The Evolution and Structure of the Two-wheeler Industry in India


Abstract
This paper studies the evolution of the competitive structure of the two-wheeler industry in
India. The evolution of the industry's competitive structure is traced using Kendall’s Index of
Rank Concordance and the Evans-Karras test of convergence. The industry seems to be
characterized by oligopoly with the onset of economic reforms not making much difference to
industrial structure. Convergence of sales and capacity at the level of the industry is
conditional while it is absolute at the level of the segment.
JEL Classification: D2, L1, L6
Keywords: index of concordance, convergence, evolution of industry
All correspondence to:
Prof. Raghbendra Jha,
Australia South Asia Research Centre
Division of Economics
Research School of Pacific and Asian Studies,
The Australian National University
CANBERRA ACT 0200
Australia
Telephone: 61 2 6125 4482
61 2 6125 2683
Facsimile: 61 2 6125 0443
Email: r.jha[at]anu.edu.au
∗
We are grateful to T.R. Madanmohan for helpful comments.
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I. Introduction
Contemporary research has examined market structure in order to explain consumer brand
preferences based on attributes of these brands. While Elrod (1988), Chintagunta (1994) and
Elrod and Keane (1995) use static market structure models, Erdem (1996) uses a dynamic
model. In another study, Bresnahan and Greenstein (1999) have examined the principal
structural features of the computer industry in the U.S. at the industry-wide and segmentlevels.
They explain the persistence of dominant computer firms, their decline in the 1990s
and the changes in the competitive entry in this industry. They discover that technological
competition in the industry has increased through a) the formation of young platforms serving
newly founded segments that challenged established platforms through the process of indirect
entry and b) divided technical leadership resulting from the vertical disintegration of
platforms. Other studies that have examined industrial structure include Baldwin and Gorecki
(1994), Adelman (1951), Golan et. al. (1996) and Amato (1995).
It is noteworthy that all such studies of evolution of industries have largely been
confined to the US and the Canadian experience. More specifically there does not exist any
work along these lines for the Indian industrial sector. The Indian industrial sector has
undergone profound regulatory changes in recent times as a consequence of the economic
reforms program put together in between 1988 and 1991. Consequent to these reforms some
of the industries that have been influenced the most have been the consumer durables industry
(such as two-wheelers, washing machines, televisions etc.), the automobile industry and
certain financial services. Typically an economy undergoing industrial reforms resorts to
regulatory changes and redefines the role of the public sector in order to create a climate of
growth and foster private competition. Therefore it is pertinent to examine the structure and
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evolution of industries (such as consumer durables) in economies where reforms have taken
place, for such industries show a propensity to evolve into oligopolies in the long run. It
would be important in this context, to analyze the impact that economic reforms have had on
industrial structure and to understand the implications thereof for the design of an appropriate
regulatory mechanism in response.
In an evolving industry especially in emerging economies like India, it is extremely
important to formulate optimal policies on competition in order to promote both competition
as well as growth. In the U.S., for example, these objectives form the basis for regulatory
mechanisms enshrined in the Sherman Act of 1890, the Clayton Act of 1914 (which targeted
price discrimination) and the Robinson-Patman Act of 1936. The Miller-Tydings Act of 1937
modified the Sherman Act with regard to firms’ policies on using distribution channels and
giving specific dealer rebates etc. One should note that for the Indian consumer durables
industry the last point is crucial, since most manufacturers operate through dealers and, the
dealer margins have been on the rise in order to provide protection for respective marketshares1.
This fact could actually constitute "unfair" trade practices on the part of the firms.
The Indian two-wheeler industry resembles a cartel in the manner in which non-price factors
are used to make the output of a given firm more valuable than that of a rival. The resulting
higher price is due to this added cost. If the consumers valued the additional services
generated by this competition above its cost, presumably these services would have been
produced in a competitive market as well.
Posner (1976) argues that if antitrust laws are not formulated appropriately, competing
sellers might be able to engage in “conscious parallelism” or tacit collusion and that the
1 The dealer margins have increased from around 5% to about 30% of the ex-factory price between 1988 and
1999. The number of exclusive dealerships has also increased.
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Sherman Act has proved ineffectual in dealing with the latter form of collusion. Bork (1978),
however, asserts that only explicit collusion was likely to exist given that collusion without
detailed communication and agreement (tacit) was not likely to be successful. In India, laws
like the Monopolies and Restrictive Trade Practices Act (MRTP) and Foreign Exchange
Regulation Act (FERA) were designed to control monopolistic tendencies in the markets. If
these tendencies create welfare losses, then, there is a case for framing appropriate antitrust
legislation.
The competitive policy so developed must be able to distinguish between real
competition and purely theoretical competition. Competitive policy is not a road to Utopia or
a complete basis for public policy (Areeda and Kaplow (1988)). Yet as Stigler (1966) points
out, an optimal policy on competition often prevents the defects of social organization from
being made worse by preventing deliberate adoption of restrictive practices by firms.
In this paper we assess the degree of imperfection in the two-wheeler industry in
particular. The reason is that this industry underwent a sea change during 1985-1991 due to
economic reforms introduced in this period. These reforms were aimed at encouraging
competition. During this period, the two-wheeler industry saw the largest proliferation of
brands in the consumer durables industry but whether this indeed led to enhanced competition
is an empirical question, not yet examined. This paper purports to address this question.
Market imperfections are typically examined by calculating the Herfindahl index and
the four-firm concentration ratios at the industry-wide and segment levels. Industrial
economists have been debating the usefulness of these indices in assessing market
concentration. While Posner (1976) argues that concentration ratios are but one of the
indicators of collusive tendencies and that it is necessary to include fringe firms in the
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analysis, Adelman (1951), Amato (1995), Golan, Judge, and Perloff (1996), and, Baldwin and
Gorecki (1994) have shown that the Herfindahl index forms a much sounder indicator of the
structure and performance of a given industry than four-firm concentration ratios.
The Herfindahl index is used, to a considerable extent, by the structuralist school,
which postulates that competition, is a state of affairs (Reid, (1987)). While four firm
concentration ratios and Herfindahl indices have their virtues as indicators of market
concentration at a point in time, it is also important to understand the evolution of market
power over time. Such an inquiry would also be in consonance with the Austrian school,
which believes that competition should be examined as a process. In this spirit Baldwin and
Gorecki (1994) track the mobility of firms (which captures shifts in market structure) by using
a variant of the instability index of Hymer and Pashigian (1962). We have used the Kendall’s
rank concordance test to put into perspective the mobility of the firms. This is a more robust
measure of tracking mobility of firms over time, since it also incorporates certain aspects of
Lorenz type measurements to indicate relative positions of firms over time. If this index is
used along with the concentration ratios, one can identify the contributors towards
concentration over time in a clearer manner. This test also enables us to examine whether the
dominance of any given firm persists over time and if this dominance is
increasing/decreasing. However, a study of dominance in terms of persistence of ranks needs
to be supplemented with one on dominance in terms of levels. If the ranks of firms in terms of
shares in sales do not alter much over time, one still needs to assess whether differences
between the sales shares of these firms are narrowing over time. The Evans and Karras (1996)
test of convergence is ideally suited for this purpose. This test enables us to examine whether
firms within the industry as a whole, tend to grow at similar rates in the long run and captures
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the dynamics associated with the long-term growth of volumes and market-shares at the
segment and industry-wide levels. This, then, sheds light on the inter-firm dependencies at
these two levels, which in turn has implications for the competitive strategies of firms. We
also conduct this test for production capacities of firms to test whether capacity expansion
was the result of competition within the industry.
This paper, therefore, attempts to analyze key aspects of the structural characteristics
of consumer durables industry in India. An analysis of the evolution of this industry has
implications for firms within the industry, as well as for regulators and policymakers. While
inter-firm linkages would be pertinent to firms in the context of competitive strategies, the
analysis of price movements in the industry and its segments relative to the general price
level, and the structure of competition within the industry and individual segments therein are
of importance to regulators. Capacity growth movements have implications for future
policymaking within the industry.
Based on the results of this paper we can make certain general conclusions about the
consumer durables industries. For example, we establish that a) consumer durables industries
will evolve as oligopolies at the industry-wide level and at the level of the segments, b) that
the convergence of growth rates of sales volume and market-share is likely to be conditional2
at the level of the industry and absolute3 at the segment level.
2 We can loosely define conditional convergence to imply that in the long run, its own past vector of means will
determine growth rate of a firm.
3 Absolute convergence implies that the growth rate of a firm is moving towards the vector of means of other
firms in the industry in the long-run.
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The rest of the paper is organized as follows. Section II describes the evolution of the
two-wheeler industry, while section III details the model and data used. Results are discussed
in section IV and section V concludes.
II. Evolution of the Indian two-wheeler industry
The two-wheeler industry (henceforth TWI) in India has been in existence since 1955. It
consists of three segments viz., scooters, motorcycles, and mopeds. The increase in sales
volume of this industry is proof of its high growth. In 1971, sales were around 0.1 million
units per annum. But by 1998, this figure had risen to 3 million units per annum. Similarly,
capacities of production have also increased from about 0.2 million units of annual capacity in
the seventies to more than 4 million units in the late nineties4.
The TWI in India began operations within the framework of the national industrial
policy as espoused by the Industrial Policy Resolution of 1956. (See Government of India
1980, 1985, 1992). This resolution divided the entire industrial sector into three groups, of
which one contained industries whose development was the exclusive responsibility of the
State, another included those industries in which both the State and the private sector could
participate and the last set of industries that could be developed exclusively under private
initiative within the guidelines and objectives laid out by the Five Year Plans (CMIE, 1990).
Private investment was channelised and regulated through the extensive use of licensing
giving the State comprehensive control over the direction and pattern of investment. Entry of
firms, capacity expansion, choice of product and capacity mix and technology, were all
effectively controlled by the State in a bid to prevent the concentration of economic power.
However due to lapses in the system, fresh policies were brought in at the end of the sixties.
4 All sales figures are from various issues of ACMA, capacity figures from various Five Year Plan documents.
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These consisted of MRTP of 1969 and FERA of 1973, which were aimed at regulating
monopoly and foreign investment respectively. Firms that came under the purview of these
Acts were allowed to invest only in a select set of industries.
This net of controls on the economy in the seventies caused several firms to a) operate
below the minimum scale of efficiency (henceforth MES), b) under-utilize capacity and, c)
use outdated technology. While operation below MES resulted from the fact that several
incentives were given to smaller firms, the capacity under-utilization was the result of i) the
capacity mix being determined independent of the market demand, ii) the policy of
distributing imports based on capacity, causing firms to expand beyond levels determined by
demand so as to be eligible for more imports. Use of outdated technology resulted from the
restrictions placed on import of technology through the provisions of FERA.
Recognition of the deleterious effects of these policies led to the initiation of reforms
in 1975 which took on a more pronounced shape and acquired wider scope under the New
Economic Policy (NEP) in 1985. As part of these reforms, several groups of industries were
delicensed and ‘broadbanding’5 was permitted in select industries. Controls over capacity
expansion were relaxed through the specification of the MES6 of production for several
industries. Foreign investment was allowed in select industries and norms under the MRTP
Act were relaxed.
These reforms led to a rise in the trend rate of growth of real GDP from 3.7% in the
seventies to 5.4% in the eighties. However the major set of reforms came in 1991 in response
5 Delicensed industries meant that firms no longer required licenses from the State to enter the industry or
expand their plants. Broadbanding meant that a firm could manufacture products related to the ones they were
currently making without the need for a separate license.
6 This meant that expansion of capacity till the MES did not now require a license.
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to a series of macroeconomic crises that hit the Indian economy in 1990-917. Several
industries were deregulated, the Indian rupee was devalued and made convertible on the
current account and tariffs replaced quantitative restrictions in the area of trade. The initiation
of reforms led to a drop in the growth of real GDP between 1990 – 1992, but this averaged at
about 5.5% per annum after 1992. The decline in GDP in the years after reforms was the
outcome of devaluation and the contractionary fiscal and monetary policies taken in 1991 to
address the foreign exchange crisis. Thus the Industrial Policy in India moved from a position
of regulation and tight control in the sixties and seventies, to a more liberalized one in the
eighties and nineties.
The two-wheeler industry in India has to a great extent been shaped by the evolution
of the industrial policy of the country. Regulatory policies like FERA and MRTP caused the
growth of some segments in the industry like motorcycles to stagnate. These were later able to
grow (both in terms of overall sales volumes and number of players) once foreign investments
were allowed in 1981. The reforms in the eighties like ‘broadbanding’ caused the entry of
several new firms and products which caused the existing technologically outdated products
to lose sales volume and/or exit the market. Finally, with liberalization in the nineties, the
industry witnessed a proliferation in brands.
A description of the evolution of the two wheeler industry in India is usefully split up
into four ten year periods. This division traces significant changes in economic policy making.
The first time-period, 1960-1969, was one during which the growth of the two-wheeler
industry was fostered through means like permitting foreign collaborations and phasing out of
7 The Indian economy was faced with several problems at this time. Foreign exchange reserves were down to
two month’s imports, there was a large budget deficit, double digit inflation, and with India’s credit rating
downgraded, private foreign lending was cut off. Also the Gulf war in 1990 brought about an increase in oil
prices, and India had to import oil for over US$ 2 billion (GATT Secretariat, 1993).
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non-manufacturing firms in the industry. The period 1970-1980 saw state controls, through
the use of the licensing system and certain regulatory acts over the economy, at their peak.
During 1981-1990 significant reforms were initiated in the country. The final time-period
covers the period 1991-1999 during which the reform process was deepened These reforms
encompassed several areas like finance, trade, tax, industrial policy etc. We now discuss in
somewhat greater detail the principal characteristics of each sub period.
a) 1960 – 1969
The automobile industry being classified as one of importance under the Industrial Policy
Resolution of 1948 was therefore controlled and regulated by the Government. In order to
encourage manufacturing, besides restricting import of complete vehicles, automobile
assembler firms were phased out by 1952 (Tariff Commission, 1968), and only manufacturing
firms allowed to continue. Production of automobiles was licensed, which meant that a firm
required a licensing approval in order to open a plant. It also meant that a firm’s capacity of
production was determined by the Government. During this period, collaborations with
foreign firms were encouraged. Table 1 illustrates the fact that most firms existing in this
period had some form of collaboration with foreign firms. Table 1 also gives the details of the
various firms that existed in the industry during this time period and the product/s they
manufactured.