Analyzing the state of competition in indian two wheeler industry

Competition Commission of India, New Delhi

Anuj Kumar Kanojia

M.A. Economics, 1^st 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.

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.

Contents Page No.

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
   

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 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.

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?

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

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 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.

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.

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).

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.

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

3. 
   COMPETITION ACT, 2002
   

4. 
   INDIAN TWO WHEELER INDUSTRY: AT PRESENT
   

1. 
   2000-2010
   

2. 
   Expectations Ahead
   

5. 
   SOURCE OF DATA AND METHODOLOGY
   

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

Automotive Component Manufacturers Association of India (ACMA)

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.

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

2. 
   Results
   

6. 
   DEMAND DRIVERS FOR THE TWO WHEELER INDUSTRY
   

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).