Why The Best Days Of 2-Wheeler Growth May Be Ending; Future Is In Upper End

On a day when Hero MotoCorp, the world’s largest two-wheelers company by the number of units sold, has announced a sharp 71 percent rise in net profits, it might seem foolish to suggest that the industry’s best days may be behind it. But it is worth putting the thought on the table, since the numbers do indicate a possible future downturn.

But before we get to Hero, let’s look at the unheroic tale of Apple in the recent quarter ended March 2016. Revenues dropped 13 percent for the first time in 13 years, and sales of its blockbuster iPhone crashed 16 percent year-on-year, and 32 percent sequentially, quarter-on-quarter. Sales of the iPad, once touted as a big category killer, peaked two years ago.

The reasons: market saturation, availability of cheaper, good-enough iPhone substitutes, and the limited ability of consumers to really use ever-expanding features. Technology fatigue is setting in.

Can the same not happen in the Indian two-wheeler market, which has seen growth like gangbusters for years on end? While the market will obviously continue to grow, one cannot guarantee two things: that the pace will remain the same, or that the market can support so many players (10 at last count).

Here’s why.

Last year, India’s two-wheeler companies sold more than 16 million vehicles in a country with a total of around 250 million households. Given the existing stock of two-wheelers already bought, it is inconceivable that six percent of households will keep buying two-wheelers every year going forward. At some point, there will be saturation, and that time will not be too far away. This could happen in the next three to four years, when a peak will be achieved. Remember, in 2015 the industry’s overall volumes grew just 1 percent over 2014 – not exactly a growth rate enough to accommodate all players.

India’s mobile penetration – now touching one billion connections - is reaching basic saturation, where growth will have to come from upgradation to smartphones rather than through just volumes. A similar thing could happen in two-wheelers. As incomes rise, people will upgrade to cars and higher-end bikes, and volumes will not grow at the bottom end as they do now. You can sell better quality, higher-end mobikes and scooters, but you can’t get the same numbers repeatedly after a point. This will shift the balance of power to performance players like Honda or even a Royal Enfield, and away from the volume players like Hero, Bajaj or TVS Motor. Lifestyle bikes will grow faster than utilitarian bikes.

Secondly, the industry will have to consolidate vertically or grow horizontally, across new geographies. The Rule of Three, proposed by Jagdish Sheth and Rajendra Sisodia, says that that “in competitive, mature markets, there is only room for three full-line generalists, along with several (in some markets, numerous) product or market specialists. Together, the three ‘inner circle’ competitors typically control, in varying proportions, between 70 percent and 90 percent of the market. To be viable as volume-driven players, companies must have a critical-mass market share of at least 10 percent.”

India is fast approaching the Sheth-Sisodia rule of three thresholds. In 2015, Hero lost steam and saw two-wheeler market share fall to just under 41 percent; Honda was catching up, with 28 percent. That’s nearly 69 percent sewed up by just two players.

At No 3 and No 4 were TVS Motors and Bajaj, with market shares of 13.9 and 11.7 percent; of the two, TVS has the volumes, while Bajaj has the margins. Then there are the Nos 5-7 revving up, ranging from Yamaha at No 5, and Royal Enfield at No 6, which is vrooming ahead with its iconic bikes. Royal Enfield saw 50 percent sales growth in 2015.

The faceoff will be between Nos 3 to No 6, and it is unlikely all of them will be able to sustain volume shares as the market approaches saturation point, and financial and technologically superior players hold the advantage. Some of the current players will either have to sell out or become niche players.

Some may have to merge vertically in India, or expand horizontally across global markets, targeting untenanted niches in emerging markets.

It is only a matter of time before the top three purely Indian firms – Hero, Bajaj and TVS – rethink their gameplans. The days of easy growth in volumes and profits are likely to end soon.