Decadal Lows in 2W Sales Wreaks Havoc on Two-Wheeler Manufacturers

The Indian two-wheeler sector has been delayed by ten years as a result of the Covid-19 interruptions and a 40% increase in costs in just three years, leaving it with overcapacity and an uncertain recovery.

For entry-level two-wheelers, which make up more than one-third of the market, new regulatory rules, high insurance costs, fuel price increases, and the rise in commodity prices have driven vehicle prices beyond the reach of rural consumers.

The two-wheeler market saw a freefall in demand after reaching an all-time high of 21.17 million in FY19, dropping it down to 13.46 million in FY22, which is on par with the FY12 level when the industry had logged sales of 13.40 million.

The most affected were motorcycles, with volumes falling to levels seen in FY10, while scooters fared somewhat better, with volumes reaching an eight-year low.

Due to the fact that scooters are mostly marketed in urban markets while motorcsycles are primarily sold in rural and semi-urban markets, this distinction has brought attention to the price sensitivity of the targeted client between the two categories.

The cost-conscious consumer has been hurt by the sharp price hike. Five years ago, the Hero HF 100 cost Rs 40,000; today, it costs Rs 55,000. In 2018, the Honda Activa 125 cost Rs 60,000; today, it costs Rs 78,000.

The two-wheeler sector is experiencing severe overcapacity due to the collapse in demand.

According to the production run published as of the end of December, estimates state that the two-wheeler manufacturers are operating at least partially at capacity.

The largest two-wheeler manufacturer in India, Hero MotoCorp, has an installed capacity of 9.3 million units annually split across six plants but based on the pace of production in December, the company is only utilising about half of this capacity.

With a total installed capacity of 5.7 million, Bajaj Auto, the third-largest two-wheeler producer in the nation, is operating at only 50% of its potential. The Pune-based company, which depends on exports for half of its sales, does not compete in the scooter (petrol) market.

The capacity of Honda Motorcycle and Scooter India (HMSI), the second-largest two-wheeler brand in India, is 5.8 million units annually. Still, less than half of that capacity is now being used. Scooters, led by Activa, account for more than half of HMSI's volume.

Although there has been modest volume improvement in the current fiscal year up until December, experts predict that the industry will, at the most, end the year with revenues on par with FY16.

K N Radhakrishnan, president and CEO of TVS Motor Company, said in a post-earning analyst call, “There is a problem in the affordability of entry level two-wheelers primarily because there has been a significant rise in product costs. Last 12 quarters prices have gone up by 40% but the incomes have not gone up by that much. We have to be patient with the current situation.”

“We remain optimistic of demand recovery in FY2023, amid multiple headwinds (elevated ownership cost, persisting inflationary pressures and increase in financing rates). As erratic monsoons and floods in many regions have impacted kharif yields, rural demand may remain dampened. Dealer check, however, indicates that sentiments have started improving at the rural level; the sustenance of the same remains key for the industry,” Icra stated in a recent report.

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