Motown drives on hinterland hopes

Automakers are banking on the rural sector to prop up demand as industry growth is seen slowing this year after a spectacular ride in 2010.

The 30% growth last year came as a big surprise to the auto industry, which sees the urban markets getting saturated and the focus shifting to the hinterland.

Experts feel that companies with higher rural exposures will continue to enjoy better volumes this year, though growth rate per se may fall due to the higher base of 2010.

Sonal Gupta, UBS Investment Research analyst in a report on January 12, said rural demand will play a strong role in fiscal 2012 and support auto demand.

“We expect two-wheelers and tractors to be the key beneficiaries of this strong growth,” the analyst said.

The demand is expected to be driven by strong growth in rural incomes, due to high food inflation and strong agriculture growth, continued stimulus to the rural economy in the form of higher National Rural Employment Guarantee Act allocation, high credit growth and investment in rural infrastructure.

Pawan Goenka, president, automotive and farm equipment sector, Mahindra & Mahindra, said, “There isn’t significant data to say that there is sharp increase in rural demand as compared to urban. Mahindra & Mahindra, however, always had higher percentage of demand coming from rural side than the industry average. Going ahead, we see more attention being given to rural demand by most of the automakers.”

He said, “There is a lot of income and affordability available in the rural segment. Urban demand in a way is getting saturated not just from the capacity point of view but also from the infrastructure point. We see a lot of potential if we are able to create right value proposition in rural area.”

Toyota Kirloskar Motor, which is expecting to add significant volumes with the launch of Etios sedan, is banking on demand from rural and semi-urban areas.

The company has expanded its dealer network to 150 in 2010 from 82 in 2009.

Other players like Hyundai Motors and Honda Siel, too, have expanded their dealer network last year to capture demand from hinterland.

In two-wheelers, players like Hero Honda, Bajaj and TVS are well networked within the rural geographies. Despite an overall household penetration level of 45%, the two-wheeler industry continues to grow in double-digits due to demand from rural markets and shortening replacement cycle.

The UBS analyst said the epicentre of the two-wheeler demand is shifting to rural segment. “We believe industry split is now 50:50 for rural versus urban and likely to increase further in favour of rural given a large rural population (71% of total), where income growth is likely to drive growth for the two-wheeler sector,” it said.
Bajaj Auto, which already had 485 dealerships across the country, is adding 130 more to give a tough fight to Hero Honda’s strong rural network.

S Sridhar, president - motorcycle business of Bajaj Auto had earlier said, “Our competition is very well established in small villages with population of 5,000, which are connected to small towns. We have a lot of thrust in taking our dealerships to Tier-II towns.”

HS Goindi, president, marketing & sales, TVS Motor, said, “About 60% of the company’s business comes from rural and semi-urban buyers. The demand in this geography will continue to remain robust. But metros and small towns will also contribute significantly to the overall industry growth.”