FADA

The Curious Case of India’s Two Wheeler Sales or Why Nothing is the Way It Seems

Ik yaaron bullet bhi hua lakh da,
dooja yaaron mehanga petrol ho gaya.

— Harkirat Singh Matharoo, Desi Crew and Jassimran Singh Keer in Bullet. 

I have been following  the issue of domestic two-wheeler sales on a regular basis. Two wheelers basically comprise of motorcycles, scooters and mopeds (around 6.37 lakh mopeds were sold in 2019-20).

Domestic two wheeler sales are a very important economic indicator which give us a good indication of the purchasing capacity of middle class India. Hence, it is important that they are interpreted in the correct way.

The sad part is that the mainstream media in its quest to get advertisements from automobile companies isn’t really doing that.

For the last few months we have been told that two-wheeler sales have been going up in comparison to the same month in 2019.
Take the case for November 2020. Newsreports tell us that 1.6 million units of two-wheelers  were sold during the month and this was 13.4% more than the number of two-wheelers sold during November 2019.

Not for a moment I am suggesting the media is making this data up. They are simply reporting the numbers that the Society of Indian Automobile Manufacturers (SIAM) is providing them with. SIAM is basically the lobby representing major vehicle and vehicular engine manufacturers in India.

SIAM reports the number of units of two-wheelers leaving the gates of manufacturers or factory gate shipments. In simpler words, these are units which have been sold by manufacturers to dealers across the country, who in turn will sell to the end consumers. So, the SIAM data does not represent retail sales or the sales made to the end consumer. If we look at retail sales, the real situation is revealed and the picture that emerges is not so pretty.

Let’s take a look at this issue pointwise.

1) In November 2020, as per SIAM, 1.6 million units of two-wheelers were sold.  But what were the real sales like?

The Federation of Automobile Dealers Associations (FADA) reports the number of units of two wheelers registered at the Regional Transport Offices (RTOs) across the country after they have been sold to the end consumer. Hence, the sales number reported by FADA is a better representation of sales to end consumers. It uses the government’s Vahan 4 database to report these numbers.

How many units of two-wheelers were sold in November as per FADA? 1.41 million units. This is lower than the number reported by SIAM. In fact, the difference is at 1.87 lakh units. This is the lowest difference between the SIAM and FADA numbers over the months since May 2020, when the difference was around 1.21 lakh units.

2) Take a look at the following chart. It plots the two-wheeler sales over the course of the current financial year (i.e. 2020-21), as reported by SIAM and FADA.

Source: SIAM and FADA.

As is clear from the above chart, in each month the SIAM sales numbers have been more than the FADA sales numbers. In fact, as per SIAM, a total of around 9.64 million units of two-wheelers were sold in India during this financial year. FADA puts the number at 6.19 million units, almost 36% lower. This is a difference of close to 3.45 million units.

3) What explains this difference? A small part of it stems from the fact that FADA sales numbers do not take into account sales made in the states of Andhra Pradesh, Telangana and Madhya Pradesh, which aren’t yet on the government’s Vahan 4 database, which FADA uses to publish the retail sales numbers. But retail sales in just three states can’t explain a difference of 3.45 million units between the SIAM sales number and the FADA sales number.

4) So what does this mean? This basically means that while manufacturers have been selling two-wheelers to retailers and retailers haven’t been able to sell a significant portion of what they have bought from manufacturers to the end consumer. Channel stuffing has been carried out and now the retailers have ended up with a significant amount of inventory. FADA suggests that the average inventory of two-wheelers with dealers is at 45-50 days. This is at the end of the festival season. Last year, at the end of the festival season the two-wheeler retailers had an average inventory of 35-40 days. What this means is that channel stuffing has gone up during the course of this year and last year’s problem has continued taking on an even bigger form.

5) Why has channel stuffing gone up? A possible explanation for this lies in the fact that both manufacturers and retailers stocked up in the hope of sales picking up during the festival season. In fact, the sales did pick up in November, with 1.41 million units and more (if we take three states for which FADA does not have data for), being sold at the retail level, the best during the course of this financial year. But this best wasn’t good enough to exhaust a bulk of the inventory build up that happened, given that retailers still have close to 50 days inventory.

Interestingly, if we look at the total sales of two-wheelers as per FADA during the 42-day festival season, from Navratri to Diwali, they were at 2.03 million units, 6.3% lower than last year. Clearly, when it comes to two-wheelers, the bets of both the manufacturers and retailers have turned out to be way too optimistic. The so-called revival in sales as per SIAM can be correctly interpreted as scooters and motorcycles stored in godowns of retailers, waiting to be sold.

6) So how bad is the situation? Let’s concentrate on FADA data for this, simply because it represents real consumer sales. Also, let’s ignore the months of April and May, when a lockdown to prevent the spread of the covid pandemic was in place and very little actual sales happened at the retail level. How do things look between June and November 2020, in comparison to the same period in 2019?

Around 6.04 million units were sold at the retail level between June and November 2020, which is 28% lower than the 8.38 million units sold during the same period last year. Clearly, retail sales have taken a huge beating.

Take a look at the following chart, which plots the fall in retail sales which happened in a given month this financial year vis a vis last financial year. Also, I have considered sales in October and November together simply because the festival of Diwali was in October last year and in November this year. This makes the comparison more robust.

Source: Author calculations on FADA data.

As can be seen, the fall in sales this year was at 40.92% in June. (I have ignored the April-May data because of the lockdown). The fall was at 12.62% in September. In the festival season of October-November it stood at 23.79%. This is a worrying sign.

7) A few two-wheeler manufacturers have made a lot of song and dance about their sales over the last few months. Let’s take a look at how things look for them during the months of October and November this year vis a vis last year. This is FADA data, hence, the usual disclaimer applies.

Source: Author calculations using FADA data.

As can be clearly seen from the above chart, the sales of the five largest two-wheeler companies during October and November this year, have been lower than the last year. On the whole, their sales were 2.25 million units, around a quarter lower than last year. The question is: what was the song and dance all about. Pleasing the government?

Finally, what will the future look like? Let’s take a look at this pointwise.

1) With an inventory of around 50 days at the retail level, the number of two-wheelers leaving the factories of two-wheeler manufacturers in the months to come will come down, unless retail sales improve dramatically. This has already happened in November with the difference between SIAM data and FADA data narrowing. The chances of retail sales picking up dramatically are low.

2) As far as retail sales are concerned, it will be interesting to see how the post-festival season period will play out. Clearly, the months of October and November were not as good this year as they were last year.

3) Also, it needs to be kept in mind that a good portion of the sales during June to November, would have been pent up demand or people who wanted to buy a two-wheeler during April and May, and couldn’t buy due to the lockdown. Further, a significant number of people must have bought two-wheelers over the last few months to avoid taking public transport. Has this demand exhausted? It is difficult to answer this question with total certainty, nevertheless, a significant portion of this demand must have led to purchases by now.

4) How the banks go about lending two-wheeler loans in the months to come will be interesting to watch. Thanks to a case which is currently on in the Supreme Court, banks haven’t gotten around to marking retail loans of under Rs 2 crore which have gone bad, as bad loans.

To conclude, it will be interesting to see how two-wheeler sales go in the remaining part of the year. From what data and logic currently suggests, things will continue to remain difficult this year. And that in turn suggests that the ability and the mindset of the Indian middle class to pay EMIs at this juncture will continue to remain limited.

Finally, petrol prices are on their way up.

Mannubhai motor chali pum pum pum.
— Rajendra Krishan, Laxmikant Pyarelal, Kishore Kumar, Asrani and Sikandar Khanna, in Phool Khile Hain Gulshan Gulshan.

The Real Story Behind India’s Two Wheeler Sales or Rather the Lack of It

Two wheeler sales are a widely used economic indicator. They give us a good indication of the prevailing spending capacity of the middle class. To put it in simpler words, is the middle class in the mood to borrow and spend money or simply spend money (given that everyone doesn’t take a loan to buy a two-wheeler).

In the last few months, several economists, analysts, journalists, politicians and many Twitter warriors, have cited robust domestic two wheeler sales data to tell us lesser mortals that the economy is well on its way to revival.
But is that really the case?

Two wheeler sales data are reported in two ways. The industry body Society of Indian Automobile Manufacturers (SIAM) publishes sales data every month. The Federation of Automobile Dealers Associations (FADA) also publishes this data every month.

The manufacturers produce the two wheelers and the dealers sell them to the end consumers.

Let’s take a look at the following graph which basically plots domestic sales of two wheelers as reported by SIAM and FADA, for this financial year.

What’s that GAP?

Source: SIAM and FADA.

As can be seen from the chart, there is a wide difference in sales as reported by SIAM and as reported by FADA (The blue bar is bigger than the orange bar throughout). Why is this the case? Let’s look at this pointwise.

1) The only month where SIAM and FADA reported same sales was in April, when the economy was under a lockdown, and the two wheeler sales reported by both the bodies was zero.

2) While both the bodies report sales, what they report are totally different numbers. SIAM reports the number of units of two-wheelers leaving the gates of manufacturers or factory gate shipments. In simpler words, these are units which have been sold by manufacturers to dealers across the country, who in turn will sell to the end consumers.

In turn, FADA reports the number of units of two wheelers registered at the Regional Transport Offices (RTOs) across the country after they have been sold to the end consumer. Hence, the sales number reported by FADA is a better representation of sales to end consumers.

3) As can be seen from the chart, in every month from May to October, two wheeler sales as reported by SIAM were more than that reported by FADA. As per SIAM a total of 8.04 million units of two-wheelers were sold during the period April to October 2020, or the first seven months of this financial year. This is around 29.8% lower than sales reported by SIAM during the same period last year. Clearly, year on year sales are down even as per SIAM data.

4) As per FADA, the two wheeler sales during the period April to October stood at 4.78 million units, which is 3.26 million units or 40.5% lower than the number reported by SIAM. Cleary, there is a huge difference between the two numbers. One reason for this lies in the fact that the FADA data still does not capture registrations made at RTOs all offices across the country. The states of Andhra Pradesh, Madhya Pradesh and Telangana, are not hooked on to the Vahan 4 system from which FADA draws its data.

This explains a part of the discrepancy but it’s still not good enough to explain the difference of 3.26 million units in the data  between SIAM and FADA.  The difference was more than a million units in October.

5) Why is the difference so huge? What SIAM is counting as sales is essentially inventory getting built up at their dealer level, something that the FADA data does not capture. This explains a bulk of the difference. A good proportion of the two wheeler units which have been sent from manufacturers to the dealers have not been sold to the end consumer.

Companies have been building up inventory with dealers across the country in the hope of good festival season sales. Also, the new Bharat Stage VI emission norms came into force from April 1. This meant that the inventory of two-wheelers at the dealer level had to be built all over again.

In fact, in its October press release, FADA pointed out that the inventory at the dealer level was at its highest in this financial year and it may impact the financial health of the dealers. In September, FADA had pointed out: “Inventory for two wheelers stands at 45-50 days”. It has only gone up since then.

6) Has this strategy of companies piling up inventory at dealer level in the hope of festive season sales worked? The answer to this question will become clearer once we get the November data from both SIAM and FADA, early next month.

Hero Motorcorp has put out a press release saying it has had a good festival season.  As the company points out:

“Despite the severe disruptions on account of the Covid-19 this year, the good retail off-take during the 32-day festival period – spread between the first day of Navratra and the concluding day after Bhai Duj – was 98% of the festive season volumes sold by the Company in the previous year (2019) and 103% compared to the same period in 2018.”

The question is does this apply to the sector as a whole or has Hero Motorcorp simply been gaining market share? The festival season this year was from around the middle of October to the middle of November. The October data as we have already seen hasn’t really been inspiring on the end consumer sales front with a gap of more than a million units in the sales data as reported by SIAM and FADA.

To conclude, two wheeler sales this year have been weak. As we have already seen, they are down 29.8% year on year, as per SIAM. As per FADA, they are down close to 40.3% year on year. This is the real picture of two-wheeler sales in the country and not the one several economists, analysts, journalists, politicians and many Twitter warriors, have been citing to us lesser mortals.

Of course, things may have improved a tad in November due to the Diwali festival. But will that be good enough to pull the industry out of the mess that it currently is in? I have my doubts about that. Also, in the months to come, the pent up demand will get exhausted. Further, one reason people are buying two wheelers these days is to avoid travelling by public transport. This is likely to have played out by the end of the year.

It will be interesting to see what happens next. Meanwhile, it is safe to say that a large part of the great Indian middle class isn’t really in the mood to spend currently like they did in the past.