Updated: Sep 22, 2019
The two-wheelers have 80% market share in production as well as sales volumes in the Indian
automotive sector. At the moment, the average inventory in June FY20 has touched 60-65 days while the normal average is 30 days.
Two-wheelers are the major mode of transport in most of the rural and semi-urban areas in India. The government has been introducing many regulatory changes in terms of emission and safety regulations for two wheelers since last year. This has increased the cost of owning two wheelers leading to reduction in their demand. Thus, two-wheeler sales have been declining from festive season last year. Another major reason for reduction in demand has been the NBFC liquidity crisis leading to increase in the cost of financing two wheelers.
“Two-wheeler penetration in India is ~30-40%. Urban areas that account for 60% industry volumes have penetration levels of ~40-45% while the rural areas that account for 40% industry volumes have penetration levels of only ~20-25%, indicating huge opportunity for growth.”
The automotive industry in India will go through a massive transition by April 1, 2020 because of the implementation of Bharat stage VI emission norms and hence FY 2019-20 will be a crucial year for the two-wheeler industry. Another major event was the EV push by the government in terms of reduction of GST for EVs from 12% to 5% and commencement of phase-II of FAME Scheme from April 1, 2019 with an outlay of Rs. 10,000 Crore planned for a period of three years.
Growth Drivers for the two-wheeler industry
India has young and fast-growing population, implying a strong long-term potential for the two-wheeler industry. The young working population, millennial and Gen Z prefer two-wheelers for the convenience they provide on busy city roads, their ease of parking and maintenance. Due to inadequate public transport facilities in the rural region, people prefer using two-wheelers for personalized transportation.
The industry is expected to grow around 6-7% as a result of recovery of investment and consumption. The Real GDP growth estimate is 7.3% for FY 2019-20 (source: IMF). Rising disposable income is another growth driver for the industry. June faced a rainfall deficit but July showed monsoon recovery. This augurs well for agriculture, positively impacting rural income and two-wheeler sales. Softer inflation will enable RBI to support the growth of economy with expansionary monetary policies.
Challenges for the two-wheeler industry
BS-VI emission norms have been mandated to be followed from April 1 2020, where all vehicles sold must have BS-VI compliant engines requiring BS-VI fuel. Sulphur content in BS-VI fuel is five times fewer than BS-IV (10 parts per million in BS-VI vs 50 parts per million in BS-IV). Also, NOx (Nitrogen Oxide) levels will be brought down by 70% for Diesel engines and 25% for Petrol engines. Also, on-board diagnostics will be made mandatory for all vehicles. Due to BS-VI, the cost of two wheelers is expected to further increase in the range of Rs.4,000 - Rs.7,000, further dampening consumer sentiments.
The industry witnessed the impact of various regulatory changes in FY 2018-19. The Insurance Regulatory and Development Authority of India mandated for all new two wheelers to have a five-year third-party insurance cover. This has resulted in an increased insurance cost since September 2018 as insurance premium for five years have to be paid up front, which has impacted consumer sentiments.
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