Motorbike Sales Could Benefit From Consumption Tax Hike

BMI View : In our view, the exodus in Japanese motorbike production capacity out of the country is likely to continue as the cost of production remains high and domestic demand remains weak. However, motorbike sales could see some respite in the coming years due to the substitution effect from the hike in the nation's consumption tax.

According to the Japan Automobile Manufacturers Association (JAMA), motorbike production for the first 11 months of 2013 (latest data available) declined 7.8% year-on-year (y-o-y), to 505,160 units. This comes as no surprise to us as domestic motorbike manufacturing has been in decline for over a decade. We remain bearish on production and estimate output contracted 6.0% in 2013, to 560,000 units.

As the accompanying chart illustrates, barring the mild growth in motorbike production registered in 2005 and 2010, growth has been in negative territory since 2000. Although Japan has been a net exporter of motorbikes, the expanding footprint of domestic manufacturers into overseas markets has made it more crucial for these firms to produce closer to their target markets in order to keep costs low. As production costs remain high in the country, the need to provide affordable two-wheelers to emerging market consumers has been behind the exodus in domestic manufacturing over the past decade.

Exodus Of Manufacturing
Japan - Domestic Motorbike Production, CBUs (LHS); % Growth (RHS)

BMI View : In our view, the exodus in Japanese motorbike production capacity out of the country is likely to continue as the cost of production remains high and domestic demand remains weak. However, motorbike sales could see some respite in the coming years due to the substitution effect from the hike in the nation's consumption tax.

According to the Japan Automobile Manufacturers Association (JAMA), motorbike production for the first 11 months of 2013 (latest data available) declined 7.8% year-on-year (y-o-y), to 505,160 units. This comes as no surprise to us as domestic motorbike manufacturing has been in decline for over a decade. We remain bearish on production and estimate output contracted 6.0% in 2013, to 560,000 units.

As the accompanying chart illustrates, barring the mild growth in motorbike production registered in 2005 and 2010, growth has been in negative territory since 2000. Although Japan has been a net exporter of motorbikes, the expanding footprint of domestic manufacturers into overseas markets has made it more crucial for these firms to produce closer to their target markets in order to keep costs low. As production costs remain high in the country, the need to provide affordable two-wheelers to emerging market consumers has been behind the exodus in domestic manufacturing over the past decade.

Exodus Of Manufacturing
Japan - Domestic Motorbike Production, CBUs (LHS); % Growth (RHS)

Another factor responsible for the decline in motorbike production is weak domestic sales themselves. Motorbike sales have been on a downward spiral from 2000-2009. As the accompanying chart illustrates, the effect of the declining market on production is evident, with the precipitous collapse in output after the 2008 global financial crisis mirroring the similar decline in domestic sales in 2009. With no catalyst on the horizon to help sales make a strong comeback, the trend of shrinking domestic production is likely to continue. We forecast production to decline an average of 2.4% a year over the 2014-2018 period.

Turning A Corner?
Japan - Domestic Motorbike Sales, CBUs (LHS); % Growth (RHS)

That said, there is some good news for motorbike sales. The rate of decline in sales has narrowed, with 2011 and 2013 even posting positive growth of 6.7% and 4.4% respectively. In fact, 2011 was the year the Tohoku earthquake and tsunami struck and the motorbike segment actually experienced growth while the other vehicle segments contracted sharply.

Going forward, risks for motorbike sales remain evenly balanced. While compact cars are an alternative entry-level vehicle, a possible increase in taxes on mini vehicles, as well as the hike in Japan's consumption tax in April 2014, could see some consumers switching demand away from cars towards motorbikes.

However, the growing use of public transport by young people in cities, as well as the introduction of the ultra-mini vehicle segment for the elderly, poses downside risks to motorbike sales. We forecast an average annual sales growth rate of merely 1.1% over the 2014-2018 period, which will see motorbike sales hitting 435,000 units, in 2018.

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Related sectors of this article: Autos, Production - Autos, Companies - Autos, Motorcycles
Geography: Japan
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