The Heady Days Of India’s Conventional Two-Wheeler Industry Are Over

For India’s conventional two-wheeler industry, life may never return to old highs.

The sector faced a series of setbacks in the last three years. It began with stricter emission standards, followed by higher upfront insurance costs. Commodity inflation has made vehicles pricier during the pandemic, and surging fuel prices only made it worse. Now cheaper alternatives in electric two-wheelers have possibly pushed it to a point of no return.

The internal combustion engine models are unlikely to ever touch the peak sales of FY19, said Vinkesh Gulati, president of Federation of Automobile Dealers Association. “No industry has gone through such a drastic change in demand momentum in a short period of time. No industry plans for something like this.”

Sales of ICE two-wheelers fell 10% year-on-year to 1.3 crore units in FY22. That’s 36.4% below the peak of FY19 when the volumes had touched 2.1 crore.

The industry is dominated by low-cost motorbikes and scooters. And it caters to low-income buyers, mostly for India's small towns and hinterland.

“With fuel at more than Rs 100 and the average cost of a two-wheeler at more than Rs 70,000, anyone earning less than Rs 20,000-25,000 will find it difficult to afford a two-wheeler,” said Nikunj Sanghi, a dealer of Hero MotoCorp Ltd. and former president of Automotive Skill Development Council, told BQ Prime over the phone from Alwar. “The size of the pond has reduced.”

Regulatory changes like the Insurance norms, mandatory anti-lock braking systems, Bharat Stage VI emission standards, and rising input costs have pushed two-wheeler prices up by 30%, said Hemal Thakkar, director at Crisil Ltd. “It’s huge for two-wheelers given the kind of buyers it caters to."

For electric vehicles, however, the cost has gone down, thanks to a government policy that increased subsidies.

“People are finding EVs much more economically viable alternative,” Thakkar said. “The economics of ICE two-wheelers have gone for a toss.”

Buyers in India's hinterland are increasingly preferring battery-powered two-wheelers.

“EVs with less than 25km/hour is eating up a chunk of the entry-level market which no one is aware of," Pradeep Agarwal, a Hero MotoCorp dealer from Cuttack and chairperson of the FADA Odisha lobby, said.

Sense Of Worry

While two-wheeler makers may be able to manage the crisis with few bruises in terms of impact on margin and capacity utilisation, dealers and ancillary firms will face the brunt of this disruption.

“Ancillary makers, especially those involved in the business of engines, crank parts, and others, will go out of the business if the transition picks up further pace,” Rohan Kanwar Gupta, vice president at ICRA, said.

FADA’s Gulati cautioned that dealers will be able to manage for another year if sales continue to go down.

“What has been helping dealers so far is that Covid-19 disruption had already pushed them to relook at manpower and inventory," he said. "But it can only help them to a certain extent, and if the volumes continue to go down further, it will have a severe impact.”

Sanghi, the two-wheeler dealer quoted above, said infrastructure and working capital of dealerships needs to be reviewed. “Because the way they (dealerships) are designed, the overheads are extremely high, and with volumes declining there is a lot to worry.”

For EVs to make up for the lost volumes, it’s imperative for legacy players to speed up their plan with a complete range of battery-powered vehicles. At present EVs account for 2% of the two-wheeler market and is projected to touch 10 lakh units by FY24-25, according to ICRA.

“It’s not that EVs will make up for the lost demand, Gupta of ICRA said. But two- and three-wheelers are low-hanging fruits, and their adoption will hasten when the legacy player targets them with the product at every segment, he said.

But the sentiment needs to recover for the sector to recover, he said. “Automotive is a sentiment-buying.”