Demand Estimation: A Regression Analysis for Honda CR-V

Group 3 Section B

ANKIT MAHESHWARI [14P069] DIKSHA MAHAJAN [14P077]

HEMANT AGARWAL [14P081] RAHUL VEMURI [14P096]

SHELDON DSOUZA [14P106] UPASNA RAUL [14P115]

EXECUTIVE SUMMARY

Honda CR-V is a compact SUV (now called crossover in North America),

manufactured since 1995 by Honda. It was loosely derived from

the Honda Civic. There are discrepancies as to what "CR-V" stands for.

Honda sales literature in UK reportedly made references to "Compact

Recreational Vehicle. It was introduced in India in 2006 at a base price of

Rs. 21, 92,000 and has been quite successful in the utility vehicle space,

competing with rival companies such Toyota Fortuner, HM Pajero and Ford

Endeavor among others.

In the project, we determine what influences the quantity demanded for

the product, using Demand Estimation and making a regression model.

For the demand analysis of the product, that is Honda CR-V, the software

Gretl was used. Gretl is an open source statistical package mainly for

econometrics. The demand analysis was done by analysing demand of the

product with respect to variations in parameters like price of good, price

of related goods, consumer income and market conditions.

Data for the product and the related products like Toyota Fortuner was

fetched from Crisil Research and was further put into excel sheets. These

excel sheets were accessed from Gretl Software and the demand analysis

was done providing the regression equation for the product. The

coefficients of the variables and the t-statistics obtained were analysed

and compared and a suitable conclusion was reached at.

2

1. INTRODUCTION

About the company

Honda Motor Co., Ltd.  is a Japanese public multinational

corporation primarily known as a manufacturer of automobiles,

motorcycles and power equipment.

Honda has been the world's largest motorcycle manufacturer since

1959, as well as the world's largest manufacturer of internal combustion

engines measured by volume, producing more than 14 million internal

combustion engines each year. Honda became the second-largest

Japanese automobile manufacturer in 2001. Honda was the eighth largest

automobile manufacturer in the world behind General Motors, Volkswagen

Group, Toyota, Hyundai Motor Group, Ford, Nissan, and PSA in 2011.

Honda was the first Japanese automobile manufacturer to release a

dedicated luxury brand, Acura, in 1986. Aside from their core automobile

and motorcycle businesses, Honda also manufactures garden equipment,

marine engines, personal watercraft and power generators, amongst

others. Since 1986, Honda has been involved with artificial

intelligence/robotics research and released their ASIMO robot in 2000.

They have also ventured into aerospace with the establishment of GE

Honda Aero Engines in 2004 and the Honda HA-420 HondaJet, which

began production in 2012. Honda has three joint-ventures in China (Honda

China, Dongfeng Honda, and Guangqi Honda).

In 2013, Honda invested about 5.7% (US$ 6.8 billion) of its revenues in

research and development. Also in 2013, Honda became the first Japanese

automaker to be a net exporter from the United States, exporting 108,705

Honda and Acura models while importing only 88,357.

3

About the product

Introduced in Japan in 1995, the CR-V was Honda's first in-house

designed SUV by Hiroyuki Kawase. The CR-V was introduced in Japan

at Honda Verno dealerships only and was regarded as a luxury vehicle in

Japan due to the exterior width dimensions exceeding Japanese

Government dimension regulations. For North American market, it was

displayed at the 1996 Chicago Auto Show and went on sale in February

1997. The bigger and heavier second generation CR-V (Chassis Code RD4-

RD7) was a full redesign, based on the seventh generation Civic, and

powered by the K24A1 engine. North American versions of the

new engine produced 160 hp (120 kW) and162 lb·ft (220 N·m) of torque.

The second generation CR-V was Car and Driver magazine's Best Small

SUV for 2002 and 2003. In 2005, the CR-V received a mid-cycle refresh.

The 2005 CR-V was now equipped with 16 inch wheels, the earlier models

had 15 inch wheels. Visual changes included new taillights and headlights

with clear indicators. The new headlights now have two separate H1 bulbs

for low beams and high beams, the previous setup used H3 single bulb for

both low and high beams. It was introduced in India at around 2006.

Unlike preceding models it features a rear liftgate rather than a side-

opening rear door and no longer has the spare tire mounted on the rear

door. The new CR-V is lower, wider, and shorter than the previous models;

the length decrease is attributed mostly to the fact that the spare wheel

no longer adds length to the back of the vehicle. For 2007, Honda CR-V

became one of the ten best selling vehicles of the year. It overtook Ford

Explorer, which had held the title for fifteen years (1991–2006), to be the

4

best selling SUV in the US.[ For the 2010 model year, the CR-V received

style, powertrain, and equipment changes. The exterior changes included

a redesigned front fascia with a new horizontal-slat chrome grille and

honeycomb-designed lower front grille, new front bumper, and revised

taillights. The rear bumper was redesigned, as well as new five split-spoke

17-inch alloy wheels for EX and EX-L models. The interior received minor

changes, including seat fabrics, as well as wider driver and front-

passenger armrests. In India, the 4th generation CR-V was launched in

February 2013 with 2 variants, a 2.0 litre petrol and a 2.4 litre, 185 bhp

petrol. The 2.0 litre variant will be equipped with a six-speed manual or a

five-speed automatic gearbox. The 2.4 litre variant will come with an

automatic gearbox, Honda's on demand 4 wheel drive system and an

Econ-mode to increase fuel efficiency

2. Factors impacted the quantity demanded of the product (Honda

CR-V)

a) Price of the good

This is the most important factor impacting the quantity demanded of

the good. This is best described as per the ‘Law of Demand’, which

states that with a fall in the price of a good, there is a rise in the

quantity demanded of the good, ceteris paribus(others things

remaining constant). Thus, as the price of the vehicle falls, there is an

increase in the quantity demanded of the vehicle.

b) Price of related goods

The prices of the goods which rival in consumption with one good or in

simple words i.e. the prices of close substitutes will have an impact on

the quantity demanded of a good. There is an inverse relationship

between the prices of substitutes and the quantity demanded of a

good. So when the price of a Toyota Fortuner falls, there will be a

decrease in the demand of the CR-V as it is cheaper for the consumers

to purchase the former.

5

c) Consumer Income

The disposable income of consumers helps them to convert currency in

terms of goods and services. So, when there is a rise in the disposable

income of consumers, they will buy more of a particular good,

depending on the type of good. Assuming that cars are normal goods,

a rise in the per capita income in India will lead to an increase in the

quantity demanded of CR-V

d) Market conditions

Market conditions have an important role to play in terms of demand of

a particular good. Favourable market conditions will naturally cause the

quantity demanded of the good to rise. So when a cut in the excise

duty for SUVs is announced in the Union Budget the quantity

demanded of CR-V will rise.

3. DATA DESCRIPTION AND SUMMARY STATISTICS:

This paper uses the secondary data from reliable databases at both the

industry level as well as at the level of the economy.

TABLE 1: Definition of variables

Variables Definition

Domestic sales Number of units sold in India at a monthly basis

from April 2009 to July 2014.

Price of CR-V Measured in terms of Rupees

Price of Toyota

Fortuner

Taken as the substitute good, measured in terms

of Rupees

Per Capita Income Taken in terms of Rupees. Measured at constant

prices in 2000 over a period of five years.

Excise Duty rates Measured in terms of percentage. Taken in the log

form.

6

TABLE 2: Regression Model

Model 1: OLS, using observations 1-64

Dependent variable: Domestic Sales

Coefficient Std. Error t-ratio p-value

const 618.838 237.575 2.6048 0.01161 **

Price of good in

lakhs

-

0.0002022

95

6.12788e-

05

-3.3012 0.00164 ***

Price of

substitutes in

lakhs

-4.48939e-

05

8.98919e-

05

-0.4994 0.61934

Per Capita

Income

-7.67163e-

05

0.0019373

5

-0.0396 0.96855

l_Excise Duty

Rates

31.1906 96.5319 0.3231 0.74775

Mean dependent

var

45.12500 S.D. dependent var 37.31994

Sum squared resid 64336.74 S.E. of regression 33.02201

R-squared 0.266776 Adjusted R-squared 0.217066

F(4, 59) 5.366635 P-value(F) 0.000938

Log-likelihood -312.0282 Akaike criterion 634.0563

Schwarz criterion 644.8507 Hannan-Quinn 638.3088

The Regression Equation would be as follows –

Q=618.38-0.0002P-0.00004Ps-0.00007I+31.19logE

Summary Statistics, using the observations 1 - 64

7

Variable Mean Median Minimum Maximum

Domestic

Sales

45.1250 36.5000 0.00000 148.000

Price of

good in

lakhs

2.14468e+

006

2.19200e+

006

1.99500e+

006

2.25155e+

006

Price of

substitutes

in lakhs

2.03154e+

006

2.00654e+

006

1.83800e+

006

2.21391e+

006

Per Capita

Income

62401.0 61564.0 46492.0 76943.0

Excise Duty

Rates

0.248488 0.220000 0.200000 0.333300

4. ECONOMETRIC MODEL AND RESULTS:

This section details the results of our efforts to formalise the previous

analysis of the determinants of quantity demanded of Honda CR-V. The

analysis involves ordinary least square regression (OLS). The basic

regression model for such a framework would be:

Yi = α + β’Xi + εi

Where Y is the dependent variable, X i is the vector of explanatory

variables, α is the constant, β’ is the vector of coefficients of the variables,

εi is the random error term normally distributed with mean 0 and variance

σ 2. This study is based on the following hypothesis that clearly defines the

research criterion:

8

a) Beta coefficient of price of CR-V is expected to be negative.

b) Beta coefficient of price of Fortuner is expected to be negative.

c) Beta coefficient of Consumer income is expected to be positive.

d) Beta coefficient of Excise Duty rate is expected to be negative.

FINDINGS:

Three important results can be drawn from the analysis results

a) The beta coefficient for price of CR-V states that the quantity

demanded of CR-V decreases by 0.0002 units with an increase in the price

of CR-V by Re. 1 keeping other things constant. Similarly the beta

9

coefficient for Fortuner suggests that the quantity demanded for CR-V

decreases by 0.00004 units with an increase in the price of CR-V by Re. 1.

Both the price of CR-V and Fortuner do not have as powerful an effect on

the quantity demanded of CR-V. While the nature of SUVs is such that the

demand is expected to be elastic, the model suggests that both the price

and the cross price elasticities in the span of five years is less than unity.

b) The beta coefficient for per capita income states that the quantity

demanded for CR-V decreases by 0.00007 units with an increase in the

price of CR-V by Re. 1. The per capita income has an inverse relationship

with the quantity demanded of CR-V, which is a surprising fact since we

assumed that a car is a normal good but the model seems to suggest that

CR-V is an inferior good.

c) The beta coefficient for excise duty rates states that there is a 31.16%

increase in the quantity demanded of CR-V when there is an increase in

the excise duty rates by 1% which is rather unusual. We took the log form

for excise duty in the model and the excise duty seems to influence the

quantity demanded of CR-V to a great extent. The model seems to

suggest that the market for CR-V is driven by market environment rather

than price factors.

10

5. CONCLUSION:

The project gave us a refreshing take on the quantity demanded of Honda

CR-V. We had taken the price of Honda CR-V, the price of Fortuner (its

competitor), the excise duty as the variables on which the models would

be based. The most important results that we found through the analysis

of this model was that the price of Honda CR-V and the price of Fortuner

has no impact on the quantity demanded of Honda CR-V. Also, on

evaluating the impact of income on the quantity demanded of the

product, we notice that there is an inverse relation between the same. It

seems that the product Honda CR-V is looked as an inferior product. This

could be on account of the fact that once the income increases, people

would move on to other cars that have a higher brand value. Lastly, on

analysing the relation between the market conditions, we found that they

influence each other to a great extent. According to the model, the

traditional variables do not seem to affect the quantity demanded. In the

end, we would like to conclude that through the model we found an

interesting relation between all the explanatory variables and we have

come across some interesting results.

11

6. REFERENCES :

a) Honda CR-V

http://automobiles.honda.com/cr-v/

b) Society of Indian Automobile Manufacturers (SIAM)

http://www.siamindia.com/

c) CRISIL Research Limited

 https://www.crisilresearch.com/

d) Honda World Report

http://world.honda.com/investors/library/annual_report/2013/honda20

13ar-all-e.pdf

e) http://pib.nic.in/newsite/erelease.aspx?relid=73929

f)http://timesofindia.indiatimes.com/business/india-business/Indias-per-capita-income-rises-to-Rs-5729-per-month/articleshow/18387279.cms

g)http://articles.economictimes.indiatimes.com/2014-02-07/news/47126380_1_2004-05-prices-lakh-crore-capita-income

12

7. Appendix

Data For Honda CRV Demand Analysis

Time Period

Domestic Sales

Price of good(in lakhs)

Price of substitutes(in lakhs)

Per Capita Income

Excise Duty Rates

Apr '09 0

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

May '09 0

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Jun '09 0

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Jul '09 30

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Aug '09 77

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%Sep 1 ₹ ₹ ₹ 20%

13

'092,192,00

0.001,838,000.0

046,492.

00

Oct '09 47

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Nov '09 1

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Dec '09 47

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Jan '10 76

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Feb '10 129

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Mar '10 66

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 46,492.

00 20%

Apr '10 71

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

May '10 35

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

Jun '10 48

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

Jul '10 43

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

Aug'10 22

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

Sep '10 92

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

Oct '10 29

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

Nov '10 35

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%

Dec '10 26

₹ 2,192,00

0.00

₹ 1,838,000.0

0

₹ 54,835.

00 22%Jan '11

38 ₹ 2,192,00

₹ 2,006,545.0

₹ 54,835.

22%

14

0.00 0 00

Feb '11 21

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 54,835.

00 22%

Mar '11 56

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 54,835.

00 22%

Apr '11 22

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

May '11 31

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Jun '11 14

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Jul '11 41

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Aug '11 26

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Sep '11 17

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Oct '11 14

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Nov '11 30

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Dec '11 16

₹ 2,192,00

0.00

₹ 2,006,545.0

0

₹ 61,564.

00 22%

Jan '12 7

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 61,564.

00 22%

Feb '12 100

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 61,564.

00 22%

Mar '12 1

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Apr '12 17

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

May '12 21

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

15

Jun '12 45

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Jul '12 53

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Aug '12 47

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Sep '12 3

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Oct '12 0

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Nov '12 0

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Dec '12 0

₹ 2,251,55

4.00

₹ 2,106,494.0

0

₹ 68,748.

00 27%

Jan '13 30

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 68,748.

00 27%

Feb '13 55

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 68,748.

00 27%

Mar '13 30

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 68,748.

00 27%

Apr '13 58

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

May '13 68

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Jun '13 100

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Jul '13 132

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Aug '13 148

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Sep '13 134

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%Oct 87 ₹ ₹ ₹ 30%

16

'131,995,00

0.002,213,906.0

074,920.

00

Nov '13 22

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Dec '13 9

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Jan '14 117

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Feb '14 65

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Mar '14 78

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 74,920.

00 30%

Apr '14 63

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 76,943.

0033.33

%

May '14 59

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 76,943.

0033.33

%

Jun '14 80

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 76,943.

0033.33

%

Jul '14 58

₹ 1,995,00

0.00

₹ 2,213,906.0

0

₹ 76,943.

0033.33

%

Source :

a) Society of Indian Automobile Manufacturers (SIAM)

http://www.siamindia.com/

b) CRISIL Research Limited

 https://www.crisilresearch.com/

c) http://pib.nic.in/newsite/erelease.aspx?relid=73929

17