i

INDUSTRY PROFILE OF TWO WHEELERS

The third chapter deals with Review of two wheeler industry in India-Opportunities,
Issues and Challenges, it highlights on Policy Environment and Evolution of Indian
Auto Industry, Policy Framework Surrounding the Indian Auto Sector, Emission and
Safety Standards, Evolution of Two-wheeler Industry in India, Demand forecast for
motorcycles and scooters for 2015 - 16, Two wheeler companies and their Brands,
Year wise production of Two-Wheelers in India, Domestic Sales of Two-Wheelers in
India, Motorcycle Majors’ Market Share (Domestic Sales, 2010-11) and Segmental
Classification and Characteristics.

Introduction

The automobile sector is a key player in the global and Indian economy. The global
motor vehicle industry (four-wheelers) contributes 5 per cent directly to the total
manufacturing employment, 12.9 per cent to the total manufacturing production value
and 8.3 per cent to the total industrial investment. It also contributes US$560 billion to
the public revenue of different countries, in terms of taxes on fuel, circulation, sales
and registration. The annual turnover of the global auto industry is around US$5.09
trillion, which is equivalent to the sixth largest economy in the world (Organisation
Internationale des Constructeurs d'Automobiles, 2006). In addition, the auto industry is
linked with several other sectors in the economy and hence its indirect contribution is
much higher than this. All over the world it has been treated as a leading economic
sector because of its extensive economic linkages. India’s manufacture of 7.9 million
vehicles, including 1.3 million passenger cars, amounted to 2.4

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per cent and 7 per cent, respectively, of global production in number. The auto-
components manufacturing sector is another key player in the Indian automotive
industry. Exports from India in this sector rose from US$1.0 billion in 2003-04 to
US$1.8 billion in 2005-06, contributing 1 per cent to the world trade in auto
components in current USD. In India, the automobile industry provides direct
employment to about 5 lakh persons. It contributes 4.7 per cent to India’s GDP and 19
per cent to India’s indirect tax revenue. Till early 1980s, there were very few players in
the Indian auto sector, which was suffering from low volumes of production, obsolete
and substandard technologies. With de-licensing in the 1980s and opening up of this
sector to FDI in 1993, the sector has grown rapidly due to the entry of global players. A
rapidly growing middle class, rising per capita incomes and relatively easier availability
of finance have been driving the vehicle demand in India, which in turn, has prompted
the government to invest at unprecedented levels in roads infrastructure, including
projects such as Golden Quadrilateral and North-East-South-West Corridor with feeder
roads.2 The Reserve Bank of India’s (RBI) Annual Policy Statement documents an
annual growth of 37.9 per cent in credit flow to vehicles industry in 2006.3 Given that
passenger car penetration rate is just about 8.5 vehicles per thousand, which is among
the lowest in the world, there is a huge potential demand for automobiles in the
country.

There are two distinct sets of players in the Indian auto industry: Automobile
component manufacturers and the vehicle manufacturers, which are also referred to
as Original Equipment Manufacturers (OEMs). While the former set is engaged in
manufacturing parts, components, bodies and chassis involved in automobile
manufacturing, the latter is engaged in assembling of all these components into an
automobile. The Indian automotive component manufacturing sector

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consists of 500 firms in the organised sector and around 31,000 enterprises in the
unorganised sector. In the domestic market, the firms in this sector supply components
to vehicle manufacturers, other component suppliers, state transport undertakings,
defence establishments, railways and even replacement market. A variety of
components are exported to OEMs abroad and after-markets worldwide. The
automobile manufacturing sector, which involves assembling the automobile
components, comprises two-wheelers, three-wheelers, four-wheelers, passenger cars,
light commercial vehicles (LCVs), heavy trucks and buses/coaches. In India, mopeds,
scooters and motorcycles constitute the two-wheeler industry, in the increasing order
of market share. In 2005-06, the Indian auto sector had produced over 7.6 million two
wheelers and 1.3 million passenger cars and utility vehicles. India is a global major in
the two-wheeler industry producing motorcycles, scooters and mopeds principally of
engine capacities below 200 cc. It is the second largest producer of two-wheelers and
13th largest producer of passenger cars in the world. Tata figures among the ten
largest global manufacturers of LCVs, heavy trucks, buses and coaches, while it is
among the top 25 in passenger car manufacturing. The two-wheeler industry in India
has grown at a compounded annual growth rate of more than 10 per cent (in number)
during the last five years and has also witnessed a shift in the demand mix, with sales
of motorcycles showing an increasing trend. Indian twowheelers comply with some of
the most stringent emission and fuel efficiency standards worldwide. The passenger
car segment has been growing at a rapid pace -- from over 6,50,000 vehicles sold
during 2001 to over a million vehicles sold during 2004-05, showing an annual growth
rate of 17.36 per cent.

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Global Comparisons

The Investment Information and Credit Rating Agency of India (ICRA, 2003) studies
the competitiveness of the Indian auto industry, by global comparisons of macro
environment, policies and cost structure. This has a detailed account on the evolution
of the global auto industry. The United States was the first major player from 1900 to
1960, after which Japan took its place as the cost-efficient leader. Cost efficiency being
the only real means in as mature an industry as automobiles to retain or improve
market share, global auto manufacturers have been sourcing from the developing
countries. India and China have emerged as favourite destinations for the first-tier
OEMs since late 1980s. There are only a few dominant Indian OEMs, while the
number of OEMs is very large in China (122 car manufacturers and 120 motorcycle
manufacturers). According to this study, the major advantage of the Indian economy is
educated and skilled workforce with knowledge of English. Our disadvantages include
poor infrastructure, complicated tax structure, inflexible labour laws, inter-state policy
differences and inconsistencies. The drivers of Chinese economic growth are FDI,
labour productivity growth, which was 1.5 times higher than that in India in the last
decade, and domestic demand. Fiscal pressure is mounting on the Chinese
government, while India is in a better state. Based on comparisons of cost composition
to pinpoint the areas in which the Indian auto industry is at a disadvantage, this study
recommends a VAT regime, speedy procedures, imports duty cuts on raw materials,
common testing and design facility, labour reforms, upgradation of design and
engineering capabilities and brand building. ICRA (2004) analyses the implications of
the India-ASEAN Free Trade Agreements for the Indian automotive industry. ASEAN
economies are globally more integrated than India. The current size of Indian and

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ASEAN market for automobiles is more or less the same but the Indian market has a
larger growth potential than the ASEAN market due to the low level of penetration. The
labour cost is low in India but the stringent labour regulations erode this advantage.
The level of infrastructure is better in India than Indonesia and the Philippines but
worse than that in other ASEAN countries. The financial and banking sector is better in
India than in the ASEAN countries. The study notes that there is a huge excess
capacity in ASEAN countries, in comparison with that in India, which will help them to
tackle the excess demand that may arise in future. The study finds a 20-30 per cent
cost disadvantage for Indian companies on account of taxation and infrastructure and
5-20 per cent labour cost advantage over comparable ASEAN-member-based
companies. Similar findings are noted in a study by the Automotive Component
Manufacturers Association of India (ACMA, 2004), particularly in comparison with
Thailand. ICRA (2004b) analyses the impact of Preferential Trade Agreement (PTA)
with MERCOSUR on the automobile sector in India. This study finds a significant threat
of imports in sub-compact and compact cars and certain auto-components. There is
huge excess capacity and intense competition in MERCOSUR countries, propelling
them to look for export opportunities. This is true especially of Brazil, which has a well
developed auto-component sector with huge economies of scale. Further, weak
currency in all MERCOSUR countries provides a natural tariff barrier. In addition,
MERCOSUR countries have an equitable arrangement within themselves to have a
balanced trade, with fair level of exports and imports. The Indian auto industry could
gain from this PTA with MERCOSUR only if it is assured of the balanced trade, as
MERCOSUR countries practice among themselves.

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ICRA (2005) studies the possible impact of FTA with South Africa on the Indian
automobile industry. The study finds that there are a few policies in South Africa that
indirectly subsidise the auto industry, unlike India, in terms of financial grants. Hence it
is suggested that India could minimise losses only if it goes for inclusion of certain auto
components, which involve huge logistic costs of imports, creating a natural protection
(for example, stampings, glass, seats, plastics and tyres) and those in which India
enjoys economies of scale and is cost-competitive (e.g. castings and forgings) in this
FTA. If South Africa is ready to discontinue the schemes such as Motor Industry
Development Programme (MIDP), India could include all automotive components in
this FTA. There should be a minimum local content of 60 per cent and the agreement
should not be trade balancing as India will not gain much in that case.

Policy Environment and Evolution of Indian Auto Industry

In this section, studies on the policy environment pertaining to the Indian auto industry
and its evolution over the years have been reviewed. Pingle (2000) reviews the policy
framework of India’s automobile industry and its impact on its growth. While the ties
between bureaucrats and the managers of state-owned enterprises played a positive
role especially since the late 1980s, ties between politicians and industrialists and
between politicians and labour leaders have impeded the growth. The first phase of
1940s and 1950s was characterised by socialist ideology and vested interests,
resulting in protection to the domestic auto industry and entry barriers for foreign firms.
There was a good relationship between politicians and industrialists in this phase, but
bureaucrats played little role. Development of ancillaries segment as recommended by
the L.K. Jha Committee report in 1960 was a major

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event that took place towards the end of this phase. During the second phase of rules,
regulations and politics, many political developments and economic problems affected
the auto industry, especially passenger cars segment, in the 1960s and 1970s. Though
politicians picked winners and losers mainly by licensing production, this situation
changed with oil crises and other related political and macro-economic constraints.

The third phase starting in the early 1980s was characterised by delicensing,
liberalization and opening up of FDI in the auto sector. These policies resulted in the
establishment of new LCV manufacturers (for example, Swaraj Mazda, DCM Toyota)
and passenger car manufacturers. All these developments led to structural changes in
the Indian auto industry. Pingle argues that state intervention and ownership need not
imply poor results and performance, as demonstrated by Maruti Udyog Limited (MUL).
Further, the noncontractual relations between bureaucrats and MUL dictated most of
the policies in the 1980s, which were biased towards passenger cars and MUL in
particular. However, D’Costa (2002) argues that MUL’s success is not particularly
attributable to the support from bureaucrats. Rather, any firm that is as good as MUL in
terms of scale economies, first-comer advantage, affordability, product novelty,
consumer choice, financing schemes and extensive servicing networks would have
performed as well, even in the absence of bureaucratic support. D’Costa has other
criticisms about Pingle (2000). The major shortcoming of Pingle’s study is that it
ignores the issues related to sectors pecific technologies and regional differences
across the country. Piplai (2001) examines the effects of liberalization on the Indian
vehicle industry, in terms of production, marketing, export, technology tie-up, product
up gradation and profitability. Till the 1940s, the Indian auto industry was non-existent,
since automobile were imported from General Motors and Ford. In early 1940s,
Hindustan

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Motors and Premier Auto started, by importing know-how from General Motors and
Fiat respectively. Since the 1950s, a few other companies entered the market for two-
wheelers and commercial vehicles. However, most of them either imported or
indigenously produced auto-components, till the mid-1950s, when India had launched
import substitution programme, thereby resulting in a distinctly separate auto-
component sector. Due to the high degree of regulation and protection in the 1970s
and 1980s, the reforms in the early 1990s had led to a boom in the auto industry till
1996, but the response of the industry in terms of massive expansion of capacities and
entry of multinationals led to an acute over-capacity. Intense competition had led to
price wars and aggressive cost-cutting measures including layoffs and large-scale
retrenchment. While Indian companies started focusing on the price-sensitive
commercially used vehicles, foreign companies continued utilizing their expertise on
technology-intensive vehicles for individual and corporate uses. Thus, Piplai concludes
that vehicle industry has not gained much from the reforms, other than being thrusted
upon a high degree of unsustainable competition. In August 2006, a Draft of
Automotive Mission Plan Statement prepared in consultation with the industry was
released by the Ministry of Heavy Industries and Public trasnsport.

Policy Framework Surrounding the Indian Auto Sector

This chapter explains the evolution of policy framework that surrounds the Indian auto
sector, over the years. Emission norms and standards and inter-state differences in
policies are also discussed under different sections in this chapter.

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Evolution of the Policy Framework

The Indian auto policy has generally been in line with the prevailing industrial policy
framework. During the British regime, India had no auto industry to begin with and all
the automobiles were imported from the global auto manufacturers such as General
Motors and Ford Motors. In the 1940s, Hindustan Motors and Premier Motors were
established by Indian entrepreneurs, by importing know-how from General Motors and
Fiat respectively. In the 1950s, a few other companies such as Mahindra and
Mahindra, Ashok Motors (with Technical Collaboration with Leyland Motors) and Bajaj
Auto entered the market for commercial vehicles and two-wheelers. Most of them
either imported auto-components or produced them in-house, till mid-1950s, when
India launched import substitution programme. This development, followed by the L.K.
Jha Committee’s recommendations in 1960 to develop an indigenous ancillaries
sector, resulted in the evolution of a separate auto-component sector. From being a
highly protected segment pre-1980s, the auto-component industry in India has
emerged into a global player, supplying not only to domestic firms but also to
numerous foreign Original Equipment Manufacturers (OEMs). Till 1991, the Phased
Manufacturing Programme (PMP), under which domestic OEMs had to increase the
proportion of domestic inputs over a specific time period, had laid foundation for the
Indian auto-component sector. However, assured demand for their products had
rendered many players in this sector inefficient. This led to abolition of this programme
under the New Industrial Policy of 1991. Passenger car segment was restricted to
licensed production. Commercial vehicles and two-wheelers were also restricted by
licences, but the extent of restrictions was less and hence there were quite a few new
entrants in these segments in the 1980s, especially in the CV segment.

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The reforms of 1991, followed by the entry of global OEMs and Tier-1 suppliers in
India, paved the way for expansion of range, technologies and number of auto-
component manufacturers. This led to a major transition in the Indian auto industry,
wherein the vehicle manufacturers started outsourcing most of their components from
the autocomponent manufacturers. Ever since the delicensing of passenger car
segment in 1993, the Indian auto industry has grown bigger, with new international
players entering the market. Since 2000, there have been many significant policy
developments such as removal of Quantitative Restrictions (QRs) on auto imports and
permission for 100 per cent FDI. Financial liberalisation in the early 1990s enhanced
credit availability to consumers and this, in turn, led to a boost of auto loans in India,
which was a key driver of demand for automobiles. This facilitated the transition of
passenger cars from being regarded as luxury goods, accessible only for the elites, to
necessary goods, accessible to a wider section of the society.

Since 2000, India has been observing a Safety Decade. Efforts have been made for
aligning Indian safety standards with global ones. Roadmap has been prepared till
2007 for safety standards, while an outline has been drawn till 2010. The National
Road Safety Board is under active consideration by the government, which will be
responsible for road-related measures, vehicle-related measures and research on road
safety. One of the major measures, which is likely to be implemented in the near
future, is the measurement of road-worthiness of vehicles, based on which a
regulatory body under the government may be engaged in certifying, whether a motor
vehicle is road-worthy or not, in terms of emissions and safety. Auto policy, 2002,
stresses on the need to provide direction to the growth and development of the auto
industry in India. This policy document resulted in reduction of duties in

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the auto-component sector to a large extent and the automobile sector to some extent
and extension of R&D incentives to the auto sector. R&D thrust by the government can
be inferred from the recent measures such as 150 per cent weighted deduction on
R&D expenditure and increased R&D budget allocation for this sector. In 2005-06, a
few major policy developments relevant for the auto sector took place in India.
Implementation of VAT has taken place in a few states. Euro III emission norms have
been introduced in 11 metro cities and at the same time, the Euro II norms have been
implementation in rest of the cities. These norms have been delayed for the diesel
vehicles due to the unavailability of fuel. Therefore, the government has decided to
implement these norms in phased manners in selected northern states. Finance Bill
2006 reduced excise duty of motor vehicles to 12.5 per cent against 15 per cent before
and import duty of raw materials to 5-7.5 per cent against 10 per cent before and has
given a thrust to the development of infrastructure, which is the key factor influencing
auto industry, both as a driver of demand and as a facilitator of enhancing
competitiveness in manufacturing of auto products.

The introduction of above mentioned norms, in addition to safety and noise norms
have led to the increase in the workload on the Automotive Research Association of
India (ARAI) testing facilities. Keeping this in mind, the Government of India has made
various efforts to improve the testing facilities. These include the approval of two
proposed additional testing facilities, upgradation of the ARAI & Vehicles Research and
Development Establishment (VRDE), establishment of a world class test track and
building of a few additional centres under the NATRIP in and around the major auto
hubs in India. This is an industry-government joint initiative, involving an investment of
Rs. 1,718 crore. The additional centres would be set up in Manesar, Pune,
Ahmednagar,

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Chennai and Indore. Efforts have also been made to promote alternative fuels. For
this, the following three initiatives have been launched:

Agreement with the sugar industry on the off-take of ethanol has been made.

An action plan has been prepared to grow and procure bio-diesel at fixed price.

Hydrogen energy roadmap has been prepared by Ratan Tata. According to this
roadmap, 10 lakh hydrogen-fuelled vehicles will be produced by 2010. The accession
to the UNWP (United Nations Working Party) 29 -1998 is another important decision
taken by the Indian Government in 2005-06. This agreement will prove a significant
step towards the global integration of the Indian auto industry. A great deal of progress
has been made on bilateral and regional trade agreements. The bilateral agreement
with Chile and Singapore and regional agreements with SAFTA (South Asian Free
Trade Agreement) and MERCOSUR (Southern Common Market) have been
concluded, while the bilateral discussion with Thailand and regional discussions with
ASEAN and BIMSTEC (Bay of Bengal Initiative for Multi-Sectoral Technical and
Economic Cooperation) have reached the final stage. In August 2006, a Draft of
Automotive Mission Plan Statement was released by the Ministry of Heavy Industries,
in consultation with industry. This was released as a report in December 2006. This
document draws an action plan to take the turnover of the automotive industry in India
to US$145 billion by 2016 with special emphasis on small cars, MUVs, two-wheelers
and auto-components. Measures suggested include setting up of a National Auto
Institute, upgrading infrastructure, cutting the duties of raw materials and fiscal
incentives for R&D.

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In August 2006, the Working Group on Automotive Industry in the Ministry of Heavy
Industries has brought out a report for the Eleventh Five Year Plan. This document
stresses on the need of speeding up the move towards VAT in the states and GST at
the Centre. Labour regulations, paperwork involved in government-related
transactions, internal trade barriers, infrastructure bottlenecks, raw materials, human
capital, increasing interest rates and threats due to FTAs are, as mentioned in this
document, barriers to competitiveness. This report notes that the effective levy is lower
for a Counter-Vailing Duty (CVD) than excise duties locally, because of the fact that
excise is made after including the post-manufacturing expenses in the price, while
imported Completely Built Units (CBUs) have the advantage of being levied the CVD
before post manufacturing expenses. In addition, the document recommends various
other measures such as upgrading human resources, mandatory inspection and
control and retirement of

vehicles based on road-worthiness. import tariffs of commercial vehicles to 10 per cent

is expected to induce further competition in the Indian commercial vehicles sector.
Since CVs are required in the development of infrastructure, duty reduction on CVs
may give a boost to infrastructure. Increase in total tax burden is certain to occur now,
because of the increase in educationcess from 2 per cent to 3 per cent of total taxes.
Extension of R&D incentives for five more years, reduction of Central Sales Taxes
(CST) and increased infrastructural expenditure are positive features of the budget, for
auto sector.

Emission and Safety Standards

In India, safety standards were introduced in the 1960s in auto-components, while the
Central Motor Vehicles Rules came into existence in 1989. In 1991, the first state
emission norms came into

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force for petrol vehicles and in 1992 for diesel vehicles. From April 1995, fitting of
catalytic converters in new petrol-driven passenger cars was mandated in the four
metros and unleaded petrol was also introduced. From April 2000, unleaded petrol is
available in the entire country. As for road safety, numerous awareness programmes
are arranged all over the country, since 2000-10 is a safety decade. In developed
countries, lead was phased out from petrol over a period of more than 10 years, while
in India this was achieved in just six years. The time gap between the introduction of
norms in Europe and India is narrowing down gradually. Euro I was introduced in the
EU in 1983, while the same was introduced to India in 1996. Euro II was introduced in
the EU in 1996-97. Bharat Stage-II norms, which are the Indian counterparts of Euro II,
have been introduced for smaller passenger vehicles (Gross Vehicle Weight < 3.5
tonnes) in 2000, and for heavier vehicles (Gross Vehicle Weight > 3.5 tonnes) from
2001 in National Capital Region of Delhi. For Mumbai, Chennai and Kolkata, these
standards were extended to different months in 2001. Later, these norms were
extended to the rest of the country in phases by 2005. However, for some categories
of vehicles such as two-wheelers and three-wheelers, new generation norms are yet to
be announced. Bharat Stage-III norms have been implemented in many Indian states
in phases. There are numerous other policy initiatives from the government and
industry to encourage adoption of environment-friendly technologies, such as
hydrogen energy initiative by Tata and a few other government policies enumerated in
the previous subsection. However, there were some contradictions and policy changes
in North-Eastern states, in terms of implementation of emission norms. The
component-suppliers of an MUV major based in Mumbai, covered in our field survey,
had adapted their technologies to suit Bharat-I norms, which were introduced in

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North-Eastern states in 1997. With the implementation of Bharat-II norms in this region
in 2005, they had adapted their technologies accordingly. However, it was later found
that fuel that is consistent with Bharath-II norms was not available in sufficient quantity
and hence Bharat-I was implemented again, instead of Bharath-II. Consequently,
some of the suppliers had to close down their operations partly or fully. Hence the
emission norms-related policies should be designed in such a way that the
manufacturers get sufficient time to adapt their processes and technologies. At the
same time, both domestic and foreign firms at all levels should be prepared for the
latest international norms.

Inter-State Differences in Policies

A major weakness in Indian policy framework is inter-state differences in policies, as

our field survey respondents reported. This section summarises the major industrial
policy initiatives in the leading auto-producing states. In addition to these policy
differences, there are individual memoranda of understanding between the companies
and state governments, resulting in further specialised incentives for the companies.

Tax Policies

· Maharashtra is the only state that levies octroi taxes, among the major autoproducing
states in India. Thus, firms in this state find it expensive to procure components from
other states. However, in an attempt to develop its backward districts, the Maharashtra
Government is providing few incentives to the industrial units that are set up in these
districts. These incentives include the exemption from the electricity duty for 10 years,
stamp duty and registration fees for 5 years. There is octroi refund to the industries in
these places. The Haryana Government

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provides exemption from sales tax and Local Area Development Tax (LADT) for certain
time period for the industries that are newly set up.· Tamil Nadu offers exemption from
the electricity tax for three years to all the new projects with investment between Rs.
50 crore and Rs. 100 crore. · Uttarakhand provides many tax incentives, such as the
following:

o Exemption from central excise is given for 10 years of establishment. o 100 per cent
income tax exemption is given for the first five years of establishment, followed by 30
per cent for the next five years.

o Exemption from entry tax on plant and machinery is granted.

Subsidies

The Maharashtra Government provides capital subsidy to the SSIs.

The Haryana Government gives financial assistance to the SMEs for patent
registration. It also provides capital subsidy to the export oriented firms and interest-
free loan to the Small Scale Industries (SSIs).

The Tamil Nadu Government provides the following subsidies:

o Capital subsidy of Rs. 25 lakh to all the new projects with investment between Rs. 50
crore and Rs. 100 crore. The amount of subsidy increases with the volume of
investment.

o Reimbursement of patent registration fee up to 50 per cent of expenses or Rs. 1

lakh, whichever is lower, is done.

o Subsidy of 25 per cent or Rs. 25 lakh, whichever is lower, is given for the setting up
of Effluent Treatment Plants (ETPs).

· The Uttarakhand government provides the following subsidies:

o Capital subsidy of 15 per cent with a maximum of Rs. 30 lakh is provided.

o 3 per cent interest incentives with a maximum of Rs. 2 lakh are given for the SSIs.

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The Automotive industry in India is one of the largest in the world and one of the
fastest growing globally. India manufactures over 18 million vehicles (including 2
wheeled and 4 wheeled) and exports more than 2.3 million every year. It is the world's
second largest manufacturer of motorcycles; there are eight key players in the Indian
markets that produced 13.8 million units in 2010-11. At present the dominant products
of the automobile industry are Two Wheelers with a market share of over 75% and
passenger cars with a market share of about 16%. Commercial vehicles and three
wheelers share about 9% of the market between them. The industry has attained a
turnover of more than USD 35 billion and provides direct and indirect employment to
over 13 million people. The Indian two-wheeler industry has come a long way since its
humble beginning in 1948 when Bajaj Auto started importing and selling Vespa
Scooters in India. Since then, the customer preferences have changed in favour of
motorcycles and gearless scooters that score higher on technology, fuel economy and
aesthetic appeal, at the expense of metal-bodied geared scooters and mopeds. These
changes in customer preferences have had an impact on the fortunes of the players.
The erstwhile leaders have either perished or have significantly lost market share,
whereas new leaders have emerged. With an expanding market and entry of new
players over the last few years, the Indian two wheeler industry is now approaching a
stage of maturity. Previously, there were only a handful of two-wheeler models
available in the country. Currently, India is the second largest producer of two-wheelers
in the world. It stands next only to China and Japan in terms of the number of two
wheelers produced and the sales of two-wheelers respectively. There are many two-
wheeler manufacturers in India. The major players in the 2-wheeler industry are Hero
Honda, Bajaj Auto Ltd (Bajaj Auto), TVS Motor Company Ltd (TVS) and Honda
Motorcycle
& Scooter India, Private Limited (HMSI) accounting for over 93% of the sale in the
domestic two wheeler market. It is noteworthy that motorbikes segment’s share is just
below 80% of the total 2W market in India which is dominated by Hero Honda with a
market share of 59%. Scooter segment’s market share is about 18% which is led by
Honda Motorcycle & Scooter India, Private Limited (HMSI) with a market share of
43%.Threefourth of the total exports in the two wheeler automobile industry are made
in the motorcycle segment. Exports are made mainly to South East Asian and SAARC
nations. The level of technology change in the Motor vehicle Industry has been high
but, the rate of change in technology has been medium. Investment in the technology
by the producers has been high. However, further investment in new technologies will
help the players to be more competitive. Currently, India’s increasing per capita
disposable income which is expected to rise by 106% by 2015 and growth in exports is
playing a major role in the rise and competitiveness of the industry. Consumers are
very important for the survival of the Motor Vehicle manufacturing industry. In 2008-09,
customer sentiment dropped, which burned on the augmentation in demand of cars.
The key to success in the industry is to improve labour productivity, labour flexibility,
and capital efficiency. Having quality manpower, infrastructure improvements, and raw
material availability also play a major role. Access to latest and most efficient
technology and techniques will bring competitive advantage to the major players.
Utilising manufacturing plants to optimum level and understanding implications from
the government policies are the essentials in the Automotive Industry of India.

This report on ‘Analysing the State Of Competition In Indian Two-Wheeler Industry’

gives insight of the industry encompassing its evolution in India, demand drivers,
influence of supply side factors,
commentary on industry players and competition and the trends in domestic sales and
exports. The report also shows the oligopolistic nature of the Indian two wheeler
industry and the propensity of the major players to increase their share. In a rapidly
growing two wheeler industry, especially in developing economies like India, it is
extremely important to analyse the state of competition to check whether a few firms
may increase their dominance and also the implications of after sale services provided
by the two wheeler firms to consumers. An important point also remains to look that
why even after being the world’s largest two wheeler industry, the Chinese two wheeler
firms haven’t been able to enter the Indian markets successfully? What challenges a
new entrant has to face in the industry?

EVOLUTION OF THE INDIAN TWO WHEELER INDUSTRY BEFORE COMPETITION

ACT, 2002

The two-wheeler industry (henceforth 2WI) consists of three segments viz., scooters,
motorcycles, and mopeds. The 2WI in India began operations within the framework of
the national industrial policy as espoused by the Industrial Policy Resolution of 1956.
This resolution divided the entire industrial sector into three groups, of which one
contained industries whose development was the exclusive responsibility of the State,
another included those industries in which both the State and the private sector could
participate and the last set of industries that could be developed exclusively under
private initiative within the guidelines and objectives laid out by the Five Year Plans
(CMIE, 1990). Private investment was channelized and regulated through the
extensive use of licensing giving the State comprehensive control over the direction
and pattern of investment. Entry of firms, capacity expansion, choice of product and
capacity mix and technology,
were all effectively controlled by the State in a bid to prevent the concentration of
economic power. However due to lapses in the system, fresh policies were brought in
at the end of the sixties. These consisted of MRTP of 1969 and FERA of 1973, which
were aimed at regulating monopoly and foreign investment respectively. Firms that
came under the purview of these Acts were allowed to invest only in a select set of
industries. This net of controls on the economy in the seventies caused several firms
to a) operate below the minimum efficiency scale (henceforth MES), b) under-utilize
capacity and, c) use outdated technology. While operation below MES resulted from
the fact that several incentives were given to smaller firms, the capacity under-
utilization was the result of i) the capacity mix being determined independent of the
market demand, ii) the policy of distributing imports based on capacity, causing firms to
expand beyond levels determined by demand so as to be eligible for more imports.
Use of outdated technology resulted from the restrictions placed on import of
technology through the provisions of FERA. Recognition of the deleterious effects of
these policies led to the initiation of reforms in 1975 which took on a more pronounced
shape and acquired wider scope under the New Economic Policy (NEP) in 1985. As
part of these reforms, several groups of industries were delicensed and
‘broadbanding’3 was permitted in selected industries. Foreign investment was allowed
in 3 Delicensed industries meant that firms no longer required licenses from the State
to enter the industry or expand their plants. Broadbanding meant that a firm could
manufacture products related to the ones they were currently making without the need
for a separate license.

Select industries and norms under the MRTP Act were relaxed. These reforms led to a
rise in the trend rate of growth of real GDP from 3.7% in the seventies to 5.4% in the
eighties. However the major set of
reforms came in 1991 in response to a series of macroeconomic crises that hit the
Indian economy in 1990-91. Several industries were deregulated, the Indian rupee was
devalued and made convertible on the current account and tariffs replaced quantitative
restrictions in the area of trade. The initiation of reforms led to a drop in the growth of
real GDP between 1990 –1992, but this averaged at about 5.5% per annum after
1992. The decline in GDP in the years after reforms was the outcome of devaluation
and the contractionary fiscal and monetary policies taken in 1991 to address the
foreign exchange crisis. Thus the Industrial Policy in India moved from a position of
regulation and tight control in the sixties and seventies, to a more liberalized one in the
eighties and nineties. The two-wheeler industry in India has to a great extent been
shaped by the evolution of the industrial policy of the country. Regulatory policies like
FERA and MRTP caused the growth of some segments in the industry like
motorcycles to stagnate. These were later able to grow (both in terms of overall sales
volumes and number of players) once foreign investments were allowed in 1981. The
reforms in the eighties like ‘broadbanding’ caused the entry of several new firms and
products which caused the existing technologically outdated products to lose sales
volume and/or exit the market. Finally, with liberalization in the nineties, the industry
witnessed a proliferation in brands. A description of the evolution of the two wheeler
industry in India before Competition Act, 2002 is usefully split up into four ten year
periods. This division traces significant changes in economic policy making. The first
time-period, 1960-1969, was one during which the growth of the two-wheeler industry
was fostered through means like permitting foreign collaborations and phasing out of
non-manufacturing firms in the industry. The period 1970-1980 saw state controls,
through the use of the licensing system and certain regulatory acts over the
economy, at their peak. During 1981-1990 significant reforms were initiated in the
country. The final time-period covers the period 1991-1999 during which the reform
process was deepened. These reforms encompassed several areas like finance,
trade, tax, industrial policy etc. We now discuss in somewhat greater detail the
principal characteristics of each sub period. The Indian economy was faced with
several problems at this time. Foreign exchange reserves were down to two month’s
imports, there was a large budget deficit, double digit inflation, and with India’s credit
rating downgraded, private foreign lending was cut off. Also the Gulf war in 1990
brought about an increase in oil prices, and India had to import oil for over US$ 2
billion (GATT Secretariat, 1993).

The automobile industry being classified as one of importance under the Industrial
Policy Resolution of 1948 was therefore controlled and regulated by the Government.
In order to encourage manufacturing, besides restricting import of complete vehicles,
automobile assembler firms were phased out by 1952 (Tariff Commission, 1968), and
only manufacturing firms allowed to continue. Production of automobiles was licensed,
which meant that a firm required a licensing approval in order to open a plant. It also
meant that a firm’s capacity of production was determined by the Government. During
this period, collaborations with foreign firms were encouraged. This was a period
during which the overall growth rate of the two-wheeler industry was high (around 15%
per annum). Furthermore, the levels of restriction and control over the industry were
also high. The former was the result of the steep oil price hikes in 1974 following which
two-wheelers became popular modes of personal transport because they offered
higher fuel efficiency over cars/jeeps. On the other hand, the introduction of regulatory
policies such as MRTP and FERA resulted in a controlled industry. The impact
of MRTP was limited as it affected only large firms like Bajaj Auto Ltd. whose growth
rates were curbed as they came under the purview of this Act. However, FERA had a
more far-reaching effect as it caused foreign investment in India to be restricted. In the
motorcycle segment FERA caused technological stagnation, as a consequence of
which neither new products nor firms entered the market since this segment depended
almost entirely on foreign collaborations for technology. The scooter and moped
segments on the other hand were technologically more self-sufficient and thus there
were two new entrants in the scooter segment and three in the moped segment.
Between 1974-79, sales of two-wheelers increased by 60%, while that of cars declined
by 21% and jeeps grew only by 11%. Indian motorcycles in the seventies had two
major drawbacks viz., low fuel-efficiency and high weight. Worldwide however, there
was a trend towards using high-strength, low-weight materials for various components
which resulted in vehicles that were compact and had lower weight. Since fuel-
consumption of a 2W depended on its weight, lighter vehicles meant greater mileage.
These drawbacks were overcome in the eighties when foreign collaborations were
once again allowed.

The technological backwardness of the Indian two-wheeler industry was one of the
reasons for the initiation of reforms in 1981. Foreign collaborations were allowed for all
two wheelers up to an engine capacity of 100 cc. This prompted a spate of new entries
into the industry the majority of which entered the motorcycle segment, bringing with
them new technology that resulted in more efficient production processes and
products. The variety in products available also improved after ‘broadbanding’ was
allowed in the industry in 1985. This gave firms the flexibility to choose an optimal
product and capacity mix which could better incorporate market demand into their
production
strategy and thereby improve their capacity utilization and efficiency. These reforms
had two major effects on the industry: First, licensed capacities went up to 1.1 million
units per annum overshooting the 0.675 million units per annum target set in the Sixth
Plan. Second, several existing but weaker players died out giving way to new entrants
and superior products.

The reforms that began in the late seventies underwent their most significant change in
1991 through the liberalization of the economy. The two-wheeler industry was
completely deregulated. In the area of trade, several reforms were introduced with the
goal of making Indian exports competitive. The two-wheeler industry in the nineties
was characterized by a) an increase in the number of brands available in the market
which caused firms to compete on the basis of product features and b) increase in
sales volumes in the motorcycle segment visà-vis the scooter segment reversing the
traditional trend. In the scooter segment, models with features like self-starter facility,
automatic transmission system, gear-less riding etc. were introduced that were
traditionally not available in scooters. In the motorcycle segment, the new 100 cc
models compared well against the existing heavier models of 250 cc, 350 cc etc. as
these were lighter and more fuel-efficient. Joshi and Little (1996) discuss the economic
crisis of 1991 and the policy response of the Indian government. The EXIM Scrip was
introduced which granted exporters entitlements worth 40% of their export earnings.
Similarly quantitative restrictions were replaced with import duties which were around
85% of the two-wheeler industry (GATT Secretariat, 1993). 10 Industry sales figures
show that scooter sales in 1990 formed 52% of the total two-wheeler sales that year,
while the corresponding figures for the motorcycle and moped segments were 26%
and 22%. By 1997, these
figures had changed to 43%, 36% and 21% respectively (ACMA, various issues).

INDIAN TWO-WHEELER INDUSTRY: A PERSPECTIVE

Automobile is one of the largest industries in global market. Being the leader in product
and process technologies in the manufacturing sector, it has been recognized as one
of the drivers of economic growth. During the last decade, well directed efforts have
been made to provide a new look to the automobile policy for realizing the sector's full
potential for the economy. Steps like abolition of licensing, removal of quantitative
restrictions and initiatives to bring the policy framework in consonance with WTO
requirements have set the industry in a progressive track. Removal of the restrictive
environment has helped restructuring, and enabled industry to absorb new
technologies, aligning itself with the global development and also to realize its potential
in the country. The liberalization policies have led to continuous increase in
competition, which has ultimately resulted in modernization in line with the global
standards as well as in substantial cut in prices. Aggressive marketing by the auto
finance companies have also played a significant role in boosting automobile demand,
especially from the population in the middle income group.

Evolution of Two-wheeler Industry in India

Two-wheeler segment is one of the most important components of the automobile
sector that has undergone significant changes due to shift in policy environment. The
two wheeler industry has been in existence in the country since 1955. It consists of
three segments viz. scooters, motorcycles and mopeds. According to the figures
published by SIAM, the share of two-wheelers in automobile sector in terms of units
soldwas about 80 per cent during 2003-04. This high figure itself is suggestive of the
importance of the sector. In the initial years, entry of firms, capacity expansion, choice
of products including capacity mix and technology, all critical areas of functioning of an
industry, were effectively controlled by the State machinery. The lapses in the system
had invited fresh policy options that came into being in late sixties. Amongst these
policies, Monopolies and Restrictive Trade Practices (MRTP) and Foreign Exchange
Regulation Act (FERA) were aimed at regulating monopoly and foreign investment
respectively. This controlling mechanism over the industry resulted in: (a) several firms
operating below minimum scale of efficiency; (b) under-utilization of capacity; and (c)
usage of outdated technology. Recognition of the damaging effects of licensing and
fettering policies led to initiation of reforms, which ultimately took a more prominent
shape with the introduction of the New Economic Policy (NEP) in 1985.

However, the major set of reforms was launched in the year 1991 in response to the
major macroeconomic crisis faced by the economy. The industrial policies shifted from
a regime of regulation and tight control to a more liberalized and competitive era. Two
major results of policy changes during these years in two-wheeler industry were that
the, weaker players died out giving way to the new entrants and superior products and
a sizeable increase in number of brands entered the market that compelled the firms to
compete on the basis of product attributes.

Finally, the two-wheeler industry in the country has been able to witness a proliferation
of brands with introduction of new technology as well as increase in number of players.
However, with various policy measures undertaken in order to increase the
competition, though the degree of concentration has been lessened over time,
deregulation of the industry has not really resulted in higher level of competition.
A Growth Perspective`s

The composition of the two-wheeler industry has witnessed sea changes in the post-
reform period. In 1991, the share of scooters was about 50 per cent of the total 2-
wheeler demand in the Indian market. Motorcycle and moped had been experiencing
almost equal level of shares in the total number of two-wheelers. In 2003-04, the share
of motorcycles increased to 78 per cent of the total two-wheelers while the shares of
scooters and mopeds declined to the level of 16 and 6 per cent respectively. A clear
picture of the motorcycle segment's gaining importance during this period depicting
total sales, share and annual growth during the period 1993-94 through 2003-04.

Demand Drivers

The demand for two-wheelers has been influenced by a number of factors over the
past five years. The key demand drivers for the growth of the two-wheeler industry are
as follows:

Inadequate public transportation system, especially in the semi-urban and rural areas;

Increased availability of cheap consumer financing in the past 3-4 years;

Increasing availability of fuel efficient and low-maintenance models;

Increasing urbanization, which creates a need for personal transportation;

Changes in the demographic profile;

Difference between two-wheeler and passenger car prices, which makes twowheelers
the entry level vehicle;

Steady increase in per capita income over the past five years; and

Increasing number of models with different features to satisfy diverse consumer needs.
While the demand drivers listed here operate at the broad level, segmental
demand is influenced by segment-specific factors. National Council of Applied
Economic Research (NCAER) had forecast twowheeler demand during the
period 2002-03 through 2011-12. The forecasts had been made using
econometric technique along with inputs obtained from a primary survey
conducted at 14 prime cities in the country. Estimations were based on Panel
Regression, which takes into account both time series and cross section
variation in data. A panel data of 16 major states over a period of 5 years
ending 1999 was used for the estimation of parameters. The models
considered a large number of macro-economic, demographic and socio-
economic variables to arrive at the best estimations for different two-wheeler
segments. The projections have been made at all India and regional levels.
Different scenarios have been presented based on different assumptions
regarding the demand drivers of the two-wheeler industry. The most likely
scenario assumed annual growth rate of Gross Domestic Product (GDP) to be
5.5 per cent during 2002-03 and was anticipated to increase gradually to 6.5
per

cent during 2011-12. The all-India and region-wise projected growth trends for
the motorcycles and scooters are presented in Table 3.1. The demand for
mopeds is not presented in this analysis due to its already shrinking status
compared to' motorcycles and scooters.