BS-VI transition poses bigger challenge for 2-wheelers

Come April 1, 2020, the automobile industry will make a transition to Bharat Stage-VI (BS-VI) emission norms. BS-VI is also seen as the last hurdle for the auto industry after going through a difficult operating environment over the last 15 months. This coupled with initial signs of stability/recovery in demand and under-control inventory, the industry hopes it will be ‘business as usual’ from the second half of next financial year.

Already, many automakers across passenger vehicles and two-wheelers have launched BS-VI models such as Maruti Suzuki, Hyundai Motors, TVS, and Honda Motorcycle and Scooters India among others. While it is expected that the prices of all vehicles fitted with the new BS-VI engines will shoot up, the two-wheelers would face the highest cost inflation of 10-15% due to the BS-VI transition, according to a report by Motilal Oswal Financial Services Ltd (MOFSL). The rise in cost for diesel passenger vehicles is estimated at 8-12% and 2-4% for petrol PVs, 15-20% for light commercial vehicles (LCVs) and 10-13% for medium and heavy commercial vehicles (M&HCVs).

Including BS-VI, the total cost inflation for mainstream two-wheelers (on-road) with less than 125cc engines would be 20-25%. “The BS-VI would not just impact the overall demand but also pose the risk of value migration and change in competitive positioning of key original equipment manufacturers (OEMs),” MOFSL said.

BS-VI-related cost inflation has the potential to change competitive positioning and lead to value migration. “We see the possibility of value migration from executive 100cc motorcycle to the economy, 125cc scooters to e-scooters and diesel passenger vehicles to petrol/CNG/hybrid PVs. We also see the potential for OEMs to gain an advantage by adopting a differentiated approach for BS-VI compliance,” the analyst firm said.

Some of the early BS-VI models are launched by Hero Motors, TVS, Honda, TVS, Maruti and M&M. Hero’s Splendor i-Smart is priced at Rs 64,900, a rise of 13% over the BS-IV model. The Jupiter Classic by TVS is priced 13.2% higher at Rs 67,900, Apache RTR 2004V is priced 10.9% higher at Rs 1,24,000, Honda Activa 125 is priced 9.2% higher at Rs 71,000 (all Ex-showroom, Delhi). Among the passenger vehicles, Maruti has priced its Baleno Sigma Petrol 2.2% higher at Rs 5,58,000 and M&M has introduced its XUV300 W4 Petrol model 2.5% higher at Rs 830,000 (ex-showroom, Delhi).

The OEMs will need to get their BS-VI transition strategy right to minimise the risk of market share loss (if the transition happens too early), loss on inventory (if the transition happens too late) and the margin impact (due to discounts to clear inventory), the Motilal Oswal report said.

While the scope of differentiation is limited on the technology front, OEMs might try to differentiate their strategy to pass on cost inflation (staggered price hikes pre/post BS-VI implementation). However, some OEMs having a reasonable export contribution would have avenues to sell unsold BS-4 inventory (though might need some modification and at extra cost) and thus have scope to transition to BS-VI much closer to the deadline.

Value migration

In two-wheelers, there is a possibility of value migration from executive 100cc motorcycle to economy segment motorcycle and 125cc scooters to e-scooters. Cost of a BS-VI economy segment motorcycle would be similar to a BS-IV executive 100cc segment motorcycle without any significant difference in the performance. Hence, a value-conscious customer could see ‘downgrading’ to an economy segment motorcycle. While Hero Motors would see value migrating from its cash-cow Splendor (Executive 100cc) to HF Deluxe (Economy 100cc), it would be EBITDA decretive due to lower margins on the latter.

Similarly, the pricing gap between an e-scooter and BS-VI 125cc scooter would narrow by Rs 8,000-10,000. “Also, as mainstream OEMs launch e-scooters at a competitive price, we see the scope of e-scooters gaining traction at the expense of 125cc scooters. This trend will influence products like Access 125 (Suzuki), Activa 125 (Honda) and Ntorq (TVS),” the report said.