After at least two decades as India’s dominant three-wheeler maker, Bajaj Auto Ltd, already struggling with sagging motorcycle volumes, is losing ground to smaller rivals.

Piaggio Vehicles India Pvt. Ltd, the local arm of Italy’s Piaggio and C SpA, has claimed the lead in the overall domestic autorickshaw market so far in fiscal 2008-09, while Bajaj’s share has contracted. Even Mahindra and Mahindra Ltd, a relatively smaller player in the segment, has increased its market share to double digits.

To analysts, Bajaj’s three-wheeler division is its cash cow, owing to the higher margins it earns. The company doesn’t give its segment-wise revenue break-up, but an average of estimates by three analysts shows its autorickshaw sales accounts for about 23% of total annual revenue.

In the 11 months from April 2008 to end-February, Piaggio sold 131,438 three-wheelers overall in India against Bajaj’s 121,628 and Mahindra’s 40,490, according to data from the Society of Indian Automobile Manufacturers, or Siam.

Piaggio’s share of the pie has increased to 41.52% from 40.71% in the corresponding year-ago period, and Mahindra’s to nearly 13% from 9%; Bajaj’s share has contracted from about 43% to 38%, the data shows.

The performance of Piaggio, which is likely to remain at the top in terms of volume sales in the three-wheeler segment this year, came in a shrinking market. Sales of three wheelers have slipped at least 5% to 316,599 units, mainly because of higher borrowing costs and the economic slowdown.

The year has been bruising for Bajaj Auto in its mainstay two-wheeler business, with market share contracting to 17.6% from 23.6% in the 11 months to end-February. Rival Hero Honda Motors Ltd’s market share in the segment has increased to 48.5% from 44%.

R.C. Maheshwari, chief executive of Bajaj Auto’s commercial vehicle business, attributed the company’s shrinking volumes to its concentration in the cities. “It’s a question of our own presence in the so-called rural segment. We have very limited presence there.”

The shrinking volumes, he added, also have to do with Bajaj’s focus on cleaner fuels such as compressed natural gas, or CNG, which are not easily available in smaller cities and rural areas.

He, however, expects Bajaj to recoup volumes and market share in the domestic market after it launches five new cargo and passenger autorickshaws, starting in the first quarter of fiscal 2010. Some of these were to be launched by end-March.

Mitul Shah, an analyst with First Global Securities Ltd, put Bajaj’s declining volumes down to the increasing acceptance of Piaggio, which has a stronger rural and semi-urban base, having launched several new products in the past two years.

“The declining volumes (for Bajaj) are largely due to the lack of innovative products from the company. It has been beaten by products like Mahindra Champion (company’s three-wheeler range),” said Mahantesh Sabarad, an analyst with Centrum Broking Ltd.

Piaggio and Mahindra have a stronger base in the hinterland, which has allowed them to rake in volumes. “These regions are relatively insulated during a cyclical downturn,” added Shah.

Ravi Chopra, managing director, Piaggio Vehicles India, said sales at Piaggio and other manufacturers have spiked since January owing to the government stimulus measures and the company expects to sell at least 13,500 vehicles in March.

Vaishali Jajoo, an analyst with Angel Broking Ltd, doesn’t see Bajaj’s new launches softening the pressure on its volumes. “With the segment expanding with newer players, Bajaj’s dominance in the three-wheeler segment will continue to be threatened. The new entrants, with lower bases, will continue to grow at a faster pace,” she said.

Bajaj still tops the passenger autorickshaw segment, which accounts for 76% of the three-wheeler market. Its market share in the passenger segment is about 46%, smaller than last year’s 55%, but well ahead of Piaggio’s 38% and Mahindra’s 10%.

Overall, sales of passenger three-wheelers has gone up by 13% to 242,149 units, while sales in the cargo segment have slipped nearly 39% to 74,450 units. Analysts attribute this decline to the shift in market preference from bigger three-wheelers to sub-1 tonne vehicles such as Tata Motors Ltd’s Ace.

Autorickshaw sales could revive in fiscal 2010 following the cut in excise duty for commercial vehicles to 10% from 12%, as part of the government’s third stimulus package to hold up a slowing economy and an overall easing of liquidity. Many three-wheeler and light commercial vehicle makers have already reduced prices.

But access to loans for vehicle purchases remains key in a market where three out of four three-wheelers are bought with financing. “Unlike a car, when people prefer financing over cash purchase even when they have the buying capability, for taxation purposes, an average three-wheeler buyer hails from a lower income group and cannot afford the vehicle without finance,” said Shah of First Global.

Added Bajaj’s Maheshwari: “With banks still wary of lending to buyers in this segment, a softer interest rate (regime) along with an excise duty cut is required to prop up the sales.”