Analyzing the state of competition in indian two wheeler industry



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ANALYZING THE STATE OF COMPETITION IN INDIAN TWO WHEELER INDUSTRY




Submitted to:

Competition Commission of India, New Delhi



Submitted By:

Anuj Kumar Kanojia

M.A. Economics, 1st year

Delhi School of Economics

June 2011

DISCLAIMER

This project report has been prepared by the author as an intern under the Internship Programme of the Competition Commission of India for a period of one month from June9, 2011 to June8; 2011.This report is for academic purposes only. The views expressed in the report are personal to the intern and do not reflect the views of the Commission or any of its staff or personnel and do not bind the Commission in any manner. This report is the intellectual property of the Competition Commission of India and the same or any part thereof may not be used in any manner whatsoever, without express permission of the Competition Commission of India in writing.


ACKNOWLEDGEMENT

This research project would not have been possible without the support and encouragement of my Guide, Mr. Shyamal Misra, under whose supervision I chose this topic and began my research. I would like to express my gratitude for her invaluable assistance, support and guidance throughout the internship period.


I would also like to appreciate the cooperation we got from Dr. Anil Kumar (Assistant Director) and Mr. Srinivasan, the librarian of CCI. I would also like to convey my gratitude to the Competition Commission for supporting this research project. I am also thankful to Mr. Hariprasad Cg, Mr. Sudarshan Bhattacharjee and Mr. Anand Sharma for helping me in every possible way they could.
I am also very grateful to the other staff of Competition Commission of India, for being immeasurably accommodating to the requirements of this humble endeavour.

TABLE OF CONTENT

Contents Page No.


1.INTRODUCTION 7

2.EVOLUTION OF THE INDIAN TWO WHEELER INDUSTRY BEFORE COMPETITION ACT, 2002 9

3.COMPETITION ACT, 2002 17

4.INDIAN TWO WHEELER INDUSTRY: AT PRESENT 17

5.SOURCE OF DATA AND METHODOLOGY 20

6.DEMAND DRIVERS FOR THE TWO WHEELER INDUSTRY 23

7.INFLUENCE OF SUPPLY SIDE FACTORS AND STATE OF COMPETITION 29

8.DOMESTIC TWO WHEELER MARKET 42

9.EXPORTS 52

10.FINANCIAL OUTLOOK 54

In view of the strong demand, most OEMs have lined up capacity expansion plans over the short term. This is likely to increase the proportion of fixed costs in their cost structure in the initial phases till such time as production ramps up. In this period, the RoCE (Return on capital employed) of such OEMs is likely to dip to a certain extent; however, the expected strong volume growth over the medium term should allow them to overcome such profitability challenges eventually. 56

11.AFTER SALE SERVICES 56

Conclusion 58

The Automotive industry in India is one of the largest in the world and one of the fastest growing globally. We see that dominant product of the industry is Two Wheelers (2W) with a market share of over 75% in sales volume. 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%. The top 4 in motorcycle segment control 93% market share which is also reflected by HHI of motorbikes segment which is .35 (much > .18 present norm for highly concentrated industry)- the question remains do they enjoy a cosy existence or is there fierce competition?. This should be noted by the CCI.  58

This report divides two wheeler industry in segments on the basis of price and scooters have been treated as a separate segment. We see that there is a different dominant player in every segment. Interestingly, while Hero controls the executive segment, Bajaj has the premium segment in its grip and Honda has a dominant position in scooter segment. If each of the segments in the 2WI be treated as a separate relevant market (eg executive, premium, scooter) then each such segment has a dominant player with extremely high share (approx 65% in cases), which could be a matter to be noted by the competition authorities. 58

Also operation of dominant firms with dealers and input suppliers highlights certain aspects of the 2WI that merit a serious notice by the CCI- not necessarily anti-competitive or abusing dominance currently, but such an eventuality could not be ruled out in future when sales do not grow at double digit and margins squeeze, given the very high market shares of the players. 58

Going further, like other durable consumer goods, two wheelers also have an after‐sales market in addition to the sales markets. It has been observed that a firm holding a market power in the after‐sales spare part market can exclude its competitors by tying its maintenance and repair services with the spare parts sales, whereby it can affect consumers’ welfare. A detailed analysis is required in this regard to come to any conclusion. 58

Bibliography: 60

ANNEXURE-I 62

63


ANNEXURE-II: Quarterly Trend in Revenues and Profit Margins for the three Listed TW Companies 63

ANNEXURE-III: Annual sales trend of top 4 motorcycle companies 65




ABSTRACT

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 this paper we assess the degree of imperfection in the two-wheeler industry by using Hirschman-Herfindahl Index (HHI).

Keywords: 2WI, HHI, Competition Concerns, Domestic Market, Exports, After Sale Market


  1. INTRODUCTION

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 year1. 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 2010-112.

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%.Three-fourth 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 this paper we assess the degree of imperfection in the two-wheeler industry by using Hirschman-Herfindahl Index (HHI). 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?



  1. 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 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 1990-914. 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.
(2.1) 1960 – 1969

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. Table 1 illustrates the fact that most firms existing in this period had some form of collaboration with foreign firms. Table 1 also gives the details of the various firms that existed in the industry during this time period and the product/s they manufactured.



(2.2) 1970 – 1980

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/jeeps5. 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 stagnation6, 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.


(2.3) 1981 – 1990

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 (Table 1) 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 products7 (table 1).


(2.4) 1991 – 1999

The reforms that began in the late seventies underwent their most significant change in 1991 through the liberalization of the economy8. The two-wheeler industry was completely deregulated. In the area of trade, several reforms were introduced with the goal of making Indian exports competitive9. 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 vis-à-vis the scooter segment10 reversing the traditional trend.



Table 1: Details of firms within the two-wheeler industry


* indicates firms/brands whose sales declined in the eighties

** In 1998, the joint venture between the Firodias Group of India (Kinetic) and Honda of Japan came to an end when the former bought out Honda’s stake of 51%. However in return for royalty and technical fees, Honda continued to supply technical know-how to the new Kinetic Motors Company Ltd. (KMCL).


Source: CMIE, the Evolution and Structure of the Two-wheeler Industry in India, 2000



Due to reforms we would expect concentration measures and PCMs to decline as a result of greater competition. But the opposite has happened in many industries. We will look at a recent study by Goldar and Aggarwal (2005) which analyzes this.


TRADE LIBERALIZATION AND PRICE-COST MARGIN

IN INDIAN INDUSTRIES (B.N. Goldar and S.C. Aggarwal, 2005)

Using panel data for 137 three-digit industries for the period 1980-81 to 1997-98, Goldar and Aggarwal in there paper examine the effect of trade liberalization on price-cost margins in Indian industries. An econometric model is estimated to explain variations in price-cost margins, in which the tariff and non-tariff barriers are included among the explanatory variables. Thus, inter-industrial and inter-temporal variations in tariff and non-tariff barriers on manufactured imports are employed to assess the effect of trade liberalization on price cost margins in domestic industries. The results of the analysis clearly indicate that the lowering of tariff and removal of quantitative restrictions on imports of manufactures in the 1990s had a significant pro-competitive effect on Indian industries, particularly concentrated industries, tending to reduce the mark-ups or price-cost margins. The paper notes at the same time that in spite of the pro-competitive effects of trade liberalization reinforced by domestic industrial deregulation, the price-cost margins in manufacturing did not fall in the post-reform period. Rather, there was an increase in the margin in most industry groups as well as at the aggregate manufacturing level. An analysis of trends in labor income in industries brings out that in the post-reform period there has been a marked fall in the growth rate of real wages and a significant reduction in labor’s income share in value added, reflecting perhaps a weakening of industrial labor’s bargaining power. This seems to have neutralized to a large extent the depressing effect of trade liberalization on the price-cost margins in Indian industries.


PCM = f (DCON, K/O, QR, DWSE, X)


  • Dependent variable: 3-digit industry-level PCM calculated from ASI data, 1973-97.

Regressors include:

  • Dummy variable DCON = 1 for high-concentration industries (HHI is high during 1991-95) from Prowess, 0 for others.

  • Direct measures of tariff and QR protection rather than liberalization dummy

  • K/O ratio (given the opportunity cost of capital, more K-intensive industries have to earn higher gross profits)

  • DWSE = deviation of wage share of VA from elasticity of VA wrt L, i.e. (wL/V)-{(dV/dL)(L/V)}. This is used as a measurable proxy for

(w-dV/dL)/(V/L)

(i.e., deviation of wage rate from VMPL, normalized by APL)


Results

  • As expected, PCM is positively related to

    • DCON

    • tariff rates ) and their interaction with

    • QR coverage ratio ) DCON

    • capital-output ratio

  • Negatively related to

    • growth rate of the industry – lower entry barriers

    • DWSE variable. The labor share of VA has been falling – this has prevented PCMs from falling despite greater competition.

[Labor productivity rose but growth of product wages decelerated and real wages stagnated during 1990s]



This paper clearly shows that price cost margin in post reform Indian manufacturing increased instead it should have declined due to competition. This also could be one of the possible explanations for Indian consumer durable industries to evolve as an oligopoly. Increased price cost margin due to stagnant wages gave competitive advantage to larger firms. Industries (such as consumer durables) where reforms have taken place show a propensity to evolve into oligopolies in the long run and that is what has happened in India after reforms.


  1. COMPETITION ACT, 2002

The competition Act, 2002 (as amended), [the Act], follows the philosophy of modern competition laws and aims at fostering competition and at protecting Indian markets against anti-competitive practices by enterprises. Competition laws all over the world are primarily concerned with the acquisition and/or exercise of market power and its abuse. The term “market power” is variously known as “dominant position”, “monopoly power” and “substantial market power”.
The Act prohibits anti-competitive agreements, abuse of dominant position by enterprises, and regulates combinations (consisting of acquisition, acquiring of control and M&A) wherever such agreements, abuse or combinations cause, or is likely to cause, appreciable adverse effect on competition in markets in India.
With increasing integration of the Indian economy and markets with the international economy the Government acquired a wider perspective on regulation of markets from merely curbing monopolies to promoting competition. Consequently, the competition act, 2002 was enacted on 13th January 2003. This Act seeks to replace MRTP Act, 1969.


  1. INDIAN TWO WHEELER INDUSTRY: AT PRESENT




    1. 2000-2010

The Indian two wheeler industry has shown rapid rate of growth in last one decade. Its share in automobile industry has increased from 15% in 2001 to 17% in 2010 (Table 2). Annual sales by industry have increased from Rs. 7486 crore in 2001 to Rs. 30096.82 crore in 2010 (Table 2). A snapshot of the 2W manufacturers operating in India across time shows that while the core that existed 10 years back continues to remain the same, there have been several casualties along the way but at the same time there have been several new entrants. This is also the period which witnessed the end of Hero Honda’s 27 years old JV with Honda in 2010. Rising income levels, reducing excise duties, higher loan tenure and loan-to-value offered by the financing companies have all fuelled the growth of two-wheeler demand. Besides, mounting traffic chaos and limited parking space has also increased the demand for two-wheelers from households that can afford or actually do own a car. Furthermore, with increasing women working population, changing social philosophy and broad-mindedness, the penetration of two-wheelers in target population has increased significantly during last one decade especially in urban areas. However rural areas and smaller towns still remains considerably underpenetrated market.
In recent years, the Indian two-wheeler (2W) industry has shown a strong volume growth over the last two-years, having grown by 25% in 2009-10 and 27% in 2010-11 to reach 13.3 million units. This strong double-digit growth has been driven by multiple factors. One reason, of course, is statistical as this period of high double-digit growth has showed up after a rather sedate previous two years, when the 2W industry volumes had shrunk by 5% in 2007-08 and had grown by a mere 5% in 2008-09. In addition to the contribution of pent-up demand, the 2W industry growth over the last two years has been supported strongly by various underlying factors including India’s rising per capita GDP, increasing rural demand, growing urbanization, swelling replacement demand, increasing proportion of cash sales and the less measurable metric of improved consumer sentiment.
Table2: Sales Revenue

 

Annual

Annual

 

Rs. Crore

Rs. Crore

 

Sales

Sales

Year

Automobile

two wheelers(U)

Mar-01

46827.84

7485.93

Mar-02

48896.27

9009.74

Mar-03

51607.3

10549.08

Mar-04

71463.02

13641.1

Mar-05

87602.04

16223.33

Mar-06

101174.48

17991.12

Mar-07

124860.7

21359.17

Mar-08

140541.96

24744.06

Mar-09

146825.07

26283.25

Mar-10

177529.92

30096.82

Source: CMIE


    1. Expectations Ahead

Going forward, Information & Credit Rating Agency of India Ltd. (ICRA) expects the 2W industry to report a volume CAGR of 10-12% over the next five years to reach a size of ~21-23 million units by 2015-16 as it views the fundamental growth drivers - comprising of expected steady GDP growth, moderate two wheeler penetration levels, favourable demographic profile, under developed public transport system and utility quotient of a 2W - to be intact. Additionally, the entry of new players in the industry, multitude of new model/ variant launches, growing distribution reach, cheaper ownership costs on a relative basis are expected to be some of the other prime movers for industry growth over the medium term. In ICRA’s view, while the trend in rising commodity prices, hardening interest rates and increasing fuel costs may lead to some moderation in industry growth over the short term, the growth over the medium to long term is expected to remain in double digits.
ICRA believes the landscape of the Indian 2W industry is set to evolve as several new players are keen to enter into the Indian market which would further intensify competition; most existing players plan to extend/ strengthen their reach into the rural and semi-urban markets to harness incremental growth opportunities; and manufacturers are showing increased thrust on new product development and repositioning to tap new customer segments. These dynamics would ensure that business does not remain as usual for the large incumbents as market share may change hands to some extent. Nevertheless, the existence of strong product capability, wide distribution network and established supply chain will continue to be the necessary conditions to sustain competitive advantage and achieve economies of scale.
In view of the higher than expected demand last year, several Original Equipment Manufacturers (OEMs) had faced capacity constraints in their supply chain for select components which resulted in persistent demand-supply gap for few models, reflected in long waiting periods at dealers’ end. To overcome supply constraints and also to gear up for meeting the continued buoyancy in demand, most players currently have plans to expand production capacity which would entail large capital expenditure (capex) both by Original Equipment Manufacturers as well as suppliers. While this may pull down the profitability metrics of industry participants over the short term, the anticipated strong volume growth should enable them to tide over the short term pressures and emerge with a bigger scale and a relatively stronger credit profile over the medium term.
Also, in expert’s views the current asset-light business model of OEMs as a key positive as most of the players source a majority of components from suppliers and in-house facilities are generally limited to component assembly (or manufacture of select parts). Thus, capacity expansion in existing facilities by OEMs is likely to involve only moderate incremental capex; although the quantum is expected to be much higher for OEMs who plan to establish Greenfield facilities to augment existing capacity which may impact Return on Capital Employed (RoCE) to some extent. Further, for suppliers engaged in capital intensive product segments like castings, forgings and machining, the payback is expected to be accomplished over a relatively longer time horizon as compared to that likely to be achieved by OEMs or other auto component manufacturers.

  1. SOURCE OF DATA AND METHODOLOGY

CMIE (Centre for Monitoring Indian Economy Pvt. Ltd.)

SIAM (Society of Indian Automobile Manufacturers)

OEM’s Annual Reports (Original Equipment Manufacturer’s)

ICRA’s Estimates (Information & Credit Rating Agency of India Ltd)

NCAER’S Estimates (National Council of Applied Economic Research)

Media Reports

Media Releases

Company Releases

Industry Estimates

Census


Central Statistical Organization

Automotive Component Manufacturers Association of India (ACMA)



5.1 Herfindahl–Hirschman Index

The data for studying HHI was obtained from the Centre for Monitoring Indian Economy. Monthly sales volume data for various brands of two-wheelers in the three segments in different Indian states, between the time-period 1991-2010, was used. This twenty year time period was chosen as it spanned all major structural shifts that had taken place in the Indian economy in the recent past and would thus enable the study of the effects of liberalization in 1991, on the two-wheeler industry. Data was available for selected brands only. We attempted to identify the oligopolistic tendency in the 2W industry by calculating the annual Herfindahl Index for firms.


One of the methods to examine the presence of non-competitive forces within the industry is through the construction of the Herfindahl Index and concentration ratios. These have historically been used in the U.S. to formulate antitrust laws aimed at regulating competition. The Herfindahl Index is calculated as follows


Where , N is the number of brands, qi is the volume of brand i.


The Herfindahl Index was calculated at the level of the individual segments at each time point in the sample. Table 3 shows the Herfindahl Index for specific time periods and the corresponding four-firm concentration ratios.


Table3: Herfindahl Index Results




 

Motorcycles: Herfindahl Index of Concentration

Mopeds: Herfindahl Index of Concentration

Scooters: Herfindahl Index of Concentration

 

 

 

 

 

Frequency

Year

Ival

Ival

Ival

Annual

Dec-91

0.258

0.316

0.417

Annual

Dec-92

0.253

0.268

0.495

Annual

Dec-93

0.259

0.254

0.341

Annual

Dec-94

0.252

0.235

0.342

Annual

Dec-95

0.247

0.272

0.372

Annual

Dec-96

0.235

0.278

0.393

Annual

Dec-97

0.213

0.302

0.372

Annual

Dec-98

0.253

0.328

0.351

Annual

Dec-99

0.26

0.302

0.324

Annual

Dec-00

0.283

0.301

0.303

Annual

Dec-01

0.313

0.28

0.28

Annual

Dec-02

0.319

0.305

0.28

Annual

Dec-03

0.252

0.353

0.228

Annual

Dec-04

0.334

0.628

0.28

Annual

Dec-05

0.356

0.697

0.37

Annual

Dec-06

0.364

0.615

0.383

Annual

Dec-07

0.353

0.689

0.413

Annual

Dec-08

0.374

0.94

0.447

Annual

Dec-09

0.323

0.988

0.201

Annual

Dec-10

0.35

1

0.149

Source: CMIE

    1. Results

The Herfindahl Index was calculated over a period of 20 years, for each of the segments. Besanko et al., (1996) state that if the Herfindahl Index is between 0.2 to 0.7, the market will be oligopolistic. If the index is 0.1 or lower, then the market is tending toward monopolistic or perfect competition. In this paper it is found that on an average the index has varied between 0.25 and 0.35 for the motorcycles and between 0.15 and 0.40 for scooters (Table 3). For the segment of mopeds HHI has been found closer to 1 which shows monopolistic nature where TVS is covering almost 100% of the market. This implies that this industry has evolved into an oligopolistic industry where, product differentiation is a decisive variable. The computed Herfindahl Index indicates that the Indian two-wheeler industry continues to be oligopolistic in the last two decades. This implies that the deregulation of the industry has not led to substantially higher competition. This may reflect the inadequacy of regulatory policy and/or the nature of the technology of the industry wherein an oligopolistic structure is natural.
The values of the Herfindahl Index also indicate that the three segments of the industry have responded in different ways to changes in the forces of competition. This is an outcome of liberalization which led to an unequal number of entrants in each segment. We find that the motorcycle segment has had a greater number of entries than did the scooter or moped segments. Thus, it is quite possible that when competition-inducing policies are introduced, there could be an unequal number of entrants in each segment, which would then further increase oligopoly in some segments and for the industry as a whole. Oligopoly could also result from the fact that it is existing firms that are introducing new brands rather than new firms entering the industry. When the movement of prices in the three segments is considered, it is seen that prices (net of inflation) have not decreased though the number of brands has increased. This is indicative of oligopoly. Therefore, future reforms in the industrial policy covering the two-wheeler industry will probably need to incorporate some mechanism to induce new firms to enter the industry.


  1. DEMAND DRIVERS FOR THE TWO WHEELER INDUSTRY

On one hand, growing economic well-being reflected in rising per capital GDP is likely to make 2Ws more affordable; on the other, various fundamental drivers such as low 2W penetration (in relation to several other emerging markets), favourable demographics, growing urbanization and swelling replacement demand are expected to enable the growth momentum to sustain over the medium term.


Rising Per Capita GDP

Penetration increase scope

Favourable Demographics

Growing Urbanization

Swelling Replacement Demand



6.1 Rise in GDP per Capita has increased affordability of 2W

India’s per capita real GDP growth of 7% (CAGR) over the last six years (refer Chart 1) has contributed substantially towards raising the standard of living of households, which in turn has been one of the key drivers of growth for the country’s automobile industry. However, income growth is likely to have been uneven across the different income deciles. Income at the lower end of the distribution scale, which comprises the 2W target segment11, is likely to have grown at a rate below the overall per capita income growth rate. Yet economic well-being has led to a significant increase in the number of households coming within the 2W target segment over the past few years. As per NCAER’s estimates, the number of households having annual income between Rs. 200,000- 500,000 is estimated to have increased to 22 million in 2009-10, a scale-up by a factor of 2.5x over 2001-02 (refer Chart2).



Incidentally, this scale-up is almost similar to the expansion in the domestic 2W industry size (by volumes) during this period. Given that economic and population growth would further expand the universe of low to middle income earners who have the threshold purchasing future as well. Also, significantly, 2W purchase prices and operating expenses (inflation power to buy a 2W, the pattern of healthy industry growth is likely to hold in the foreseeable adjusted) are now around 36% lower than they were a decade back, considering that vehicle prices have not escalated much over the years, indicating increasing in affordability of 2Ws (refer Chrt3).




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