Honda puts the brakes on growth plans as scooter sales slow in India

“What’s 2020 without a 6?” read the full page ads for Activa in national print dailies. This was a teaser campaign by Honda Motorcycle and Scooter India, the country’s largest scooter manufacturer. Released on January 1, 2020, it was to set the pace for the brand for the year and tie up a routine new year greeting with the launch of the new Activa 6G.

On January 7, 2021, Honda celebrated yet another milestone of 25 million Activas on Indian roads. But the celebrations were a blink-and-miss, and for a reason: Just a day before, the company had announced a voluntary retirement scheme (VRS), a first in its two decades in India.

This came just a fortnight after Honda’s car manufacturing arm in India made a similar announcement. But company officials maintain the two events are unrelated and the decisions independent. Both announcements are a telling comment on the impact of Covid-19 on India’s automobile market, which has been in a slow lane since financial year (FY) 2018-19 anyway.  

With the sixth generation of the Activa being linked to the cricket-crazy nation’s obsession with sixes on the field, the idea behind the campaign was to frame a relatable pitch for the brand’s new avatar — as a scooter that presumably can hit the ball out of the park. It was also to celebrate the beginning of the 2020s for the Activa brand and mark the roll out of Bharat Stage (BS) VI emission norms.

Back then, little did anyone realise that the pandemic would run everyone out. Though none of HMSI’s rivals have been unscathed by the strike, the pain for the Japanese two-wheeler maker has been deeper. Here is why: Scooters, HMSI’s core segment, are sold primarily in urban India which has been the epicentre of the health crisis. Also, the company’s sales mix is disproportionately skewed in favour of scooters, which contributes 60-65 per cent of total volumes.

The crisis has weighed on volumes. Honda’s scooter sales plunged 37 per cent year-on-year to 1,447,002 units in the first eight months of FY21. Its market share also dropped to 52 per cent from 56 per cent a year ago, according to Society of Indian Automobile Manufacturers (Siam).

Honda's rivals TVS Motor, Hero MotoCorp, Suzuki Motorcycles have fared better. In fact, Honda has ceded some ground to them. Hero saw its share in the scooter segment increase to 10.38 per cent from 7.96 per cent in the eight months to November. Even the fall in sales wasn't as sharp. Though on a much lower base, it dropped to 288,592 units from 330,774 units a year ago. Similarly, TVS, the second largest in the pecking order, saw its share climb to 20.33 per cent from 19.09 per cent a year ago. Again, volumes fell sharply to 563,000 from 765,000 in the same period.

To be sure, this fiscal’s figures are not strictly comparable to last year’s owing to the two months of the pandemic-induced lockdown. But it has dented Honda’s India operations significantly, forcing the company to announce a VRS for employees.

“Scooters are 60-65 per cent of the business. The rest of our sales comes from our motorcycle business. This was another challenge for us because urban India took more time to open (from lockdown),” Yadvinder Singh Guleria, director- sales and marketing, HMSI told PTI.

Honda said the VRS was designed to “realign its production strategy” and improve the overall efficiency in “these uncertain times.” Employees above the age of 40 or those who have completed 10 years of service are eligible for the scheme. Effective from January 5 it will remain open till January 23, and be applicable only to company’s Manesar facility. HMSI employs close 1,200  people there and plans to reduce it by a third, said a person aware of company’s plans.

With a combined annual capacity of 6.4 million units, HMSI has production facilities in Manesar (Haryana), Alwar (Rajasthan), Narsapura (Karnataka), and Vithalapur (Gujarat), and employs over 20,000 people across the plants.

The Manesar facility, which manufactures the Unicorn, Shine and Activa models, is the oldest of Honda’s four plants and has the highest cost structure. So it won’t be surprising if the company takes a call to shutter it once and for all, said an official at a component maker that counts HMSI as its key customer.

Another person privy to the development concurred. “They have already uprooted the scooter- making lines from there and it’s only a matter of time before they stop all kinds of manufacturing there and consolidate it at the other three factories,” the person said.  

A planned expansion of its Gujarat plant also appears to have been shelved. “In terms of demand, the existing lines and existing capacity are good enough to take care of the demand that is currently in the market and in the coming two years or so,” Guleria told PTI.  

In 2018, HMSI had projected sales of seven million units per annum, but sales kept skidding thereafter (see chart). The company was, in fact, considering consolidating operations for some time, said the component supplier quoted above. It may take two or three more years for Honda to bounce back to FY18 levels. This is in line with trends in the broader two-wheeler market, for which the pandemic has pushed back targets by two or three years, said an analyst at a domestic brokerage.  

The VRS is not the making of just the pandemic. The strong run in scooter sales that  the company had seen over the past decade had started slowing in recent years as buyers preference began shifting to the more fuel-efficient motorcycle segment after fuel prices started rising from FY2019.   

As sales in urban India suffered amid the rising number of Covid cases,  the share of scooters touched multi-year lows in the first five months of FY2021 slipping to 27.36 per cent from the record high of 33.21 in FY18. As normalcy returned, some lost ground was recovered with market share climbing to 29 per cent between April and November.    

 Whether Honda will be able to fully recover and hit a six in the two-wheeler market with its scooters when other players are also getting aggressive will depend on a host of factors, including recovery in urban demand. For now, though, the Japanese two-wheeler is leaving nothing to chance to turn the corner in one of its most important markets globally.