Automobile Sector Two Wheeler Segment

MFM -Group D2 2nd Semester

Index
Overview of Indian Automobile Industry Two wheeler segment
Overview Segmental profile Key Financials Supply Demand Elasticity Growth Strategies
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Overview Automobile Sector

One of the major Industrial Sector Comprises of automobile and auto component sector One of the key driver of national economyprovides large-scale employment

Contribution to GDP ~ 9%
Turnover of ~> USD 35 bn and provides direct and indirect employment to over 13 mn people.
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Regulation
Auto Policy 2002,- 100 % FDI
picking up a 100 per cent equity stake or by acquiring a share jointly with another company, in the auto
and auto ancillary segments.

Exim Policy 2001-02 -Non-tariff barriers to protect the domestic industry

Imports would be allowed only from the country of manufacture. Vehicles must conform to the provisions of the Motor Vehicles Act, 1988. A prototype of the vehicle must be approved by the notified agencies in India.
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Market Structure Oligopoly to Monopolistic

Before 1983
Closed market Growth of market limited by supply Outdated models - Ambassador, Premier Padmini Limited Players Hindustan Motors Premier Telco Ashok Leyland Mahindra & Mahindra Entry Barrier License Raj

Market Structure Oligopoly to Monopolistic

From 1993 onwards
De-licensing of sector in 1993 Imports allowed from April 2001 Increased Competition > 21 manufactures , > 25 brands Intense competition among players Launch of Nano created price war Product differentiation allows range of price Branding, advertising and personal selling use to differentiate the product Demand and Supply regulated by market forces .
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Market Structure Oligopoly to Monopolistic

Profile of Indian Automobile Industry

The second largest two-wheeler manufacturer in the world as well as the second largest market. The fifth-largest commercial vehicle manufacturer in the world. The ninth-largest car manufacturer in the world Established Automobile Testing and R&D centers.
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Growth of Indian Automobile Industry

CAGR 13.3%

Indian automobile industry stands at 18 million vehicles at present

Two Wheeler Segment

Total Industry estimated Rs 400 billion total volume of 13.3 million units in 2010-11 Domestic industry continue to grow a near 26 % in last 2 years Over last 5 years, the domestic industry has clocked a growth at a CAGR of 10.8 % until 2010-11.

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Segment Wise Market Share

The motorcycle segment - segregated into three category Economy 30K to 45K ( 17.2%), Executive segment 45K to 60K ( 64.5%) , Premium > 60K ( 18.3%)
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Competitive Landscape
Major Players- Hero Honda, Bajaj Auto and TVS Motors together holding over 80 % market share
HHML leads the motorcycle segment

HMSI leads the scooters segment.

Mopeds continues to have monopoly with TVS Motor being the only player operating in the segment

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Player Wise Market Share

The three players - Hero Honda, Bajaj Auto and TVS Motors - continue to hold around 82 per cent of volumes share.
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Motorcycle Segment - Market Share

Hero Honda, the market leader, holds a dominant market in the executive segment. Whereas Bajaj Auto leads the premium segments with a market share of around 48.2 per cent.
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Cost Structure ( %)
Head Raw Material Employee Cost Other Mfg cost Selling Expenses Operating Profit 2006-07 74.3 4.0 5.0 5.1 11.7 2007-08 73.7 4.0 5.1 4.9 12.2 2008-09 73.2 3.9 5.5 5.6 11.8 2009-10 69.4 3.7 4.8 5.0 17.1 2010-11 73.1 3.4 4.2 4.3 15.0

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Key Financial
Two-wheelers - Financials of key players (stand-alone) (2009-10)
Agg. turnover Net profit (Rs million) Bajaj Auto Hero Honda 123,999 174,104 Operating Margin Net Profit Margin (per cent) 14.2 13.3 Gearing (times) 0.46 0.02 RoCE (per cent) 52.7 82.1

(Rs million) (per cent) 17,001 22,318 21.3 16.9

TVS Motor

46,796

880

6.2

2.0

1.18

4.9

Note: Gearing: Debt divided by net worth.

Based on audited results.

Source: CRISIL Research

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Margin
Two-wheelers - Player-wise operating margin trends (standalone)
(in per cent) Bajaj Auto Hero Honda TVS Motor Note: Operating margin - [Operating profit before depreciation, interest, tax (OPBDIT)/Operating Income] 2005-06 17.6 15.8 7.7 2006-07 14.9 12.2 4.8 2007-08 12.2 12.9 3.2 2008-09 15.8 13.7 5.0 2009-10 21.3 16.9 6.2

Source: CRISIL Research

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Pricing Strategy Motorcycle Segment

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Price Hike
Hero Honda June 10: 1% -1.7% (except splendor & karishma) Dec 10: 1 -2.5% Mar 11: 2% Bajaj Auto Jul 10: 1-2% Oct 11: 2% Jan 11: 1% Apr 11: 1% TVS Jul 10: 1-1.5% Sept 10: 1.2 -2.2% Apr 11: 1.5 -2%

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Non pricing Growth Strategy Hero Motor

Joint Collaboration Agreement with Honda Motor Co. Ltd. (Japan) Increase in overall production capacity- 5.4 mn units from 4.6 mn in 10-11 17 products (excl variants). Concentric diversification all the variants available Entry Executive Premium Super Premium Eyeing to take over the luxury bikes maker Ducati Motor Holding SpA. Tie up with Erik Buell Racing from US to further enhance and expand its R&D capabilities
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Non pricing Growth Strategy Hero Motor

Creating Visibility- extensive Promotion Backward IntegrationDealer Management System automating supply chain, enhancing information availability as well as transparency Forward Integration Goodlife Membership 5000+ customer touch points 100000+ villages covered , extensive in rural India Sector contributes ~ 44% of total sales volume Tie up with rural and co-operative banks Shwet-Labh, a specially designed loan package for Milk Cooperative members 21

Factors Affecting Supply- Motor cycle

Moderate capital- intensive.
Avg. capex required for manufacturing car is ~1L per unit, for two wheeler12K to 15K per unit.

Requires facilities for making engines, body fabrication and assembly.

Currently use of flexible production line that reduce change-over time when capacity is shifted between various products.

Estimated Capacity 16.3 mn units 72-75% utilization. Over the next 2 years, incremental capacity of over 5 million units is likely to come up with a total investment of Rs 40-50 billion.
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Factors Affecting Supply- Motor cycle

100% FDI Quantitative restrictions on imports of new and used two-wheelers have been removed. Scope of increase the Market Penetration

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Shift in Supply- Motor Cycle

S S1
Price p .u 35K
13.4

33K 10.5

Price

32K 8.4 29K 8.4 8.0

06-07 07-08 08-09 09-10 10-11 Qty Produced (mn)

Quantity Supplied

Changes in Qty produced

59%

Change in Price p.u

21%

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Factors affecting Demand- Motor Cycle

Per capita real GDP growth of 7% (CAGR) over the last six years

Rural Demand
Demand in rural market is on rising trend due to increase in farm incomes, supported by higher minimum support price and stable crop output Increase in non-farm sources of household income in rural areas due to higher business activity

Urban Demand
Growing urbanization Higher income level

Improved finance scenario due to small ticket size. Swelling replacement demand.
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Factors affecting Demand- Motor cycle

High fuel prices led consumers to shift towards more fuel efficient products Favourable demographic profile- young population
33% of Indias population of 1.2 billion (in 2011) belongs to the age

bracket of 20-40 years.

Underdeveloped public transport system Cheaper ownership cost

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Shift in Demand- Motorcycle

Price p .u 35K

D1 D
33K 10.5 32K 8.4 29K 8.5 8.1

13.3

Price

06-07 07-08 08-09 09-10 10-11 Qty Sales (mn)

Quantity demanded

Changes in Sales Qty

57%

Change in Price p.u

21%

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Price Elasticity of Demand- motorcycle segment

Particular Net Realization p.u Unit Sold 2010-11 35000 13329895 2006-07 29000 8469345

Price Elasticity of Demand =% change in Qty sold/ % change in Price Ep = -2.75 Since Ep>1, the demand is relatively elastic.

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Income Elasticity- motorcycle segment

Income Elasticity >1. Increase in the Per Capita Income has driven the growth in this segment As per NCAERs estimates, the number of households having annual income between Rs. 2 lac- 5 lac is estimated to have increased to 22 million in 2009-10, a scale-up by a factor of 2.5x over 2001-02.

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Promotional Elasticity of Demand- Hero Motor

Promotional Elasticity :-Advertising and distribution expenses have accounted for 6.0-6.5 per cent of the operating income. Based on the number for Hero Motors calculation.
Particular Net Sales ( Rs in Cr) Advt & Publicity Cost( Rs in Cr) 2010-11 19245 382.6 2009-10 15758 364.97

EA ~ 4.6 % .

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Short-term & Long-term outlook

In 2011-12, domestic two-wheeler volumes growth is expected to moderate to 10-12 per cent owing to tighter credit availability, high inflation and the higher base of 2010-11. Over the long term, the domestic two-wheeler market will grow at a CAGR of 10-12 per cent to achieve volumes of 19-21 million units by 2015-16. Growth will be driven by a rise in rural income, improving finance scenario, increasing number of attractive finance options such as direct cash collection (DCC) and stable urban demand.
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Non Pricing Strategy Hero Motor Corp

44.5 % share in domestic 2W market

5000+ customer touch points

100000+ villages covered , extensive in rural India
Distribution network has grown nearly 2x compared to peers over past 4 years Sector contributes ~ 44% of total sales volume

6 new products launched in 2010-11( incl variants)

Add on Features
New Karizma comes with an ensemble of new features (new design stripes and colours, new seat texture and winkers with clear lens. Maintenance-free battery and enhanced position lamp illumination
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Non Pricing Strategy Hero Motor Corp

Creating Visibility
Add campaign Desh Ki Dhakan Sponsored XIX Commonwealth Games in Delhi Hero Honda Karishma lead brand ICC World Cup 2011. Introduced Passion Pro Commonwealth Games Limited edition

Customer Centric Approach

Extended warranty option 8.2 mn + membership in Goodlife loyalty program- largest customer relationship program of its kind in India. 14% of the sale comes thru referral in 2010-11 Rural Approach Har Ghar Har Angan every Indian home and every Indian village . Saral finance for rural Indian tie up with Rural & Co-operative banks Swet Labh- specially designed loan package for milk co-op societies
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Non Pricing Strategy Hero Motor Corp

R&D efficiency-help in launching multi-models in short interval with high level of localization. Focus on new product development Strong Focus on supply chain integration Accurate and prompt decision making- Cost Modeling Analysis

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2W Penetration in India
(Figures in million)
Total number of households
-Households (with annual income <90,000) -Households (with annual income between 90,000-1,000,000) -Households (with annual income >1,000,000)

2009-10
222
114 104 4

2W population in India
2W Penetration Based on total number of households Based on addressable income levels
Source : Census, NCAER, ICRAs Estimates

80

36% 74%

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Motorcycle

Scooter
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Evolution of India as a global manufacturing hub

From 19831993
Government of India (GoI)-Suzuki joint venture (JV) to form Maruti Udyog JV with companies in commercial vehicles and components Players Maruti Udyog Hindustan Mot Premier Telco Ashok Leyland
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Evolution of India as a global manufacturing hub

From 19932011
De-licensing of sector in 1993 Global major original equipment manufacturers (OEM) start assembly in India (Toyota, GM, Ford, Honda, Hyundai) Imports allowed from April 2001; alignment of duty on components and parts to Association of Southeast Asian Nations (ASEAN)* levels Implementation of value-added tax (VAT)

More global players, such as Volkswagen, BMW, Nissan, etc. set up manufacturing bases in India

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