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How two-wheeler makers' plans to leverage lower BS-IV costs were ambushed by COVID-19

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By mid-March two-wheeler manufacturers were dealt a blow and left contending with a completely different situation due to the coronavirus outbreak.

How two-wheeler makers' plans to leverage lower BS-IV costs were ambushed by COVID-19
India transitioned to a cleaner vehicular emissions regime -- the Bharat Stage VI standards – on April 1. This mean, every new vehicle that is produced and registered in the country from April 1, 2020, must comply with stricter emission norms. The auto industry is investing approximately Rs 70,000 crore towards the transition, according to the Society of Indian Automobile Manufacturers (SIAM).
While passenger vehicle makers were able to wind down production in a phased manner to ensure there were few unsold BS-IV models left by March 31, two-wheeler manufacturers were dealt with a blow and were left contending with a completely different situation due to the coronavirus outbreak.
Inventory reduction to complete transition to BS-IV and lower production due to the lockdown announced in the latter half of the month led two-wheeler makers to report a steep double-digit decline in March wholesale numbers.
Domestic sales during March declined 42.4 percent for Hero Motocorp, 55 percent for Bajaj Auto, 62 percent for TVS Motor, and 44 percent for Royal Enfield on year-on-year basis. Volumes for Honda Motorcycles and Scooters India grew 11 percent in March due to a low base in FY19.
The auto industry was aware in 2016 itself that India would switch to BS-VI emissions standards, yet, the last few months of the transition saw two-wheeler makers aggressively push BS-IV inventory to their dealer partners, hoping to leverage the lower cost of BS-IV vehicles to drive sales and maximize market-share. A BS-VI two wheeler costs Rs 8,000 to Rs 10,000 more, on average when compared to a BS-IV vehicle.
The country’s biggest two-wheeler manufacturer, Hero MotoCorp -- which is particularly successful in the under 125cc vehicle category -- seemed to be driven by this strategy when it drew up plans to continue dispatching BS-IV vehicles well into mid-March, when inventories at dealerships were at alarming levels.
Sources CNBC-TV18 spoke to confirmed that Hero MotoCorp was dispatching stock to dealers in some cases as late as March 15. Currently, the company has 1.5 lakh BS-IV units, including sold but unregistered vehicles in the system. The company told CNBC-TV18 earlier that it registered a double-digit retail growth in the first two weeks of March. The nation-wide lockdown soon followed, and sales and registrations virtually dropped to zero thereafter.
In a conference call with analysts, Hero MotoCorp said that the company will take back its stock lying with dealers in Delhi-NCR region (about 12,000 units) and committed to taking care of inventory with dealers elsewhere. Hero said that the company would evaluate what part of the Delhi-NCR inventory could be sent for exports or used for the parts business.
Bajaj Auto, which manufactures popular models like Pulsar and Avenger -- in what the company calls the ‘Sports’ segment -- has liquidated its BS-IV inventory in urban markets, but has some unsold and unregistered units in the dealership network , mostly in the commuter segment, in markets like Uttar Pradesh, Madhya Pradesh, West Bengal and Rajasthan, sources told CNBC-TV18.
There were instances of vehicles being stuck in shipment due to the lockdown, and haven’t reached the destined dealership.
However, Bajaj Auto told CNBC-TV18 that the company had ‘zero saleable stock’ as of April 1. A unit is considered sold by an OEM when a dealer bills it on the VAHAN dashboard. Self-invoiced stock, however, is not considered sold by a dealership until it has purchased by an end user.
"Our approach, decided early on in 2019, to navigating the BS-IV to BS-VI transition was primarily supply chain led. The objective was to put out better products at least cost increment and get it right the first time. We ceased BS-IV production by mid-January, apart for some made-to-order Pulsars and were free of BS-IV stocks in our Plants by end Jan. We were targeting for our dealer network to be BS-IV free by 1st March. We were conscious that competition may try and maximize sales of the lower-cost BS-IV range to win market share in the closing period of the transition but decided to not be distracted from our approach,” Rakesh Sharma, Executive Director of Bajaj Auto told CNBC-TV18.
The Pune-headquartered company expressed opposition to OEMs like Hero MotoCorp and Honda Motorcycles and Scooters seeking an extension of the BS-IV deadline from the Supreme Court.
"Since we were not carrying vast quantities of BS-IV stock to begin with, we could accomplish this exercise by March 31 with some effort and did not require to take back any stock from the market", Sharma added, distinguishing the company's strategy from competitor Hero.
"Return and re-export was never an option at our end, though we have a substantial overseas business. To do so would have been presumptuous of our international franchise - overseas customers will not at all be happy to accept products which have been sold and returned by dealers... all that remains is for the RTO system to ensure registration of all the products which have been sold but could not be registered due to the lockdown,” Sharma added.
For the April 2019 to Feb 2020 period, the marketshare of Hero MotoCorp was down 10bps at 35.7 percent, HMSI gained marketshare by 20bps at 27 percent, TVS was at 16 percent losing 60bps, and Bajaj Auto gained 20bps to enjoy 12 percent marketshare YoY.
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