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Why Hero MotoCorp needs to get its scooter act right

The company has slipped to the third position in this fast growing two-wheeler segment in 2016-17

N Madhavan
Published: 11, May 2017

A journalist for 18 years, I have been writing on business with special focus on automobiles, commodities and management. Corporate stories are my forte but that has not restricted me from writing on diverse subjects such as sports (especially Formula 1), films, music and so on...

Photographer: Prashanth Vishwanathan/Bloomberg via Getty Images
Photographer: Prashanth Vishwanathan/Bloomberg via Getty Images

On 10th May, Hero MotoCorp – the world’s largest two-wheeler manufacturer (as a single entity) -- posted muted fourth quarter results for FY2017. Its profits, weighed down by deep discounts which it had to offer to clear a large stock of BS III vehicles by March 31, 2017 (it reportedly cost the company as much as Rs 200 crore) fell by 14 percent to Rs 717.80 crore as against Rs 833.30 crore in the fourth quarter of 2015-16.

The stock market has taken the results in its stride. Hero MotoCorp’s stock which closed at Rs 3,323 on May 10 at the BSE, rose by over four percent on Thursday, closing at Rs 3,463.8.

It appears that the impact of BS IV norms was lesser than what analysts had expected and they appear to have also taken the statements from chairman Pawan Munjal on new product launches and plans to invest Rs 2,500 crore over the next two years in product development, digitisation and capacity expansion/modernization quite positively. “With half a dozen new launches slated for FY18, we will go for aggressive market share gains,” he said in a press statement.

Hero MotoCorp is a clear market leader in India. It sold 64.84 lakh units in 2016-17 compared to the 47.25 lakh units its nearest competitor and former partner Honda Motors did through its fully-owned Indian subsidiary Honda Motorcycle and Scooter India (HMSI).

But a closer look at the numbers reveal some wrinkles that the Munjal-led company needs to urgently deal with failing which it will lose its tag as investor favourite when it came to two wheeler players.

Scooters continue to be a weak link in its otherwise strong position in the market. It was never a big player in that segment and of late, its scooter sales have further declined. It sold 7.90 lakh scooters in 2016-17 as against 8.19 lakh units in 2015-16.

Considering that scooters account for just 12 percent of Hero MotoCorp’s overall volumes, this small decline of 3.5 percent may not appear significant. But the way the Indian two-wheeler market is evolving, poor scooter play is fast becoming a big chink in the company’s armour.

In India, the scooter segment is growing much faster than motorcycles - Hero MotoCorp’s area of strength. In 2016-17 the growth was 11 percent.  Today scooters account for 32 percent of India’s overall two-wheeler segment and it is growing rapidly.

HMSI dominates this market with a market share of 57 percent. Hero MotoCorp which till 2015-16 held the second spot, lost it to TVS Motor in 2016-17. Its market share stands at 14 percent.

The company entered the scooter segment late as it, in its earlier avatar as Hero Honda (a JV with Honda Motor Company, Japan), could not enter the segment as per an agreement with Honda. HMSI cracked the predominantly motorcycle market with its 'Activa' gearless scooters.

Hero MotoCorp did launch multiple models – Pleasure, Maestro, Maestro Edge and more recently, Duet. But they have so far failed to capture the imagination of the customers in a manner so as to unravel HMSI’s iron grip on the market. Ironically for Hero MotoCorp, the motorcycle segment is not growing fast enough. In 2016-17 it grew by just 3.68 percent (110.94 lakh units).

Demonetisation and poor rural demand are some of the reasons for the low growth of the segment. Its market share declined slightly to 51 percent (52 percent in 2015-16). HMSI, meanwhile held its share at close to 14 percent.

Overall, the relatively faster growth in the scooter segment and Hero MotoCorp’s weak play there has seen its market share in the two-wheeler space decline considerably. It was 45 percent in 2010-11 (HMSI’s was 13 percent). In 2016-17 Hero MotoCorp’s share is 37 percent and HMSI 27 percent.

Will HMSI overtake Hero MotoCorp to become the largest two-wheeler player in India? Unlikely soon but that remains a possibility. If the industry dynamics (growth in scooter segment fast outstripping that of motorcycles) continue the way it is, HMSI will continue to chip away Hero MotoCorp’s lead as it has been doing over the years.

Hero MotoCorp can reverse this trend only with a break through scooter model and that should be its major focus when it comes to product development.

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