Despite steadily declining margins due to white-hot competition, capacity expansion plans of two-wheeler companies are cruising.
NEW DELHI: Two-wheeler firms seem to be driving into a vicious circle with eyes wide open.
Despite steadily declining margins due to white-hot competition, capacity expansion plans of two-wheeler companies are cruising. Such capacities will mean more price aggression, and, completing the vicious circle, new product launches would cannibalise existing high-margin products.
The potential impact of all this on profitability is a no-brainer.
Over the next three years, India’s three top two-wheeler makers — Hero Honda Motors, Bajaj Auto and TVS Motors, are together expected to hike production capacity by a massive 40%.
This comes at a time when capacity utilisation in the industry is at 70%. The number is expected to drop further to 64% next year.
Deepak Jain, analyst with Macquarie Research, in a report on last Thursday said based on this math, an overcapacity of six million units per year is being built up over the next two years.
Put it another way, this is like producing nothing after having invested money to set up a facility for 12 million units.
According to Merrill Lynch, two-wheeler capacity in India would rise by about 20% this fiscal to 127 lakh units (from 106 lakh) and then to 145 lakh units the year after.
But total demand (exports plus domestic sales) is expected to grow at a slower clip — by only 14.5% next fiscal and 13.53% the year after.
So why this race for capacity expansion?
It’s a bit of a necessity, said analyst, since new capacity additions are being planned in tax-free zones, helping companies to arrive at lower product price tags.
Each of the three stalwarts — Hero Honda, Bajaj and TVS — are putting up units in Uttaranchal, which offers excise and tax benefits.
The silver lining comes from the new kids on the block — Suzuki Motorcycle and Scooter India, and Honda Motorcycle and Scooter India.
Analysts said while these companies still do not have the product or distribution capability of the three bid daddies, they have aggressive plans and a better product range that should progressively improve sales.
HMSI, in particular, could be a major player in the near term. In May, it had a 4% market share and was the second-largest player in the 125-250cc segment.
“Having established itself as a leading scooter manufacturer, the company is in a position to capitalise on its distribution channel. The anticipated launch of its 100 cc motorcycle could be the catalyst,” said Macquarie’s Jain.
Merrill had already predicted that the two-wheeler industry is seen slowing down somewhat in the next two years.
Decreasing price elasticity - most bike sales are being driven by incentives - and lack of product innovation are also pushing the two-wheeler market towards a slight slowdown.
No wonder then, margins across the two-wheeler sector have been under pressure already, declining by 300 basis points this year to touch the 10% mark and this is expected to deteriorate further.
According to its estimates, margins could fall further in the next two years, to settle at around 9% by 2008-09.
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