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Common Tread

Why are sales collapsing in the world's largest motorcycle market?

Dec 18, 2019

Through the first three quarters of 2019, sales of new motorcycles in India were down about 1.5 million units compared to 2018. To put that into perspective, the nine-month decrease was six times the size of Harley-Davidson's global annual unit sales. Thousands of workers were laid off and one Honda plant was shut down temporarily to reduce inventory.

Why does it look like the world's largest motorcycle market is crashing? And why are some experts still not worried?

The motorcycle market in India is huge

To put the changes in perspective, more than 20 million new motorcycles were sold in India in 2018. Companies such as Hero, Bajaj, TVS and Mahindra — little known in the United States — are huge and Honda, Yamaha and Suzuki build motorcycles and scooters specifically for India. To give just one example, in the month of September, Hero sold 750,000 units, which is almost 50 percent more than all the motorcycles sold by all brands in the United States in an entire year.

motorcycles in India
India is now the largest motorcycle market in the world. Photo by Nomad.

Motorcycle sales in India surpassed sales in China as these companies saw year-over-year double-digit percentage growth, with some years up by 20 percent or even 30 percent. This year, however, the Indian domestic market will shrink by about 10 percent. Thousands of contract workers were laid off and a factory that builds the fantastically popular Honda Activa scooter was closed altogether for a few days to reduce the number of bikes in the distribution network and at dealers. The India market is so huge it can affect the results of international motorcycle companies if sales there are weak.

To find out what was going on, I used social media to contact writers covering the automotive sector in India, starting with Vaishali Dinakaran, a talented motoring journalist who introduced me to Shubhabrata Marmar, the man she described as “the best motorcycle journalist India has to offer.”

Shubhabrata Marmar
Shubhabrata "Shumi" Marmar has been covering the two-wheeler scene in India for more than 20 years. Photo by Ishaan Bhataiya.
"Shumi," as Marmar is known, has covered the Indian scene for 20 years. He’s currently the motorcycle editor of PowerDrift, India’s top YouTube automotive channel, which has nearly two million subscribers. Shumi described a series of factors that led to this year's collapse in sales, but despite the turmoil, he remains optimistic about the industry.

“The first thing you need to understand is that the fundamental need for two-wheelers has not changed,” he told me. “We don’t have public transport, so you need two wheels to get around. The kids are still interested in two-wheelers, too. Look at our advertisements. Whether the ad’s for a shirt or a housing development, there will be a motorcycle in there. In movies, actors still ride motorcycles. All this gives me confidence that the market will come back, but a series of government moves have impeded the market.”

Shumi told a tale of a series of well meaning but sweeping government regulations that had — surprise — unintended consequences. It began in late 2016 when the Indian government implemented "demonetization." That is to say, it took the two largest-denomination banknotes out of circulation and restricted the use of cash in large transactions.

Following that, the cost of new motorcycles was pushed upwards by rules that mandated ABS on most models and forced consumers to pay for five years of liability insurance up front. Costs will go up again in April 2020, when new emissions regulations take force that are even stricter than those in Europe or California. Starting next spring, India will have the world’s tightest motorcycle emissions standards.

Those weren't the only factors that led to this year's sales drop, but they set the stage.

Demonetization and emissions

Sunny Soral
Sunny Soral is an engineer who worked in the Indian automotive sector for a decade before shifting gears to become a content producer. Photo by Sunny Soral.
To dive deeper into the details, I spoke at length with executives at two motorcycle manufacturers, both of whom requested anonymity because they weren’t authorized to speak for their employers, and I talked to Sunny Soral, an engineer who worked in the automotive sector for over a decade before shifting into online journalism and content creation.

The government pursued demonetization to try to eliminate "black money" transactions that avoided taxation, to hamper criminal enterprises and to impede funding of terrorism. Existing 500- and 1,000-rupee banknotes had to be turned in to banks and were replaced with new 500- and 2,000-rupee bills. Despite a communications campaign in advance, implementing the change was a challenge because most Indians didn't even have bank accounts.

“As an idea, it was a bright thing to do,” Soral explained. “But 85 percent of the money in circulation was in cash. The women of the houses were saving that money. They had it all hidden away somewhere.”

“There was no time for industry to adapt,” he added. “It killed off real estate, and the auto sector, too. It destroyed the economy. Our GDP had been growing at 8.1 percent and 18 months later it was 4.5 percent.”

Even though the most popular motorcycle models still sell for under $1,000 U.S., that is about 60 percent of the average buyer's annual income. So almost all buyers have to borrow money. On the face of it then, increasing access to organized banking seems like a good thing for the motorcycle business over there — and could prove to be a good thing over the long haul. But as Shumi told me, “Our government is good at optics, but not so great at actually getting things done.”

As part of the new regulations, the government disrupted two other important sources of credit: small-scale cash loans made within families or villages, and more formal loans made by so-called "non-bank financial companies." The largest of those actually went bankrupt.

Then there’s this BS…

As Shumi mentioned, the cost of new bikes rose because India made ABS mandatory on all powered two-wheelers over 125 cc. (Bikes under that displacement limit need only be equipped with combined braking systems, but even that change increased manufacturers’ costs, which were passed on to consumers.) And the government now requires buyers to pay for five years of third-party liability insurance up front.

Those factors are small compared to the next big change, however.

air pollution in India
Air pollution is a serious issue in India. The World Health Organization ranks Delhi as the city with the world's worst air pollution. CSC Mktg. photo.

Effective April 1, 2020, new motorcycles must meet an emissions standard known in India as "BSVI." (BS stands for Bharat Stage and the VI is six in Roman numerals.) Technically, it’s very similar to Euro 5, but even stricter in some ways. Urban air quality in India has reached dangerous levels, so the government recently decided to leapfrog the expected change to BSV and jump straight from the current standard, BSIV, to BSVI.

This means that manufacturers that want to sell into India’s domestic market will have to meet the world’s tightest emissions standard. That will bump prices up again. Sunny Soral did a quick back-of-the-envelope calculation for me and guessed that prices of the most popular models will have increased about 30 percent by the time all those changes have been accounted for.

What’s worse, the communications around the new rules have been misunderstood out in the countryside, where potential buyers did not understand that motorcycles purchased before April 1 would be grandfathered in. Potential buyers worried that come April 1, earlier models would be taken off the road altogether. Many decided to postpone new purchases until BSVI models hit the market in March.

As a result, it’s been reported that inventories are piling up at dealers and in the distribution network. Shumi told me that the last time there was a step up in emissions standards, when India went from BSIII to BSIV, there was huge confusion over whether the rule meant that no BSIII machines could be manufactured after a certain date or couldn't be sold at retail after the deadline. The courts eventually ruled the deadline applied to retail sales and manufacturers and dealers became desperate to sell off existing BSIII inventory. There were deals like, “Buy one at 30 percent off, get the next one free!"

This time, manufacturers know how the rule will be interpreted, so there’s no excuse for being caught off guard. Both Shumi and Sunny Soral gave me the impression, however, that dealers and distribution chains are saddled with too many bikes and have too little time to unload them before the deadline.

Inventory levels may vary from company to company, of course. Both of the executives I spoke to told me that they didn’t know about competitors, but they assured me that their brands’ dealers had strong sales during the recent Diwali festival period — that’s the Indian retail sector’s equivalent of Christmas — that helped reduce inventories. And both said that the companies they work for have reduced production by as much as 15 percent in the last couple of months to ensure they can sell through the last BSIV bikes and avoid the extreme discounting that preceded the last transition.

One exec admitted, however, that the transition to BSVI was not going to be easy. Many popular models that were made with carburetors now need electronic fuel injection. Even global Tier 1 suppliers like Keihin and Magneti-Marelli can’t easily satisfy Indian manufacturers’ huge appetite. Because of supply-chain problems, manufacturers are focusing on their most popular models first, and for a while this spring, some less popular models won’t be sold at all.

Honda Activa scooter
Though motorcycles outsell scooters in India, the single most popular nameplate is the Honda Activa scooter. Even in 2019, a slow year, Honda will sell about 1.5 million of these. Honda Motorcycle and Scooter India photo.

It never rains but it pours

There are a lot of motorcycles in Indian cities, but even more are sold out in the countryside, where the economy is still dependent on agriculture. Indian farmers are, in turn, dependent on monsoon rains. On top of all the unintended consequences of government policies, the last few years have had sub-par monsoon seasons resulting in disappointing harvests.

As one executive explained to me, the average buyer of a sub-150 cc motorcycle — the most popular category in India — hangs on to that bike for about five years. Then, he sells it to someone who uses it for another five years. It’s easy for the average user to delay his next purchase a year or two, and manufacturers expect that many buyers will defer purchases, whether they are saving up more money to offset higher costs, or hoping for good rains and better crop yields in 2020.

Despite all these economic headwinds, both of the execs I spoke to were, like Shumi, confident that the market would rebound in a couple of years. One of them told me that by his estimate, Indian motorcycle manufacturers had only achieved about 25 percent penetration of the domestic market; there’s still huge growth potential out in the villages.

Hero Splendor
The Hero Splendor is the best-selling motorcycle in India. This 110 cc version, including mandatory insurance, currently sells for about US$850. The Indian market is maturing, however, and there is an increasing demand for larger displacement motorcycles. Hero MotoCorp photo.

The biggest Indian motorcycle manufacturers also export a lot of machines and have factories in other countries that are not subject to the vicissitudes of the Indian market. That diversification will help them weather this temporary — albeit significant — downturn. One exec told me that while South America and Africa both have their own issues (like rampant inflation and political instability), the long-term forecast for those markets is very bullish, too.

Higher emissions standards aren't the end of the government's interventions, either, as it set a target for the automotive sector to make 30 percent of its sales electric vehicles by 2022. No one I spoke to thinks that’s remotely achievable, especially while countless millions of Indians still don’t have access to reliable electricity. It would not even be that beneficial, in a country that still relies on coal-burning power plants.

The government has also long flirted with a "15-year scrapping" rule that would take all older vehicles off the road. One exec told me that in his opinion, that rule would become law within the next few years, too.

It is said there are 33 million gods in Hinduism alone, to say nothing of the fact that every other religion is also practiced in India. Gods only know what other unintended consequences will affect the world's largest motorcycle market.