When the 100cc motorbike rides into a downturn

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Only 50 metres away, at a Hero MotoCorp dealership, the […]

Only 50 metres away, at a Hero MotoCorp dealership, the contrast is disorienting. This is the largest two-wheeler showroom in town and it is deserted. Rows and rows of metal gleam under the lights, with not a single customer in sight. There are no keys being handed over, no sound of celebration filling the air. “There were many more motorcycles here, but the Dhanteras and Diwali week footfall has helped clear some inventory,” said an employee at the shop, who did not want to be named.

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Among other things, the two-wheeler market is a measure of the economic well-being of those at the bottom of the pyramid. Five times as many two-wheelers are sold in India as cars, making India the largest two-wheeler market in the world. Within this big market, entry-level vehicles, which are typically bought by agricultural workers, daily-wage labourers and self-employed small business-owners and traders, account for one in every two vehicles sold. An entry-level or economy motorcycle is usually defined as one with a low engine displacement of less than or equal to 125 cc.

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Mooka Khan (left) sits at his tea stall (Priyanka Parashar/Mint)

But sales in the two-wheeler segment have crashed, plunging to record lows of a decade. “Two-wheeler is the only automotive segment which has witnessed a year-on-year negative growth for three consecutive years. Sales in the financial year 2021-22 were lowest in the last 10 years. In the first half of 2022-23, domestic sales did inch up, but volumes are still lower than what we saw in 2016-17, 2017-18; 2018-19 and 2019-20,” said Rajesh Menon, director-general, Society of Indian Automobile Manufacturers (SIAM).

Similar stress can also be seen in the entry-level market for cars: Even as production hit a record 1 million units in the September quarter, sales of small cars fell 44% (mini-segment) and 9% (compact segment) in the fiscal second quarter, from the peak levels of FY19.

The worst drop in sales has been in the entry-level segment. “The sale of mopeds has dropped 51% in the July-September quarter compared to the same period in 2018-19,” said Menon. Motorcycles (up to 110 cc) saw a drop of 35% in the same period.

A three-hour drive from Delhi and Gurugram, Alwar is a quiet tier III city, with one multiplex, and a sprinkling of fast-food chains. The city is the main urban centre of Alwar district. It is surrounded by villages in Haryana, and by the Bharatpur and Dausa districts of Rajasthan. A few kilometres away is the Sariska Tiger Reserve. Here, most people farm cash crops like onions, mustard and cotton, as well as foodgrains like bajra, jowar and maize. Skilled and unskilled factory workers take up jobs in nearby industrial centres like Bhiwadi and Neemrana; many also work as construction labourers or as drivers of commercial vehicles. Like much of Rajasthan, one of the largest markets for entry-level two-wheelers in India, Alwar is a two-wheeler town.

In the rural-semi-urban economy of Alwar, the motorbike is not only a prestige purchase. For its farmers and traders, it means access to healthcare and education facilities in the city centre, a way to find better-paying work and access new, bigger markets. It is an investment in one’s business, a tool of trade and also a first step up the social ladder.

So, why are customers walking away from two-wheeler showrooms? And what does that say about India’s post-covid economic recovery?

Making do with the old

On a nippy November day, Nandu Singh is carrying two canisters of milk on his 2013 Hero Honda Splendor Pro as he drives to Alwar city. Singh is a 35-year-old daily-wage labourer, who doubles as a milk-seller. Every day, at the crack of sunrise, he takes off from his village in Dhai Pedi, passing by views of the Aravali hills, to reach Alwar city to deliver milk. Singh has owned this motorcycle for nearly a decade, from the time he was newly married. Without it, he would have no means to deliver milk or even travel to the city to find work.

Launched back in 1994 when Hero and Honda were still joint venture partners, the Hero Honda Splendor gave mobility on two wheels a new meaning. Buyers in villages, small towns and cities would buy the Splendor and “fill it, shut it, forget it”. It was a motorcycle that could be your trusty companion for years, cost very little to run, and ask for next to no maintenance—among the many reasons the brand is unrivalled in the commuter market.

But after a decade of extensive use, Nandu realises that his Splendor Pro, bought for 50,000, now wants to retire. “The bike is giving way, but I just have it repaired when it breaks down. It’s the only vehicle I have and I’ll have to make it work”, he said. Today, a Splendor +, which is an equivalent model, costs roughly 87,000 on-road. That’s almost 75% more expensive. It isn’t a price Singh can afford when he is still repaying loans he had taken to support his family during covid.

“I want a new motorcycle, but how do I buy it?” said the father of two children. “Even if one gets the bike financed, it will cost at least 1 lakh. On top of that, if I have to ride 100-150 km a day, I need to spare 200 for petrol. Now, if I bought an electric scooter, I’ll be able to get this range on just a single charge. Right now, I have the money for neither,” said Singh, who earns approximately 15,000-20,000 a month.

He is not the only one. Battling high food inflation and disrupted income streams, the two-wheeler consumer is postponing purchases to a distant future.

Mooka Khan, for instance, runs a tea stall along a dusty, unpaved road, opposite a mustard oil extraction plant in Alwar. He has five children, including three married daughters and a son in his early twenties who has started to work in a factory to support the family. His youngest child goes to a private school–but not for much longer. Khan, who said he was around 50 years old, hasn’t been able to pay his son’s school fee since the start of the pandemic. In the months of the first lockdown in 2020, he saw his business collapse, dependent as it was entirely on footfall from travelling truck drivers and nearby factory workers. “For two years I could do no business. I could only stay at home. Now there is work, but not much… only sufficient to somehow keep our expenses going. I can earn close to 400 a day, but prices of food have gone up so much in the recent months that my income is coming up short. We spend 50 a day on buying vegetables alone, then there is cooking oil, foodgrains, medicines and milk to be bought. That adds up another 200-250. My son brings in 300 a day, and with our combined income, we somehow manage,” Khan said.

For a big portion of the population, the bounce-back from covid is still ongoing. “During the pandemic, the bottom 40% was in big distress irrespective of whether they were in urban or rural India. How did they survive? Petty traders, self-employed, labourers, household industry owners lost their savings. They borrowed money from informal sources. They even sold their assets. People borrowed to save their near and dear ones. Now if they start earning, the practical way is not to purchase goods and services. There is a dip in the sale of budget two-wheelers because their major demand is from the households recovering from these shocks,” said Rajesh Shukla, economist and co-founder of People Research on India’s Consumer Economy and Citizen Environment (PRICE), an institute housed in IIM Udaipur.

The bike-inflation

Motorcycles have also become prohibitively expensive for a large set of buyers. Two-wheeler prices have risen 45% since 2018, when the government made it mandatory for vehicle owners to pay the cost of third-party motor insurance upfront, significantly raising the cost of acquiring a new vehicle. That was only the start of a series of unconnected price increases that went on making entry-level vehicles particularly unaffordable.

New mandatory safety standards and the BS-VI emissions norms in 2020 sent prices spiking. Soon after the BS-VI changeover, the country went into a covid lockdown, a period where economic activity stalled and incomes of the poorest collapsed.

The cheapest offering of Hero MotoCorp, which derives more than 80% of its volumes from motorcycles under 125cc, is the HF Deluxe, which costs nearly 80,000 ex-showroom. The kick-start variant costs 70,000 ex-showroom.

According to the BNP Paribas report, this period marks “one of the steepest price increases” in the history of the auto industry. Rural incomes, on the other hand, grew only 20% in the same period, according to Reserve Bank of India data.

“Repurchase cycles have almost doubled now. We would see our XL100 moped or TVS Sport customers come to replace or exchange their motorcycles every two-three years. That timeline has gone up to five-and-a-half to six years now because of two years of covid in which vehicle usage came down,” said Sachin Gupta, owner, Pakhi TVS, a TVS Motor Company dealer based in Alwar. While his overall sales were back to 2019-levels this festive season, it was driven by new launches and premium products.

As many as 10 million households have fallen off this two-wheeler market since 2018, according to the analysis by BNP Paribas. To be sure, 95% of all two-wheeler sales in India come from models priced below 1 lakh. These are alarming figures. The entry-level segment drives half the volumes of the entire two-wheeler market in India. In FY22, motorcycles under 125cc formed 52% of total industry volumes. In FY23, this number is estimated to come down to 49%. BNP Paribas estimates the share of entry-level motorcycles in total two-wheeler sales will fall further to 45% by FY25.

“People here in Alwar say that buying a Hero motorcycle is like buying gold. We would get customers who would buy five motorcycles for one family. Now, they tell us they’d much rather save that money,” said Nikunj Sanghi, owner of JS Fourwheel Motors, a Hero MotoCorp dealership in Alwar.

Another important sub-segment is mopeds, which are load-carrying vehicles typically used for carrying goods over long distances. “The moped customer is the most loyal. They have a functional need for the vehicle and they always come back for the same thing. Typically, they’re in the 40-and-above age bracket and self-employed. The moped is a critical work companion as they go for daily distribution of groceries or to wholesale markets to trade various goods,” said Gupta.

But this moped customer is struggling, say dealers. “Sales in this segment have halved since 2019,” said Gupta. Where mopeds would account for 30-35% of his sales in 2019, that has dropped to 15-20%. “High upfront costs are keeping them away. In many cases, they’ve done away with the need to buy the moped altogether. Small traders now hire an electric rickshaw for a day and are able to transport a far larger amount of goods for far less,” he said.

Most owners are also spending more on servicing older bikes. Several two-wheeler dealers in Alwar said revenues from paid service have increased 100% after covid.

The health shock

After two years of less-than-joyous festivities, Rajendra Saini was looking forward to a happy Diwali this year. On 16 October, Saini went over to his nearest Bajaj Auto dealership to make a booking for a new Bajaj Platina 100. The family already owns a Platina, which was bought eight years ago by his father. But 27-year-old Saini, a customer service professional in a telecom company, needs his own vehicle as his job requires him to go door-to-door selling new post-paid connections to customers. The motorcycle would cost him nearly 79,000 on-road: He would pay 16,000 as down payment and take out a loan for the remaining amount.

That was the plan. But two weeks later on 1 November, Saini had to cancel the booking. “My older daughter was diagnosed with dengue and needed to be hospitalized for a week. I ended up spending nearly 33,000-34,000 in hospital bills. I don’t have the money for the motorcycle anymore,” he said.

Like millions of Indians, who often find their finances wrecked by health shocks, Saini too had exhausted his savings to pay for his four-year old daughter’s treatment at a children’s hospital in Alwar. “I still intend to buy the motorcycle, but I will now probably buy it after a few months in the new year, when I am financially stronger,” he said.

Even when he does buy the bike eventually, Saini will have to depend on his younger brother’s good CIBIL score to avail a loan at a relatively good interest rate. “My savings have also gone down by quite a lot since prices of everything, from fuel to electronics to daily essentials, have shot up in the last year. Where I could save 5,000 earlier, I now save only about 2,000 a month,” he said. During covid, Saini also took a business loan of 3 lakh to help his father set up a kiraana store. He has several credit cards that he also pays for.

“Our customer is typically one who saves for 2-3 years and then comes to buy a vehicle. Building up this kind of saving now is taking much longer now,” said Kamal Dhonkaria, a two-wheeler dealer from Alwar.

It is not just the rural market alone. In urban areas, too, individuals in entry-level salaried jobs have been hit hard by inflation and low-income prospects. Many individuals who lost their jobs during covid haven’t got their pre-pandemic incomes back. With families to support and a grim outlook for the future, there is a sense of anxiety. “People have seen what the absence of a good financial corpus can do during covid and they are spooked by it. So now, instead of purchasing a new motorcycle for a son or daughter’s wedding, parents are choosing to open a fixed deposit. And if they can afford a premium motorcycle, they are choosing to buy a small car instead— because finance options are available,” said Sanghi.

The debt route

In another corner of Alwar city, a young, 18-year-old is about to see a dream come true—that of owning a Royal Enfield Bullet. Sonu Singh is a freshly minted driving licence-holder. He goes to college during the day and works part-time at a pharmacy in the evening. He arrived at a Royal Enfield showroom in Alwar with seven of his family members, neighbours and friends to take delivery of the motorcycle.

While Sonu will get to drive the motorcycle, the purchase is not only for him. His father Gurjit Singh, who will shell out 2.5 lakh for the bike, has functional priorities in mind. Gurjit is a thekedaar, or a contractor, who takes up shuttering or formwork jobs for under-construction buildings. The family resides in Guru Nanak Nagar, a Sikh-majority neighbourhood in Alwar.

Gurjit will need to shell out 5,000-5,500 for the motorcycle’s EMI. He said his family needed a high-capacity bike that could be used to travel long distances. So he stretched his finances a bit more and bought a motorcycle that also fulfilled his son’s aspiration. “It is important to have a big motorcycle for travelling longer distances. Work is not great now. I am not getting many projects. But now that I have this motorcycle, I will be in a position to drive farther away from the city to look for work,” he said. But if it wasn’t for a loan that covered almost 90% of the motorcycle’s cost for the Singh family, buying the Bullet today would have been a distant prospect.

Financiers and industry experts claim that the penetration of finance in the two-wheeler market has reached over 50%.

Two-wheeler dealers in Alwar reported an average of 25% increase in the number of customers opting for a vehicle loan instead of paying cash for purchases in the last 2-3 years. As a result, finance penetration has gone up to 65-75% in Alwar city’s two-wheeler showrooms. A Hero MotoCorp sub-dealer in Alwar told Mint that 70% of the vehicles he was selling in Ramgarh village, about 25 km outside the city, were financed by a lender, as opposed to only 40% pre-covid. Financiers are also covering 90-95% of the vehicle cost, as opposed to just about 75% earlier, as high interest rates on two-wheeler loans provide them enough risk cover against defaults.

For first-time buyers like Sonu, the jump to an executive or premium motorcycle is made easier because a higher loan-to-value ratio ensures upfront payments don’t skyrocket as much as vehicle prices have.

But higher finance penetration conceals another phenomenon playing out in the entry-level market. “Financing has crossed 50% in two-wheelers, but we believe it’s partly a reflection of weak rural demand in the entry segment. Cash customers aren’t coming to the market the way they used to a few years ago,” said Kumar Rakesh, an analyst at BNP Paribas.

This is symptomatic of a K-shaped economic recovery, where the affluent sections of the population have been able to emerge on the other side of the economic downturn much faster than those at the bottom of the pyramid.

“The price elasticity impact of price hikes has reset the volume of the two-wheeler industry to a lower base. We calculate a price elasticity factor of 1.6x. In other words, if the industry sees a 10% price hike, demand falls by 16%. Based on the price elasticity and price increases, the industry volume has been reset lower by 29% over the previous peak volume of 21 million in FY19,” Rakesh said.

For customers at the lowest extreme of the market, the high unaffordability of a new two-wheeler will mean several trade-offs. A lower standard of living is an inevitable fall-out. “The two-wheeler is a social and economic need. Take an electrician or a service provider. A pan-India survey we conducted shows that if we compare income of an electrician who owns a two-wheeler vs one who doesn’t, the electrician earns at least nine times more than the one who doesn’t own a two-wheeler. The number of clients or houses attended by a electrician with a two-wheeler is 12 times higher, as he can cover a bigger area,” said Shukla of PRICE.

Going electric

The next phase of the two-wheeler market in Alwar is likely to be shaped by many variables. For one, many vehicles will have batteries instead of engines. “There are at least 30-odd recently opened electric vehicle showrooms in Alwar. Customers see the merit of buying an electric scooter. Electricity is almost free, absolutely free in the case of farmers and the financial savings are immediately visible to them,” Sanghi said. The brands include the more popular names like Hero Electric, Okinawa, Ampere and Kinetic Green as well as some relatively smaller ones, like Dynamo, Ryoto Electrix, and Birla E-bike.

But the user experience with e-scooters hasn’t been very assuring so far. “I will not recommend anyone an electric scooter. I have had one for the last 10 months. When I brought it home, I was promised a 100km range. I barely manage to squeeze out 30 km on one charge. What’s more, it keeps breaking down. The dealer I bought it from has gone bust … and parts aren’t available in the market,” Saini said. “I’ll come back for a 2023 model Platina.”

 

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