Roses in the Rot

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‘Comfort in numbers’ is an old adage. As long as a market has huge numbers, it is very difficult to go wrong.

Take India for instance – a country of 1.2 billion people; the beauty with such a large population is that for the right product, the market can be huge. And even if the product is not so right, the market can simply be big. Popularity is not really a requirement for success as even the right niche can be a bigger market than the entire Scandinavia.

For example, say you are a manufacturer of Batarang shaped chocolates with bitter gourd flavour, selling at two dollars a pop with 50% margins. Not many would like the chocolates, but even if a minuscule fraction of the Indian population does bite into them, you are a millionaire made.

And if you did manage to get a half-naked yoga practitioner to endorse the chocolates for their obvious health benefits, you have a good shot at beating some e-commerce sites on valuation.

Such a huge market often translates into some companies and people making fortunes in hidden corners, which most others have avoided because of the smell.

The rot turns into roses for those who take the beaten path.

Swimming Against the Tide

At the local phone accessory shop, I have always wondered why there were a few thousand choices of accessories for the iPhone; slightly lower number of choices for Samsung models and virtually none for the Asus PadFone X.

The reason – businesses have a herd behaviour and are often very reluctant to swim against the tide. So when businesses realised that the iPhone would be the fastest growing smartphone brand with the most loaded-pockets user-base, everyone changed the dies on their plastic moulding machines and started churning out iPhone covers.

As a result, there are now a 100 (more!) manufacturers of iPhone cases and none for the Asus PadFone X. prices of the commodity are only held up because of the buyer’s stupidity iPhone charisma.

Theoretically, if one of the factories changed a few spindles and started spooling out PadFone X covers, they have a virgin market to explore. And even though the PadFone X may have a very small market as compared to the iPhone, it is still a million units and even a fraction of that is a good market segment for someone to enter.

The situation with the Moped segment in the Indian two-wheeler market is somewhat similar to the Asus PadFone X.

Mopeds

With the advent and increase in popularity of automatic transmission scooters, mopeds should have died long back. That’s what everyone thought as well. Hero Motors and Majestic Auto exited the business more than a decade back while Kinetic’s moped range died in the last decade as well.

This pretty much left only TVS to enjoy the spoils of the dying moped market.

Except, mopeds did not die.

Moped Sales 1972 - 2013

Data indicates that over the last decade, moped sales grew at a CAGR of 8.27%. During the same time period, motorcycles grew at 9.49% CAGR while scooters jumped up at a CAGR of 14.22%. Comparatively, mopeds were much slower than scooters and even motorcycles. At the same time, they were no slouches either and in no way were they dying.

So why did everyone exit mopeds in a hurry?

D-uh!

Call it arrogance, call it myopia, or call it herd mentality, everyone exited mopeds too soon. Hero-Majestic stopped making them because motorcycles and scooters were booming and it was becoming impossible to flog the Steyr Puch Maxi Plus in the 21st century.

Working on own R&D was an alien concept in those days.

Kinetic Engineering displayed a typical herd mentality that would eventually result in the almost death of the company. They jumped into motorcycles and scooters and let their popular moped range die; terrible strategy from a company, which had its Luna brand almost synonymous with mopeds in India.

Anyways, TVS hasn’t stopped grinning ROFLing over the last decade as they alone enjoy the spoils of the mopeds segment. The company offers only one model in the segment in the local market and that alone accounted for more than 727,000 units in sales in 2013. The model has been around for years and requires very little nothing in terms of engineering or R&D support.

 

Two Wheeler Forecast India

 

In other words, it is a money-printing machine. Correction, it is a money-printing machine that has required very little maintenance over the last decade and has printed more money every year.

 

How long will the party last?

The bad thing about all good things is that they eventually come to an end. TVS’s party is on but it is unlikely to last very long. Factors like hardening emission norms, changing customer preferences; speed and utility will likely lead to mopeds dying eventually.

But then this is what analysts probably told Kinetic and Hero-Majestic many years back. It hasn’t come true and this probably won’t in the near future. The beauty of the staggering 1.2 billion is that even if only retirees wearing spectacles, with lenses carved out of soft drink bottle bottoms, plan to buy mopeds, that’s still a million-odd units market.

Enough then for TVS to keep screwing up on their motorcycles without breaking a sweat.

But that does present an opportunity for someone who may want to reinvent mopeds. Typically mopeds in India have been associated with terms like cheap, slow, crude, and unaesthetic. However, in the process of researching this analysis, various Google Image searches of mopeds across the world associated them with terms like classic, trendy, aesthetic, custom two-tone paint, and fashionable.

It’s all about a change in customer’s perception to make something trendy (and charge a lot more than it deserves) and Indian companies are capable of doing it – remember Royal Enfield was synonymous with milkmen a couple of decades back. Now it is trendy and Katrina Kaif and Anushka Sharma plant their respective derrieres on the bike with chutzpah.

Someone – theoretically – may do the same with mopeds and make the segment grow at many times the current pace. It would also be the easiest thing to do, as the competition is zero.

Three-Wheelers

Three wheelers is another segment, which has outlived its life many times over. Noisy, crude and unaesthetic, three-wheelers are the underbelly of the automotive world. Most machines look the same, are similarly repulsive with their noise and NVH levels and manufacturers are not losing sleep on updating the models. Lifecycle management is something the management jokes about over tea and biscuits. Most R&D efforts are aimed at liberating some more space inside the vehicle and maybe rig up a socket for the mobile charger (on the deluxe model) to fit in.

Manufacturers just don’t go beyond that.

Things like improvements to suspension, braking and refinements in NVH require deep R&D and it is simply a case of why mess with success when we are anyways rolling in dough without doing anything.

While analysing three-wheelers, it should be noted that the broad segment should be divided into two sub-segments – passenger carrying three-wheelers and Goods carriers. Both have different behaviours and sales growth, future prospects and everything else are driven by completely different factors.

Goods carriers were going strong till 2006 till Tata cooked up the Ace small-truck and it caught the fancy of small entrepreneurs, local freight operators and enterprises who were relying on much cruder machines till date. The Ace crippled Goods Carrier Three Wheeler sales so much that over 2007 & 2008, sales came down by a combined 46%, from the 2006 peak of 168923 units. Sales would further fall 9.4% in 2009 to touch a bottom of 82061 units before stabilising.

Three-Wheeler Sales 2005-13

So bad was the collapse in sales of Three Wheelers – Goods carriers that many figured out that the entire segment was heading towards extinction.

However, that did not happen. Sales stabilised post 2009 and then grew steadily over the next two years. The market has again taken a breather during 2012 & 2013 as nearly all commercial vehicle segments tanked in this period.

The story has been quite interesting in the first half of 2014. While Small Trucks (<2T GVW) of the Tata Ace segment have crashed 36%, Goods Carrier Three Wheelers are up by nearly 4% over H1 2013. This is quite interesting and may signal a revival in three-wheeler sales ahead of any signs of recovery in the Small Trucks segment.

On the passenger carrier three-wheeler side, the vehicles are used as local cabs in large and small cities across the country. In most cities, the number of such three-wheelers on the road is controlled by a license structure that allows only a certain number of such vehicles to be registered.

In contrast to Goods Carrier three wheelers, the Passenger Carrier segment sales have hardly witnessed a decline since 2005. Apart from a minor blip in 2013, sales have always been on the up. Unlike Goods carriers, Passenger carrier three-wheelers have been fortunate that there is little competition in the market.

Even though the machines are crude with mediocre weather protection (canvas roof and doors and pretty much the entire thing above the waist line) and nil NVH refinement (in many models the semi-naked engine is right under the driver’s bum and inside the passenger cabin), three wheelers have no parallels on acquisition price and running costs. Almost all of them now run on CNG (noisy) or diesel (warzone!) and have frugal running costs, maximising the profits for the operator.

In 2012, Tata launched the Magic Iris, essentially a commuter variant of the Ace Zip micro truck in select states. The response has been lukewarm even though some markets in the south of the country are shifting towards the Iris. The Magic Iris scores over the ubiquitous three-wheeler in terms of refinement and passenger comfort but fails to please the operator on costs. Overall, it would be a couple of decades before something like the Iris makes three-wheeler Passenger carriers defunct.

Secretly, Bajaj Auto thinks that the three-wheeler Judgment Day may come sooner than imagined. In a way it is preparing for the same and has the RE 60 quadricycle in store. Touted as a personal transport option, the RE 60 is the ideal replacement for the three-wheeler fleet. It would have better NVH characteristics, decidedly better weather protection, more driver / passenger comfort, and a higher top-speed as well. However, it is likely to face the same problems of meeting three-wheelers on the cost front.

If through a concerted effort, Bajaj Auto is able to shift even half of its passenger three-wheeler sales top the RE 60, the product would be a qualified success. That is what Bajaj Auto would be looking at when they launch the quadricycle in the market.

Beyond Numbers

If the SIAM data is badly skewed in one segment, it is three wheelers. You see, cooking up a contraption three wheeler is so easy, especially with Greaves Cotton and Kubota around to sell you small diesel engines, that many small manufacturers have entered the sector. These manufacturers are not SIAM members and do not report numbers. A correct estimation of real numbers is difficult and even EMMAAA analysts put the overall market at 25%-40% more than what SIAM numbers suggest.

Often these Small & Medium Enterprises (SMEs) manufacturing three-wheelers are regional in nature and the shape of the three-wheeler keeps on changing as you move from one small town to another.

Which brings us to the real importance of three-wheelers in the Indian context. These machines are important to the Indian economy as at times there are multiple SMEs across the supply chain. SMEs make the components, SMEs assemble the machine and SMEs operate the machine. This is a beautiful scenario and makes the market much more relevant than what the SIAM data of the organised three-wheeler sector suggests. In some perfect cases like Atul Auto, some of these SMEs gain traction and become reasonably big. In a nutshell, three-wheelers (apart from mopeds) is the only segment where the cottage industry can dream of entering the automotive sector.

And that is the biggest reason why three-wheelers would not die in a hurry.

Are you interested in the Indian three-wheeler industry? EMMAAA’s three wheeler forecast provides the right guidance and hand-holding to navigate the sector. Mail us at quickfire (at) emmaaa (dot) com to know more.

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3 Responses

Leave a Reply
  1. David Jones
    Jul 31, 2014 - 08:26 AM

    An insight worthy of the term.

    Great analysis from the EMMAAA team.

    Reply
    • DR
      Jul 31, 2014 - 09:47 AM

      Thank you David for the kind words.

      Reply

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  1. You might not see it on Indian roads, but the moped isn’t dead – Quartz

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