the existing large firms, it could well turn out to be a double whammy of lower growth rates and greater competition.

It’s not that the markets haven’t been cognizant of these changes in the competitive landscape. Since end-August, when rumours of Honda’s decision to go alone hit the Street, Hero Honda’s share price has fallen by more than 20%, while the markets have been flat.

Interestingly, even shares of Bajaj Auto have been flat during the same period.

While the latter will be less affected, thanks to its presence in the three-wheeler space and its relatively strong research and development unit, it will no doubt be hit to some extent.

Hero Honda’s shares, too, aren’t particularly cheap at around 15 times estimated earnings for the current fiscal. There seems to be room for more correction in the two-wheeler space.

Graphic by Sandeep Bhatnagar/Mint

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