Roller coaster ride for 2-wheelers

The two-wheeler market saw exceptional sales growth in 2018-2019, which resulted in record volumes. However, the growth story lost its momentum due to multiple factors such as rising ownership costs, the pandemic, and economic challenges in rural areas. Nonetheless, 2023 has witnessed a remarkable recovery in sales, demonstrating the industry's resilience and potential for strong growth.

Pain point

Entry-level motorcycles have a crucial role in India's two-wheeler market, accounting for a significant portion of total volume. The 110cc bikes serve as an entry point to the two-wheeler market for a majority of Indian consumers because of affordability and fuel efficiency. However, the segment witnessed severe pricing pressure over the last few years and was hit hard by the pandemic.

Disposable income, particularly in rural markets, was under stress after the coronavirus outbreak. This along with a significant increase in the cost of ownership, arising primarily from regulatory changes and higher insurance costs, led to de-growth in the entry-level segment. Also, with higher petrol prices in recent years, price-sensitive consumers deferred their purchases, hoping to switch to an affordable electric vehicle.

The market share of 110cc motorcycle dropped to 33 percent of the total domestic two-wheeler sales during the FY22-23, compared to 36.6 percent in 2021-22, according to the data from the Society of Indian Automobile Manufacturers (SIAM).

“The cascading impact of regulatory changes (Insurance norms), safety standards, emission norms (BS-VI transition), Covid-19 pandemic and the relentless increase in the cost of vehicle ownership led to contraction in domestic 2w volumes over the period FY20-FY22. With sales of 13.4 million units, the industry volumes were almost pushed back by a decade to FY12 levels in FY2022,” ICRA Vice President Rohan Gupta said.

Rural economy recovery

As expected, one of the major talking points of 2023 has been the recovery of the 110cc motorcycle segment. An improvement in disposable rural income, infrastructure and e-commerce in recent months resulted in some green shoots in the rural areas. Meanwhile, festival season enthusiasm helped the two-wheeler segment outpace the passenger vehicle segment in growth to record all-time high sales during the season and in November.

“For the 2w category, the month witnessed a significant boost in auto retail, thus making it clock all-time high retails, buoyed by the festive excitement of Deepawali and enhanced by strong rural sentiments, thanks to thriving agricultural income,” Federation of Automobile Dealers Associations (FADA) President Manish Raj Singhania said.

Data from the FADA shows that two-wheeler retail sales grew 20.7 percent on year to 2.89 million units in the 42-day festival period, which ended on November 15. Retails in November also rose 21.1 percent on year to 2.25 million units.

The Reserve Bank of India Governor Shaktikanta Das has said there are signs that rural demand is turning around. In a press conference following the central bank's recent policy meeting, Das cited two-wheeler retail sales, Rabi sowing, FMCG volumes, and a decline in demand for the social welfare scheme to say the demand is turning around.

Manufacturers including Hero MotoCorp and TVS Motor have also indicated that rural growth is picking up. In a recent earnings call, TVS Motor’s K N Radhakrishnan noted that rural confidence is improving with higher income levels, recovery from the pandemic worries, infrastructure investment and retail finance support.

"The urban-rural demand split for two-wheelers was more in favour of urban in the last few years. But it has sort of evened out during this festival season with rural demand picking up," Hero MotoCorp’s Chief Executive Officer Niranjan Gupta said post Q2 earnings.

Premiumisation trends

While the increase in prices and subsequent slowdown in demand crippled the entry-level motorcycle and overall two-wheeler sales volume over the period, the premium motorcycle and scooter market has shown strong resilience over the period.

In 2023, the premium space getting crowded with manufacturers shifting their strategy towards premiumisation to capitalise on the trend. The buoyant premium market bolstered two-wheeler makers, partially mitigating the impact of weak entry-level segment sales and sluggish demand for exports.

Data from the SIAM shows that the growth of total domestic two-wheeler sales during the April-November period was higher than the growth witnessed in the motorcycle segment with engine capacity between 75-110 cc. The segment’s share in total two-wheeler volume also declined to 31.8 percent during the period from 32.3 percent in the year-ago period.

The contrast between the robust growth of the premium segment, and the weakness in the entry-level post Covid and export markets shows the shift in the two-wheeler landscape. “As opposed to the price-sensitive entry segment, the premium segment demand has remained relatively healthy, buoyed over the years by increasing per capita income, growing motorcycling culture, the rising popularity of superbike clubs along with the availability of a wide range from several global brands,” ICRA’s Gupta said.

Hero MotoCorp’s Gupta feels that it is not one segment eating into another, it is just that different segments have taken different time periods to come back to growth after the pandemic. Apart from launching new models and variants in the 125cc + segment, Hero MotoCorp and Bajaj Auto raised the competition in the premium space this year with the launch of their first premium products in partnership with Harley-Davidson and Triumph Motorcycles, respectively. Royal Enfield on the other side has been reaping the benefits of its pure premium play for some time.

India’s largest two-wheeler maker Hero MotoCorp said earlier this financial year that the company plans a new launch in every quarter with a focus on the 125cc plus category. A higher mix of premium products in sales has helped automakers improve their profit margins in the last couple of quarters despite weakness in volume and higher input costs.

“On domestic motorcycles, overall industry motorcycle growth has continued with the first half being mid-single digit and Bajaj Auto clearly outpacing the market and our continued thrust on leading premiumisation of the 125cc upwards which has augured well from mix as well as seen us outstrip the market by quite a multiple,” Bajaj Auto CFO Dinesh Thapar said in the second quarter earnings call.

Electric vehicle adoption

2023 has been a turbulent year for the Indian electric two-wheeler industry, navigating rapid growth and significant challenges. The electric vehicle market also witnessed consolidation in favour of large players after the initial frenzy. Two-wheelers have been leading electric vehicle adoption in India. Exponential growth over the period has boosted electric vehicle penetration in the two-wheeler segment to around 5 percent.

This can be attributed primarily to government subsidies and better recognition of the long-term economic benefits. Sales of electric two-wheelers witnessed robust growth in the first five months of the year with monthly registration clocking a high of 1,04,750 units in May.

However, the booming sales hit a roadblock in June and the monthly registrations plunged to 46,000 units after the government reduced the subsidy for electric two-wheelers under the second phase of FAME scheme in India. The government slashed the subsidy for electric two-wheelers by around 33 percent to Rs 10,000 per kWh, and reduced the cap on incentives for two-wheelers to 15 percent of the ex-factory price of vehicles from 40 percent.  The subsidy is given to electric two-wheeler consumers in the form of an upfront reduced purchase price of vehicles and the government reimburses the manufacturers for the discount. So the OEMs resorted to price hikes soon after the cut in subsidies, which subsequently hit the demand. The decline in incentives also pushed manufacturers for more research and innovation to keep prices lower for higher sales.

However, the decline in sales had only a transient effect on demand, as sales swiftly rebounded within two or three months, buoyed by the festive season, re-igniting consumer interest. The registrations recovered to 71,604 units in October and 91,243 units in November. The cumulative January-November sales during this year came in at 7,83,128 units, up 38 percent year-on-year.

“Despite the subsidy cut, industry growth continues to be supported by fundamentally favourable economics for e2ws. The total cost of ownership is estimated to be 20 percent lower for e2ws compared with petrol variants even under the current subsidy regime, as against 32 percent lower under the earlier subsidy regime. The average running cost of 25-30 paise per km compared with Rs 2.00-2.25 per km for a petrol vehicle makes a difference over the life of the two-wheeler,” CRISIL Ratings Director Naveen Vaidyanathan said.

Companies like Hero Electric, Okinawa, Ampere, and Revolt, which had an early mover advantage, have seen their market share dip significantly from double-digit to low single digits over the last one-year period, while players like Ola Electric, Bajaj Auto, and Ather captured the market.

The market consolidation was driven primarily by the government's strict actions against OEMs failing to comply with local manufacturing regulations. The consolidation was also boosted by new launches by traditional players, reduced subsidies, and stricter quality standards.

Following the complaints that some of the companies violated the sourcing norms to claim the subsidies by importing components, the government last year investigated the companies and found that seven of them flouted the phased manufacturing programme guidelines.

The Centre then withheld the incentives of the seven erring companies, reportedly Hero Electric, Okinawa, Ampere, Benling India, Revolt, Amo Mobility, and Lohia Auto, and ordered them to refund the subsidies availed along with interest. This action had a severe impact on several cash-strapped companies at a time when the competition intensified in the market.

Way forward

After a long time, all segments of the petrol run two-wheelers are growing in tandem. Better distribution of income in the rural areas and the marriage season will offer heft to the entry segment, whereas growing economy is likely to sustain demand in the premium segment. The industry will be very closely watching the impact of the elections and how the Rabi season progresses, given the erratic rainfall distribution.

This feature was first published in Autocar Professional's December 15, 2023 issue.