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BAJAJ vs HERO HONDA Comparative Analysis in Automobile Industry Thesis 86p

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Chaptet-1 INTRODUCTIONPeter Drucker called the automobile industry as "the industry of industries". During the last few years, the production and management systems have been revolutionized in the automobile industry (Karmokolias, 1990). One of the major changes in the industry has been the opening up and growth of several emerging markets. In 1991, the Government of India embarked on an ambitious structural adjustment programme aimed at economic liberalization, based on the pillars of Delicensing, Decontrol, Deregulation and Devaluation. Post-liberalization, the Government of India's new automobile policy announced in June 1993 contained measures, such as delicensing, automatic approval for foreign holding of 51% in Indian companies, abolition of phased manufacturing programme, reduction of excise duty to 40% and import duties of CKD to 50% and of CBU to 110%, and commitment to indigenization schedules. The Indian automotive industry has been on a high growth path in the domestic market, given strong demand-push factors coupled with an encouraging policy environment. Changing lifestyles, increasing disposable income, deterioration of public transport and accelerated urbanisation is leading to a growth in demand for passenger vehicles and 2-wheelers. Improving rural income on account of the rise in the agri-commodity prices and near normal monsoons together can boost the demand for tractors. Domestic demands for cars are expected to grow at a double-digit rate for the next three to four years. The brilliant performance of the automotive sector is attributed to better performance of the economy and high all round growth leading to robust GDP growth, improved infrastructure development, excise duty reduction on passenger vehicles, improved financing of second hand vehicles, availability of

finance in rural and semi-urban areas and the emergence of India as a manufacturing hub for the automotive industry. Investment upto Rs 30,000 crore has been planned for the Sector, by leading Indian and global players, by 2010.

The Indian automotive industry consists of five segments: commercial vehicles; multi-utility vehicles & passenger cars; two-wheelers; three-wheelers; and tractors. With 5,822,963 units sold in the domestic market and 453,591 units exported during the first nine months of FY2005 (9MFY2005), the industry (excluding tractors) marked a growth of 17% over the corresponding previous. The two-wheeler sales have witnessed a spectacular growth trend since the mid nineties.The two-wheeler industry (henceforth TWI) in India has been in existence since 1955. It consists of three segments viz., scooters, motorcycles, and mopeds. The increase in sales volume of this industry is proof of its high growth. In 1971, sales were around 0.1 million units per annum. But by 1998, this figure had risen to 3 million units per annum.

Similarly, capacities of production have also increased from about 0.2 million units of annual capacity in the seventies to more than 4 million units in the late 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. 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 as a part of NEP. This, coupled with the announcement of the MES of production for the two wheeler industry, 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.

In a consumer durables industry in which there is a proliferation of brands, we expect the long run competitive structure at the level of the industry to be oligopolistic. This is due to the fact that in order to survive firms must introduce new brands which might improve capacity utilization even as this induces brand competition. This, in turn, will cause only a few large firms in the industry to survive indicating that in the long-run, a brand proliferated consumer durable industry will tend towards oligopoly. We expect a general downward stickiness in prices and resultant increase of volatility in non-price variables such as sales volumes, market-shares etc. Convergence is likely to be absolute at the level of the segment and conditional at the level of the industry. Competitive strategies (which include product development and other strategies aimed at innovation and technological change) are more inter-dependent at the level of the market-segment than at the level of the industry. This is due to the fact that within each segment the products are, to a large extent, similar. Hence we can expect convergence to be absolute at the level of the segment and conditional at the level of

the industry.Two-wheeler sales continue to be buoyant with a 19% growth joy, driven by its motorcycle segment that has posted a rise of 24%. Bajaj Autos market share in the domestic motorcycle market has improved from 23% in FY03 to 30% in FY06. Hero Honda, the largest motorcycle manufacturer in India, with a domestic market share of 50% in FY06, was down from 52% in FY05, while the market share of TVS Motors is 18%. The Indian two-wheeler industry is entering a strong secular growth phase, driven by increasing affordability, easy availability of finance, and accelerating exports. The next phase of earnings growth will be driven by unit volume growth, while the four-wheeler passenger car industry is driven by low penetration, increasing consumer aspiration levels, increasing affordability, and proliferation of new models. Some of the features that deserve attention in respect of the Indian two wheeler segment are as mentioned: The total sale of two wheelers in India has touched a figure of 7.86 million units by March, 2007, up 11.42% from the previous fiscal figures of 7.05 million. Production during the period reached 8.63 million units. The production of two wheelers in India is expected to reach a staggering 17.85 million units by 2011-12, more than double of the current production level. The two-wheeler production capacity is to reach 22.31 million units in 2011-12 compared with 10.78 million in 2006-07. India is likely to export 1.39 million two-wheelers in 2011-12 compared with 590,000 in 2006-07. Total investment for new capacity generation in two-wheeler segment is likely to be more than $2.2 billion (INR10, 000 crore).

Hero Honda, Bajaj Auto and TVS Motor remain the leading players in terms of sales and popularity of their two wheelers.

After facing its worst recession during the early 1990s, the industry bounced back with a 25% increase in volume sales in FY1995. However, the momentum could not be sustained and sales growth dipped to 20% in FY1996 and further down to 12% in FY1997. The economic slowdown in FY1998 took a heavy toll of two-wheeler sales, with the year-on-year sales (volume) growth rate declining to 3% that year. However, sales picked up thereafter mainly on the strength of an increase in the disposable income of middle-income salaried people (following the implementation of the Fifth Pay Commission's recommendations), higher access to relatively inexpensive financing, and increasing availability of fuel efficient two-wheeler models.

Nevertheless, this phenomenon proved short-lived and the two-wheeler sales declined marginally in FY2001. This was followed by a revival in sales growth for the industry in FY2002. Although, the overall two-wheeler sales increased in FY2002, the scooter and moped segments faced de-growth. FY2003 also witnessed a healthy growth in overall two-wheeler sales led by higher growth in motorcycles even as the sales of scooters and mopeds continued to decline. Healthy growth in two-wheeler sales during FY2004 was led by growth in motorcycles even as the scooters segment posted healthy growth while the mopeds continued to decline. Figure 1 presents the variations across various product sub-segments of the two-wheeler industry between FY1995 and FY2004.

DEMAND DRIVERSThe 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 urbanisation, wh