Indian two wheeler industry is facing its Osborne moment
Indian two wheeler industry, the largest in the world with a sales of 15 million two wheelers every year is facing crisis. Production in November is expected to be 25–30% lower than initial planned output. As this Economic times article reports, manufacturers and dealers are sitting on huge inventory and even festive sales turned out to be a damp squib. The demand is soo weak that reduction in production might have to be continued in the month of December as well causing the entire industry to shrink in 2022 Fiscal year, making it a third straight year of de-growth.
Again as per the same report — “The month of November has historically seen sequential growth in production, show data — in seven out of the past ten year, it has grown 2–36%. Based on the current production schedule, however, product in the ongoing November will be as much as 28% lower than the previous month.”
And the industry’s fears were not unfounded, as the industry saw sharp decline in sales in November. Hero motors corp who is the leading player in the Indian two wheeler industry with a market share of 35–40% saw its sales plummet in the month of November with overall sales of 3,49,393 two-wheelers as compared to 5,91,091 units in the same month last year (a pandemic year). Honda Motorcycle and Scooters India(which has 15–20% market share) reported a nearly 35% year-on-year decline in two-wheeler sales in November. TVS Motor Company (15% market share) registered a decline of 15.5% in two wheeler in November 2021 over November 2020. Bajaj Auto (10% of market share) two-wheeler domestic sales saw a dip of 23% in November sales year on year. We can clearly see that the slow down is broad based across both scooters and motorcycles and across price segments and geographies.
Now one might say that given India just want through a very difficult second wave of the pandemic, the fall in demand is understandable. But I would disagree with such an analysis, because all other consumption trends have not only recovered but actually boomed in the festive season (Typically in the months of October and November corresponding to Hindu festivals of Dussehra and Diwali). Few data points that corroborates the same include record breaking GST (Goods and Service Tax) collection of ₹1.31 trillion ($ 17 Billion) in November back to back with collection of ₹1.30 trillion ($ 17 Billion) in October. This is the second highest GST collection ever. This is also reflected in the fact that value of UPI (Unified Payment Interface - real time payment system enabling people to pay using their mobile phones) transactions in October broke the $100 billion monthly value for the first time and maintained the same run rate in November. The Confederation of All India Traders (CAIT) estimated a record sales of ₹1.25 lakh crore ($16.6 Billion) during the festive season. Now it is very hard to say that there has been pandemic induced reduction in demand when there is such a broad based uptick in consumer demand across sector and across the country, with even gold sales increasing over 66% in festive season over pre-pandemic sales in 2019 Dhanteras (festive season).
The other reason that is attributed to fall in sales is the global chip shortage. It is true that Auto industry is particularly hit hard by the chip shortage. Even Indian Auto industry is not immune to its effect. While there is definitely an impact on the two wheeler industry in India, the sharp decline in sales cannot be attributed alone to chip shortage. The reason is that unlike cars, the demand for semi-conductor chips is restricted only to a small segment, which is the 150 cc+ motorcycles (ICE engine capacity). This segment accounts for 15–20% of the overall market. Given the very sharp declines of the range of 15–25% year-on-year, a segment accounting for 15% alone cannot be the main contributor to the decline unless it actually saw its sales drop to 0. Hence we can easily and comfortably rule out that semi-conductor chip shortage alone caused this decline in sales.
Then the question arises, what is contributing to this decline in demand? The answer is Osborne effect. Basically Osborne effect is a social phenomenon where the customers start canceling or deferring orders for the current, soon-to-be-obsolete product hoping instead to buy the new and improved product instead. (here is an interesting video explaining this in a better way). Now in the traditional sense, Osborne effect works on a company or a specific line of product but here it is actually working at the industry level itself. The soon-to-be-obsolete product are the ICE (Internal Combustion Engine or Petrol/Diesel) two wheelers and the new and improved product are the EVs.
While non of the Industry majors have announced or brought an EV which is market capturing, the psyche of the Indian consumer has now firmly turned towards the EV space, specially when it comes to the two wheeler market segment. There are many reasons for this shift, rising fuel prices have shown to the customer the operational cost difference between an ICE and EV two wheeler. EV segment is seeing the launch of credible products across price ranges with decent performance. There is the overall marketing buzz and hype created by high profile launches by Ola electric and others. And finally there is the aspects that present crop of EVs are actually far better products than traditional ICE ones, with innovative features including connectivity, smart vehicles and others. [Compare the recent launched Ola S1 Pro with another recently launched Suzuki Avenis 125]
This is reflected in growing sales of the EV market, while overall industry is seeing declines in double digits, EV two wheeler market has seen triple digit growth. Registered electric two-wheeler sales have grown more than five times at 22,450 units in November 2021 compared with the volumes of about 4,000 units in November 2020. EVs are consistently growing at 20–25% month over month. Now I agree that all of this is albeit on a small base, where EVs are estimated to have accounted for 1% in 2020 and are projected to hit 2% sales this year. But the truth is this could easily be 5–7% today if not for the industry being supply constrained. Specifically with regards to EVs from credible startups/brands. This is borne by the fact, that Ather energy just announced a second plant enhancing capacity to 400,000 annually by next year when their existing factory itself commenced operations at the start of this year. This is phenomenal and unheard of in the hardware and physical goods space and seen only in the digital and social media space.
That is the point, there is demand for two wheelers and that demand is constrained from being fulfilled due to lack of supply. Nothing more illustrates this point further than the fact that Ola was able to sell more than ₹1,100 crores ($150 Million) worth of EVs in just two days. Ola was able to sell 20% of the total monthly demand for all two wheelers in those two days. You could argue that those sales were based on pre-booking and not actual sales, but with down payment of ₹20,000 to ₹25,000 ($265 to $332) and with an estimated 100,000 orders, that translates to ₹200 to ₹250 crores ($27 to $33 Million) of consumer money paid to Ola, a company not originally known for their auto manufacturing nor having a working product available for consumers to test ride. Hence there is demand but that demand is for new EVs not the same old traditional ICE vehicles.
And to be honest, Osborne effect from EVs is not as unexpected, there has been significant discussions in the larger media on the same for some time (check out these articles — here, here, here and check out this video on the same).
However, the existing traditional two wheelers are still behind the curve on this. While some like Hero motors have now begun to realize the threat and hence the need to transition quickly to an EV world, there are others like Bajaj where the CEO is more content on making snide remarks on EV startups and who are dragging their feet towards the transition.
The Indian two wheeler market will continue to see tepid demand and only will start to reach sales figures of yesteryears when the new EV manufacturing capacity additions by startups and traditional companies start to meet consumer demand. Until then the likes of Bajaj will see more pain before any cheer.
