Factors which affected the industry in general :
1. Rising steel prices – pushing up the costs of production.
2. 8 percent import duty coupled with octroi, sales tax, registration, transportation, insurance etc. Pushing expenditure up
3. Credit Crunch – specially for the executive segment. Interest rates have gone up.
Factors which have affected Hero Honda in particular in addition to general factors :
1. Impact of interest rates on two wheeler buyers at the entry level. Interest rates started firming up in early 2007, and have shown no signs of letting up ever since; the slump in the entry segment has coincided with this rise. Indication that entry segment is very Interest Elastic.
2. Quantum of down payment percentages has shot up exponentially, destabilising the market.
3. Rising Commodity prices during 2008 which has been compensated for and is already in the verge of decline in the 1st quarter of 2009.
The motorcycle segment is further sub divided into 3 classes, starting from the entry/economy class (Rs 30,000 – Rs 40,000), executive class (Rs 40,000 – Rs 50,000) and the premium class (>Rs 50,000).
Performance of Hero Honda :
1. Entry Segment – Sales of Hero Honda went down by 6% (same as the whole industry). But overall its market share in the industry went up from 28.7 to 36.6 %. This shows that the decline in the quantity supplied to the market by other market firms has declined at a faster rate than Hero Honda.
2. Executive Segment – Sales went down by 1.18%. But similar to Entry segment, the share of market went up to 71.5 % from 68%.
3. Premium Segment – Outperformed all other players where its sale went up by a whopping 69% whereas in the previous year it had grown by 25%. Its share in this segment has increased by 8% and now account for the major source of revenues.
Interpretations from the given data :
1. Due to recession, expendable income of consumer has gone down. Having said that and considering the credit crunch existing in the market (Banks not ready to lend loans) it can be concluded that the spending behaviour of consumer is different across different income segments.
2. For the executive and entry segments, the demand is going down. Reason being mainly – High percentage of down payments and banks not willing to lend/lending at higher rates of interest. This particular segment is Interest elastic.
3. For Premium segments the demand has not been affected since these are consumers whose expendable income has not been much affected by the recession. Evidence being the strong position of Hero Honda still in this segment. These consumers are least likely to postpone purchase decisions on account of increasing EMI. This segment is relatively Interest Inelastic.
4. According to the National Council of Applied Economic Research (NCAER) in 2001-02, there were 61 million Indians belonging to families that earned more than Rs. 2 lacs a year; by 2005-06, that number had crossed 100 million. In 2009-10, this number is projected to increase to 173 million. It is safe to assume that the bulk of the buyers from these segments will opt for either entry or deluxe segment motorcycle offerings. On the other hand, it has now been established beyond doubt that a large chunk of entry segment buyers will continue to react when there is a spike in interest rates. In other words, two wheeler makers have few options but to ride out the difficult times.
