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Indian Two-Wheeler Industry Is Facing Its Osborne Moment

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By Lakshmisha K S

November Auto Sales: Domestic 2-Wheeler Sales Under Pressure  | Business Lunch | CNBC-TV18

Indian two wheeler industry 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 so 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 2022, 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 a sharp decline in sales in November. Hero Motors, which 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 349,393 two-wheelers as compared to 591,091 units in the same month last year (a pandemic year). Honda (which has 15–20% market share) reported a nearly 35% year-on-year decline in two-wheeler sales in November. TVS (15% market share) registered a decline of 15.5% in sales of two wheelers 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 slowdown is broad based across both scooters and motorcycles and across price segments and geographies.

Now one might say that given India just went 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. A few data points that corroborate this include record breaking GST collection of ₹1.31 trillion a (around €15.3 B) in November back to back with collection of ₹1.30 trillion (€15.2 B) in October. This is the second highest GST collection ever. This is also reflected in the fact that the monthly value of UPI transactions in October amounted to ₹7.71 lakh crore (trillion) (around €90B) for the first time and maintained the same run rate in November. The Confederation of All India Traders (CAIT) estimated record sales of ₹1.25 lakh crore (trillion) (€14.6 B) 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 sectors and across the country, with even gold sales increasing 66% in the festive season over pre-pandemic sales in 2019 Dhanteras.

The other reason that is attributed to fall in sales is the global chip shortage. It is true that the auto industry is particularly being hit hard by the chip shortage. Even the 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 150 cc+ bikes. 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 the 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 the Osborne effect. Basically, the 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, the Osborne effect works on a company or a specific line of products, but here it is actually working at the industry level itself. The soon-to-be-obsolete product is ICE (Internal Combustion Engine or petrol/diesel) two-wheelers, and the new and improved product are the EVs.

While none 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, especially 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 electric two-wheeler. The 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 and others. And finally there are the aspects that present a crop of EVs are actually far better products than traditional ICE ones, with innovative features including connectivity, smart vehicles, and others. (Compare the recently launched Ola S1 Pro with another recently launched product, the Suzuki Avenis 125.)

Ather 450X

This is reflected in growing sales of the EV market. While the overall industry is seeing declines in double digits, the 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. 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.

Ola S1 Pro

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 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 (around €234) and an estimated 100,000 orders, that translates to ₹200 crores (€23.4 M) 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, the Osborne effect from EVs is not as unexpected. There have been significant discussions in the larger media on the same for some time (check out these articles — hereherehere and check out this video on the same).

However, 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 about EV startups that 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 yesteryear 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.

Lakshmisha K S

Lakshmisha K S,
Technology enthusiast, ex-management consultant and amateur economist, NITK-Surathkal, XLRI alumnus

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