58642744 BAJAJ vs HERO HONDA Comparative Analysis in Automobile Industry Thesis 86p

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Chaptet-1 INTRODUCTION Peter Drucker called the automobile industry as "the industry of industries". During the last few years, the production and management systems have been revolutionized in the automobile industry (Karmokolias, 1990). One of the major changes in the industry has been the opening up and growth of several emerging markets. In 1991, the Government of India embarked on an ambitious structural adjustment programme aimed at economic liberalization, based on the pillars of Delicensing, Decontrol, Deregulation and Devaluation. Post-liberalization, the Government of India's new automobile policy announced in June 1993 contained measures, such as delicensing, automatic approval for foreign holding of 51% in Indian companies, abolition of phased manufacturing programme, reduction of excise duty to 40% and import duties of CKD to 50% and of CBU to 110%, and commitment to indigenization schedules. The Indian automotive industry has been on a high growth path in the domestic market, given strong demand-push factors coupled with an encouraging policy environment. Changing lifestyles, increasing disposable income, deterioration of public transport and accelerated urbanisation is leading to a growth in demand for passenger vehicles and 2-wheelers. Improving rural income on account of the rise in the agri-commodity prices and near normal monsoons together can boost the demand for tractors. Domestic demands for cars are expected to grow at a double-digit rate for the next three to four years. The brilliant performance of the automotive sector is attributed to better performance of the economy and high all round growth leading to robust GDP growth, improved infrastructure development, excise duty reduction on passenger vehicles, improved financing of second hand vehicles, availability of

finance in rural and semi-urban areas and the emergence of India as a manufacturing hub for the automotive industry. Investment upto Rs 30,000 crore has been planned for the Sector, by leading Indian and global players, by 2010.

The Indian automotive industry consists of five segments: commercial vehicles; multi-utility vehicles & passenger cars; two-wheelers; three-wheelers; and tractors. With 5,822,963 units sold in the domestic market and 453,591 units exported during the first nine months of FY2005 (9MFY2005), the industry (excluding tractors) marked a growth of 17% over the corresponding previous. The two-wheeler sales have witnessed a spectacular growth trend since the mid nineties.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 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. The technological backwardness of the Indian two-wheeler industry was one of the reasons for the initiation of reforms in 1981. Foreign collaborations were allowed for all two-wheelers up to an engine capacity of 100 cc. This prompted a spate of new entries into the industry the majority of which entered the motorcycle segment, bringing with them new technology that resulted in more efficient production processes and products. The variety in products available also improved after ‘broadbanding’ was allowed in the industry in 1985 as a part of NEP. This, coupled with the announcement of the MES of production for the two wheeler industry, gave firms the flexibility to choose an optimal product and capacity mix which could better incorporate market demand into their production strategy and thereby improve their capacity utilization and efficiency. These reforms had two major effects on the industry: First, licensed capacities went up to 1.1 million units per annum overshooting the 0.675 million units per annum target set in the Sixth Plan. Second,

several existing but weaker players died out giving way to new entrants and superior products.

In a consumer durables industry in which there is a proliferation of brands, we expect the long run competitive structure at the level of the industry to be oligopolistic. This is due to the fact that in order to survive firms must introduce new brands which might improve capacity utilization even as this induces brand competition. This, in turn, will cause only a few large firms in the industry to survive indicating that in the long-run, a brand proliferated consumer durable industry will tend towards oligopoly. We expect a general downward stickiness in prices and resultant increase of volatility in non-price variables such as sales volumes, market-shares etc. Convergence is likely to be absolute at the level of the segment and conditional at the level of the industry. Competitive strategies (which include product development and other strategies aimed at innovation and technological change) are more inter-dependent at the level of the market-segment than at the level of the industry. This is due to the fact that within each segment the products are, to a large extent, similar. Hence we can expect convergence to be absolute at the level of the segment and conditional at the level of

the industry.Two-wheeler sales continue to be buoyant with a 19% growth joy, driven by its motorcycle segment that has posted a rise of 24%. Bajaj Auto’s market share in the domestic motorcycle market has improved from 23% in FY03 to 30% in FY06. Hero Honda, the largest motorcycle manufacturer in India, with a domestic market share of 50% in FY06, was down from 52% in FY05, while the market share of TVS Motors is 18%. The Indian two-wheeler industry is entering a strong secular growth phase, driven by increasing affordability, easy availability of finance, and accelerating exports. The next phase of earnings growth will be driven by unit volume growth, while the four-wheeler passenger car industry is driven by low penetration, increasing consumer aspiration levels, increasing affordability, and proliferation of new models. Some of the features that deserve attention in respect of the Indian two wheeler segment are as mentioned: ⇒ The total sale of two wheelers in India has touched a figure of 7.86 million units by March, 2007, up 11.42% from the previous fiscal figures of 7.05 million. Production during the period reached 8.63 million units. ⇒ The production of two wheelers in India is expected to reach a staggering 17.85 million units by 2011-12, more than double of the current production level. ⇒ The two-wheeler production capacity is to reach 22.31 million units in 2011-12 compared with 10.78 million in 2006-07. ⇒ India is likely to export 1.39 million two-wheelers in 2011-12 compared with 590,000 in 2006-07. ⇒ Total investment for new capacity generation in two-wheeler segment is likely to be more than $2.2 billion (INR10, 000 crore).

⇒ Hero Honda, Bajaj Auto and TVS Motor remain the leading players in terms of sales and popularity of their two wheelers.

After facing its worst recession during the early 1990s, the industry bounced back with a 25% increase in volume sales in FY1995. However, the momentum could not be sustained and sales growth dipped to 20% in FY1996 and further down to 12% in FY1997. The economic slowdown in FY1998 took a heavy toll of two-wheeler sales, with the year-on-year sales (volume) growth rate declining to 3% that year. However, sales picked up thereafter mainly on the strength of an increase in the disposable income of middle-income salaried people (following the implementation of the Fifth Pay Commission's recommendations), higher access to relatively inexpensive financing, and increasing availability of fuel efficient two-wheeler models.

Nevertheless, this phenomenon proved short-lived and the two-wheeler sales declined marginally in FY2001. This was followed by a revival in sales growth for the industry in FY2002. Although, the overall two-wheeler sales increased in FY2002, the scooter and moped segments faced de-growth. FY2003 also witnessed a healthy growth in overall two-wheeler sales led by higher growth in motorcycles even as the sales of scooters and mopeds continued to decline. Healthy growth in two-wheeler sales during FY2004 was led by growth in motorcycles even as the scooters segment posted healthy growth while the mopeds continued to decline. Figure 1 presents the variations across various product sub-segments of the two-wheeler industry between FY1995 and FY2004.

DEMAND DRIVERS The demand for two-wheelers has been influenced by a number of factors over the past five years. The key demand drivers for the growth of the two-wheeler industry are as follows: ⇒ Inadequate public transportation system, especially in the semi-urban and rural ⇒ ▪⇒ ▪⇒ ▪⇒ ▪⇒

areas; Increased availability of cheap consumer financing in the past 3-4 years; Increasing availability of fuel-efficient and low-maintenance models; Increasing urbanisation, which creates a need for personal transportation; Changes in the demographic profile; Difference between two-wheeler and passenger car prices, which makes two-

wheelers the entrylevel vehicle; ▪⇒ Steady increase in per capita income over the past five years; and ▪⇒ Increasing number of models with different features to satisfy diverse consumer needs. While the demand drivers listed here operate at the broad level, segmental demand is influenced by segment-specific factors.

DEMAND Segmental Classification and Characteristics The three main product segments in the two-wheeler category are scooters, motorcycles and mopeds. However, in response to evolving demographics and various other factors, other sub segments emerged, viz. scooterettes, gearless scooters, and 4-stroke scooters. While the first two emerged as a response to demographic changes, the introduction of 4-stroke scooters has followed the imposition of stringent pollution control norms in the early 2000. Besides, these prominent sub-segments, product groups within these sub-segments have gained importance in the recent years. Examples include 125cc motorcycles, 100-125 cc gearless scooters, etc. ‘Riding on Top Gear’ is what our two-wheeler update said for the first half of FY05, wherein the industry volumes had grown over 12% on back of good monsoons. If that was anything to be happy about, the second half of FY05 has given the industry reasons to celebrate, with strong volume rise of nearly 16% (Apr-Feb) in motorcycles, largely aided by faster growth in the entry level 100 cc segment. Though competition has been on the rise in the past year, with new models and variants being launched every alternate day, the overall market has been growing fast enough to accommodate all of these models. The most striking feature of the year gone by was the growing volumes in favour of the entry-level segment. Industry leaders Hero Honda and Bajaj Auto have once again kept the other players at bay, and increased their market share during the year. In fact, Bajaj Auto has been outperforming the industry by a good margin for the last few months, courtesy its new launches CT100 and the Discover. TVS Motor on the other hand has been reeling under pressure since the time its Max 100 sales started dipping at the end of FY04 while the new models are yet to taste

success in the market. Apart from the big three, the talk of the town in the past year was the entry of Honda Motors into the Indian motorcycle segment through its ‘Unicorn’. Launched in the premium 150 cc category, the bike received spectacular response initially with a waiting period of almost 6 weeks.

The 2-wheeler segment displayed a buoyant performance, largely attributed to Bajaj Auto’s newly launched Platina in the entry-level segment, which has posted 1-lakh unit sales within three months of its launch and the Discover model in the 125-cc segment. The Company’s focus towards the executive and premium motorcycle category has led to the expansion of the two-wheeler segment and has pushed it up the value chain, availing better profitability. From FY06 till date, the Company has notched up a 200-bps gain in the market share in these two segments, from 31% to 33%, respectively, eating into the market share of Hero Honda. The Company is also likely to start manufacturing a four-wheeler low-cost goods carrier by end 2008 or beginning 2009. Despite the strong volume growth witnessed by the industry, profits

have grown at a slower rate or even de-grown in some cases due to the cost pressures and higher sales of economy bikes. Due to growing competition, manufacturers resisted passing on price hikes and instead took a hit on their profits. However, recently the companies have raised prices on most of their models by around 1-3%. The margins for Q1FY07 for Hero Honda have been the lowest for the Company in recent past, indicating that the margins will continue to be under pressure due to hardened metal prices. But with hike in prices of different models, margins may show an improvement in the current quarter as compared to last quarter’s. The Company plans to launch seven new models in FY07, and with the launches scheduled for Q3 & Q4, volumes are expected to grow significantly during this period. This may translate into a richer product mix, in favour of the executive & premium segments, helping realisations to improve. However, Hero Honda appears to be on a defensive mode, with Bajaj Auto scoring aggressively. The first-quarter results for the automobile sector assume great significance, given the volatility that the economy has witnessed in the past few months. However, despite the uncertainty, the mood was upbeat among vehicle makers and most of them posted a positive growth. With most companies, particularly in the consumer-led 2-wheelers and passenger car space, announcing price hikes, margins are expected to remain protected despite cost pressures. While the Q2FY07 earnings growth should remain moderate due to the monsoons, higher earnings are expected, Q3FY07 onwards. We advise investors to Hold M&M, Tata Motors and Maruti, and give a BUY recommendation for Bajaj Auto.

Globalisation is pushing auto majors to consolidate, to upgrade technology, enlarge product range, access new markets and cut costs. Major areas of concern will remain the high and rising prices of crude oil, rubber, steel and other metals, which put pressure on the input costs. Increase in the interest rates and exchange rate fluctuations may further add to the uncertainty. Though the demand outlook remains strong, the key issue is how to increase supplies and capital expenditure, required to ramp up the capacities, as most of the automobile companies are investing in augmenting them. Auto Companies would have to play with their product mix and increase their volumes in order to survive the current scenario.

MARKET HIGHLIGHTS

1. High Growth market At just over 7.3 million vehicles sold in 2004-2005, the Indian automobile market is one of the fastest growing in the world. Total unit sales grew 15.8% in 2004-05 over the previous year. 2. 75- 125 cc motorbikes see most action 84% of the 4.9 million motorbikes sold in India in 2004-05 were in the 75-125 cc range. This segment has the largest number of brands and variants in style and price. Significantly, this segment has lost 3% share since 2003-04 to 125-250 cc bikes. 3. Scooters grow 4%; 75-125 cc most popular Scooters, geared and ungeared, are enjoying a revival of sorts, growing 4% since 2003-04 to under a million units. 63% of all scooters sold are in the 75-125 cc segment, where all the major players have brands. Also, most of these are of automatic gears as well.

4. Revival of the mopeds Mopeds of engine capacity less than 75cc grew 4% in 2004-05 to 3.2 lakh units after two years of falling sales. 5. Rise of the 4-stroke 4-stroke engines are now the preferred engines even though power developed is lower than in a 2-stroke because they are more environmentally friendly, and can match the stringent emission norms that are now in place even in India.

6. Easy Financing Cheap loans and fast processing has made owning a two wheeler extremely easy, thereby spurring sales as well.

Scooters dominated the Indian two-wheeler industry till the early 1990s, when motorcycles from Hero Honda began to appear. Within half a decade, the market shifted decisively to motorcycles, which delivered better, styling, and power and fuel efficiency. Today motorcycles account for three quarters of all two-wheeler sales, a total of 49.6 lakh sold in 2004-05 against 9.2 lakh of scooters. The advent of Honda spurred the scooter market again, with a range of ungeared and geared scooters emerging with great style and a market positioning targeting the youth- a step between the moped (positioned for students) and the motorcycle (upwardly mobile young men). This strategy paid dividends to every company that adopted it; today Honda Scooters and Motorcycles (HMSI) holds a dominant share of the scooters market. With the rapid rise of the scooter, the moped (motorized pedal cycle) as it was known then died a sudden death in the early 1990s. However, from 2003-04 onwards, moped sales have again begun to creep up: chiefly because the new ranges now are a far cry in style and power from those in the late 1980s and early 1990s. 3.2

lakh mopeds were sold in 2004-05, a rise of 4% over the previous year but still quite way off from the 3.84 lakh sold in 2001-02. Significantly, exports have risen from around 16,000 units in 2001-02 to over 28,000 in 2004-05.

Market The size of the Indian two-wheeler market is 62.1 lakh units in 2004-05, increasing by 16% over 2003-04.

Motorcycles The motorcycles segment of two wheelers has seen the greatest number of new launches as well as the most fierce competition on every plank – pricing, style, power, fuel efficiency, pedigree and so on. The 75-125 cc segment, also called the

economy segment, remains the driver for the industry, accounting for 84% of all sales in 2004-05 (see table ‘ Mobikes Map’). Price points in the 75-125 cc range from a low of Rs 38,000 to as high as Rs 65-70,000. A marginal shift towards the next higher category of power, 125-250 cc is becoming visible in 2004-05, driven by lifestyle statements, need for speed and style, greater disposable incomes and quite simply more variety on offer in the segment. Hero Honda’s Karizma, for example, was one of the first to be launched in this segment at over Rs 80,000 a piece, and much to the company’s surprise, sold over 2,000 units every month in the first year of its launch. More surprisingly, its demand was coming not just from the metros, but the semi-urban areas in North India as well. Clearly, there was a demand for such products. Today Bajaj Auto has its hugely successful Pulsar positioned directly against the Karizma, while all other players are at differing levels of power and price as well. In fact, 15% of all motorbikes sold in 2004-05 were in the 125-250 cc range, up from 10% in 2003-04.

Every second motorbike in India is from Hero Honda, which holds 51.5% market share in 2004-05. It has gained and retained that share since 2003-04 (see table ‘ Motorcycle market shares’). Bajaj Auto , rejuvenated into a motorbike company now rather than a scooter one, has also been steadily gaining share, from

24.5% in 2001-02 to 27% in 2004-05. Every other player has his work cut out to regain any share.

Scooters Most scooter manufacturers were caught off guard by the Indian market’s rapid shift to motorcycles. Long seen as family workhorses, scooters lost share steadily to motorbikes all through out the 1990s. It was only when an entirely new segment – youth- was tapped with style, power and price that things started looking up again for scooters. Being positioned as easy to drive with all the power of a traditional 125 cc Bajaj Chetak (the standard bearer for scooters), the new scooter easily straddled the gap between the moped and the motorbike- providing another competition to the geared scooter. Today, 3.2 lakh scooters – of all kinds – are sold in India, 4% higher than in 2003-04 (see table ‘ Scooters Map’), but still some way off from the 3.8 lakh sold in 2001-02. Scooters account for 15% of all two-wheeler sales in 2004-05 against 17% in 2003-04. Again, it’s the 75-125 cc segment that is hot on sales in scooters even though the segment started off with the less than 75 cc range, but moved quickly to the middle range.

Not even a decade ago, Bajaj Auto and TVS dominated the scooters scene; today its Honda Scooters and Motorcycles (HMSI) that holds the dominant share. While Bajaj has reinvented itself into the higher value larger motorcycle segment, practically giving up on the scooters front, TVS Motor has managed to do well; launching a series of brands- which shows up in the rise in market share from 16% in 2001-02 to just below 24% in 20040-05 (see table ‘Scooters market share’)

Mopeds The smallest segment in two wheelers is the mopeds one, at 5% of total two wheeler sales in 2004-05, with 3.2 lakh units sold (see table ‘ Moped Map’)

Only three companies, much the same as before, remain active in the mopeds business. This segment has seen a revival of sorts, with better styling and power. TVS Motors absolutely dominates mopeds, with over 80% share in 2004-05, a significant jump over the 66% it held in 2001-02 (See table ‘ Mopeds market share’)

Exports Motorcycles, scooters and even mopeds have been doing well on the export front- mainly to neighbouring countries in Asia like Sri Lanka, Thailand, and Indonesia. Many of the Indian players have also set up plants in those countries. Bajaj Auto leads in exports with a 49.6% growth in units over 2003-04 (see table ‘ Motorcycle exports’). In scooters, it’s Honda Scooters all the way (see table ‘ scooters exports’). Scooter exports overall grew 13% in 2004-05 over the previous year.

In mopeds, Majestic Auto leads the charge with a 14% rise in exports, a slow down from the 26% it posted in 2003-04. TVS Motors is fast catching up, though- a

89% rise in exports in 2004-05 is the highest growth rate in exports in 2004-05 (See table ‘ Mopeds exports’)

Present scenario for motorcycle segment in the industry

Having a glance at the industry, there is an increasing demand for the latest and fuel efficient four stroke motorcycles at the cost of a cannibalization of the traditional scooter segment. We believe the growth in motorcycle segment has remained consistently good due to •

Rise in rural demand as the per capita income of rural people have increased

•

More suitability on rural road conditions, comfortable long distance riding and ease of maintenance

•

The stricter emission norms increase the cost of manufacturing of two stroke vehicles which in turn brings a shift from two stroke vehicle to four stoke motorcycles

•

Option of various Finance schemes available and above all

•

Consumer preferences for the latest, stylish and fuel-efficient motorcycles.

INDUSTRY CHALLENGES AND OPPORTUNITIES The Indian two-wheeler industry saw an increase of 15 percent during the year. Two-wheeler sales crossed 7.5 million units mark, which accounted for more

than 80 percent of domestic auto sales. Motorcycles shared around 82 percent of the entire two-wheeler sales. However, industry margins came under some pressure during the year in review because of an increase in input prices of steel, aluminum and rubber. Operating margins were also affected on account of erratic power supplies and high costs of back up power. Nevertheless, the upside potential for the future is still extremely high because of the sheer potential for volume growth. According to NCAER, there are about 225 million people - about 22 per cent of the population-who live in households that have an annual income range of Rs. 90,000200,000. Large towns (population of over 500,000) have about 30 per cent of this population, while rural India has about half of this income group. These groups are the real growth engines for the great Indian dream, because at these levels, a number of aspirational and discretionary purchases (which includes two-wheelers) are within reach. Against this backdrop, your Company should be able to comfortably sustain double-digit growth in the medium to long term, despite increasing competition.

Inputs and Technology Technology Hitherto, technology transfer to the Indian two-wheeler industry took place mainly through: licensing and technical collaboration (as in the case of Bajaj Auto and LML); and joint ventures (HHML). A third form - that is, the 100% owned subsidiary route - found favour in the early 2000s. A case in point is HMSI, a 100% subsidiary of Honda, Japan. Besides the below mentioned technology alliances, Suzuki Motor Corporation has also followed the strategy of joint ventures (SMC reportedly acquired equity stake in Integra Overseas Limited for manufacturing and marketing Suzuki motorcycles in India).

Technological tie-ups of Select Players Nature of Alliance Bajaj Auto

Company

Product

Technological tie-up

Kawasaki Heavy Industries Ltd, Japan

Motorcycles

Technological tie-up

Tokya R&D Co Ltd, Japan

Two-wheelers

Technological tie-up

Kubota Corp, Japan

Diesel Engines

HHML

Joint Venture

Honda Motor Co, Japan

Motorcycles

KEL

Technological tie-up

Hyosung Motors & Machinery Inc

Motorcycles

KEL

Tie up for manufacturing

Italjet, Italy

Scooters

and distribution LML

Technological tie-up

Daelim Motor Co Ltd

Motorcycles

Hero Motors

Technological tie-up

Aprilia of Italy

Scooters

Compiled by INGRES

With the two-wheeler market, especially the motorcycle market, becoming extremely competitive and the life cycle of products getting shorter, the ability to offer new models to meet fast changing customer preferences has become imperative. In this context, the ability to deliver newer products calls for sound technological backing and this has become one of the critical differentiating factor among companies in the domestic market. Thus, the players have increased their focus on research and development with some having indigenously developed new models as well as improved technologies to cater to the domestic market. Further, with exports being one of the thrust areas for some Indian two-wheeler companies, the Indian original equipment manufacturers (OEMs) have realised the need to upgrade their technical capabilities. These relate to three main areas: fuel economy, environmental compliance, and performance. In India, because of the cost-sensitive nature of the market, fuel efficiency had been an interest area for manufacturers. It is not only that the OEMs are increasing their focus on in-house R&D, they also provide support to the vendors to upgrade the technology and also assist them striking technological alliances. 2-stroke v/s 4-stroke

The single most important change in the 2-wheeler market is that of the movement from the 2- stroke to the 4-stroke engines driven by environmental and fuel efficiency concerns. The 4-stroke engine, by virtue of burning fuel more completely than the 2-stroke, emits lesser pollutants as well, as vital factor as

emission norms move from tail-pipe norms to engine norms and the margins themselves become tighter. Because a 2-stroke engine gets a power stroke twice as often as a four-stroke engine, it puts out about twice as much power (and makes twice as much noise) as a four-stroke engine of the same size. Hence in times when emission and fuel wasn’t as much a concern, powerful bikes used the 2-stroke engine. Secondly, a 2-stoke engine is exposed to much more wear and tear in pressure and combustion than a 4-stroke, with the result the 2-stroke engines need a good deal more high quality lubricating oil than the 4-stroke. The net result is that 2-stroke engines can be quite expensive to run. In the consumer market, the cruiser and economy segments sell much more than the motor or premium range where the power/ weight ratio is key. The 4-stroke engine adapts well to longer and continuously running times, combusting fully and with less pollutants. Newer developments in fuel injection and timing in4-stroke engines have improved power / weight ratio as well, so that many of the disadvantages of the lower power in 4-stroke are gone now- much the same way as MPFI and common rail injection in diesel have improved efficiencies for cars. Emission standards India is adopting increasingly stringent emission standards, which have a direct implication on engine design and quality. 2-stroke engines are already passé, while the four strokes are being continuously upgraded to reduce both tailpipe emissions and engine emissions. Today India is adopting the Bharat II and III norms for emissions, which are as stringent as those in the European markets. Companies Hero Honda

Hero Honda is India’s largest motorcycle company with 2004-05 sales of 26.2 lakh units, giving it a market share of 51.5% in motorcycles. Founded in 1984 in a joint venture with Honda Motors, Japan, Hero Honda is one of the most profitable and smoothly operating JVs for Honda Motors anywhere in the world, giving it a foothold in one of the world’s largest and fastest growing two wheeler markets. In 1985-86, Hero Honda sold just 43, 000 units, launching its business with the CD-100; Five years later, in 2000-01, it sold over 10 lakh, and in another five years, doubled that to over 25 lakh units. In 1987, it started the engines plant as well, and produced with 100,000th bike that year. 1989 saw the launch of the Sleek, now discontinued. It was in 1994 that Hero Honda introduced the Splendor, which would go on to become the world’s single largest selling motorbike brand. In 1995, Hero Honda was producing 800 bikes a day, 4 times the number of bikes it could produce a day when it started up. By 1997, the company was producing 1200 bikes a day. In 2001, Joy and Passion were launched, and the Ambition was launched in 2002. Since then, the company launched Karizma, at Rs 80000 one of the most expensive heavycc bikes (250cc) in India, but which once again belied the general belief of India as a low-price market. The company was also surprised when demand for this expensive bike came from rural and semi urban areas and it sold 2000 bikes a month for a few months. This bike opened up a whole upper cc segment in bikes. Today Bajaj Pulsar is its biggest competitor in the 250cc range. It was the first to herald the shift from scooters to motorcycles with style, power and competitive pricing. For much of the early 1990s, established players like TVS Motors and Bajaj Auto suffered reverses as the market shifted to motorcycles. Today, the scenario is different as both these

competitors have brands that challenge Hero Honda, but market leadership still remains with Hero Honda. It was also the first to create critical mass in the 75-125cc ranges, where most brands compete. Hero Honda set a first with its dividend policy as well, announcing a 1000% dividend in 2003-04. With the motorcycle business doing well, Honda Motors announced its own entry into India but not in the segments where Hero Honda operated; also the technical JV was extended for another decade. Hero Honda sales for March 2005 were Rs 7,421 crore, against Rs 5,832 crore in March ’04. Net profits stood at Rs 810 crore against Rs 728 crore in March ’04.

Bajaj Auto Founded in 1945 and reborn fifty years later. Bajaj auto is a revival story. Long known for its scooters like the Chetak, which gave it over 90% of its sales for most of the past few decades, today Bajaj Auto is more known for its motorcycles, after reinventing itself in the late 1990s. Today its brands give the leader Hero Honda a run for its money in every segment of the motorcycle business; while its scooters have seen a revamp in style and power and are beginning to fight back against the brands like TVS and Honda Scooters. Its come a long way since importing 2 and 3 wheelers in 1948. In 1959, it got its license to manufacture in India, and in 1971 it introduced the 3-wheeler and one year later the Bajaj Chetak. 1976 saw the launch of the Bajaj Super scooter and in 1977, the year the company sold 1-lakh units in the

year, it launched the rear engine rickshaw. In 1981 came the M-50 scooter, which sells to this day specially in Pune and surrounding areas. In 1985, after 16 months of its foundation, Bajaj Auto’s new plant at Waluj, Aurangabad started up. This plant would produce the Kawasaki KB100 motorbike and M-80 scooters. By 1990, the decline in the scooter market was visible, with the rapid increase in motorbike sales. Bajaj was active in the motorbike market, but not as a core line of business. As late as 1990, it launched the Bajaj Sunny, gearless scooter and until 1995, continued to upgrade and sell the scooters. From 1997 onwards, the pace of new products ramped up- Spirit came in 1998, Legend, India’s first four stroke engine scooter in the same year; and the Kawasaki Bajaj Caliber, its first serious attempt at motorbikes also in 1998. The Caliber touched 1-lakh unit sales in less than 12months, accelerating the shift towards the motorbike business in Bajaj Auto. In 2001, the Eliminator (now discontinued) and the Pulsar- its first serious blockbuster- were launched. But in 2003, the pace was frenetic. That year the Caliber 115 came in; so did the Wind 125, and the Pulsar DTS-I. Bajaj Auto sold 1-lakh bikes in just one month that year. 2004 was a brand change for Bajaj Auto, reflecting a new identity. In May 2004, The Bajaj CT 100 bike was launched, in August the 4-stroke Chetak with Wonder Gear and in September ’04, the Discover DTS-I. In June 2005, came the latest launch, the Avenger. All the excitement, and the obvious improvement in quality of Bajaj products, saw sales rise to match competition. From a market share of 24.5% in 2001-02 to 27% in 2004-05, Bajaj has gained at the expense of competitors like TVS Motors, although Hero Honda also continues to grow its share. However, at 13.4 lakh motorbikes sold in 2004-05, Bajaj Auto is now a serious player in the motorbike business.

In scooters, its work is still cut out. From a market share of 50.2% in 2001-02, today it holds less than 14%; in the interval, Honda Scooters and Motorcycles (HMSI) saw its share rise from 6.5% to 48.8%. TVS Motor took share from 16.3% to 23.7%. Clearly, while it has its act right in motorbikes, a lot of work still needs to be done to regain its pole position in the scooters market, which it once defined and dominated. Bajaj Auto net sales for 2004-05 were Rs 5927 crore, against Rs 4916 crore in 2003-04. Net profits were Rs 766 crore versus Rs 731 crore in 2003-04. It has also been retiring surplus manpower: today 11,531 employees run it, against 17,213 in 1999-00. A bulk of these are in the older plants, while the newest plant at Chakan, near Pune, runs with less than 500 people with a productivity much higher than in any other plant. One of the gains is that its gone from a net positive working capital of Rs 632 crore in 1999-’00 to a negative of 273 crore in 2003-04. Bajaj auto declared a 250% dividend for 2004-05.

TVS Motor The third largest motorbike company in India, TVS Motor, rolled out the TVS 50, India’s first moped (motorized pedal cycle) in 1980. It was also the first to introduce a 100cc motorbike in India in September 1984.Another first was in 1994, when it launched TVS Scooty, India’s first scooterrette (sub 100 cc variomatic gears

scooter). December 1996 saw the launch of India’s first motorbike with catalytic converters for emission control, the 110 cc TVS Shogun. The 5-speed motorbike Shaolin came in late 1997, and 4-stroke Fiero 150cc came in 2000.In August 2001 came its real blockbuster, the TVS Victor, a 4-stroke 110cc motorbike, which the company claimed to be India’s first indigenously developed bike. Building on the drive towards more fuel and emission efficient bikes, TVS launched its Centra, 4stroke 100 cc bike in January 2004. The 100 cc TVS Star came in September 2004. The series of launches were needed as TVS struggled to maintain its lead in the motorbike market. In the mid 1990s, Hero Honda opened up the market in all segments, from 75-125-250 cc categories. From selling 7.1 lakh units a year in 200203, to 6.82 in 2003-04 to 6.4 lakh in 2004- 05, TVS Motor has found the going hard against Hero Honda and a rejuvenated Bajaj Auto. Its market share rose briefly to 19.2% in 2002-03 before slipping to 12.9% in 2004-05. It has primarily lost share to Bajaj Auto over these years. One of its concerns is that it loss has been heaviest in the key 75-125 cc segment, where its market share has dipped from 21% in 2002-03 to 17% in 2003-04 and to 12.8% in 2004-05. At the same time, it has gained market share in the 125-250 cc range up to 14% in 2004-05 from 8% in 2002-03. Clearly, the company is striving to move up the value chain, into a relatively less cluttered marketplace. TVS Motors net sales were Rs 2875 crore for the year ended March ’05 with a net profit of Rs 137 crore, against net sales of Rs 2820 crore and net profits of Rs 138 crore in March ’04. The concern for TVS Motor comes also from the fact that falling unit sales aren’t been shored up by any price rises and bottom line profitability is being hit by rising raw material prices, which cant be passed on as a result of severe

competition. Operating margins have been squeezed as well, falling from 9.2% in April-June ’04 to 4.9% in January- March ’05.It scooters business continues to do well, where its market share went to 23.7% (2.19 lakh units) in 2004-05 from 16.2% (1.35 lakh) in 2001-02. However this wasn’t enough to boost overall company figures. Clearly, TVS Motor is on the lookout for a blockbuster down the road – and not too far away either.

The outlook for the two-wheeler industry continues to remain rosy, with motorcycles leading the growth. Top players have forecasted a growth of about 15% for two wheelers for FY06 in their investor presentations post FY05 results. However, this is an indicative number. It essentially means that companies expect sales to grow in two digits. Easy finance, better and more models at same or lowering price points, and fuel efficiency will drive growth. Rising fuel prices may in fact spur motorcycle sales more than mopeds or scooters who offer much lesser mileage per litre. Threats to growth of motorcycle sales are from the lowering prices of entry-level cars like the M800 (seems a distant threat, but while motorcycles have become necessities, cars are yet aspirational, if aspirations come within reach, they would become necessities shortly). Growth could be impacted by the passing on of raw material price increases to customers, as well as better scooters that take away a swathe of fence sitters between scooters and motorcycles.

CHANGING TECHNOLOGY AND CONSUMER BEHAVIOUR

TheTheory. To fully understand consumer behavior we have to separate two actions by the consumer. These two actions are interrelated. The consumer buys some goods, so she realizes the “action of purchasing”. In this act of buying she buys several goods, at the same time. The second action is the “action of consuming” goods. The later is related with “experienced utility”, i.e. with the hedonistic capacity of the goods. The former is related with the “decision utility”. The figure captures the relationships between these two actions.

The relationship between decision utility and experienced utility is formed in the consumer’s brain. Depending on the experienced utility, especially whether or not she likes what she consumes, she will decide to purchase or not. Probably she will

consume most of the articles before she feels the need to purchase more goods. In most cases the action of purchasing and consuming may be separated. Some of the articles would be stored, and used later. For most services the two purchasing and consuming activities are inter-related. I pay for the cinema and watch the movie right after paying. But some of the services are enjoyed for a long time after paying for them, like a hair-cut. We have to think about the idea, that most of the stimuli we get over one normal day, they do not come from the shopping. We get stimuli from our work, from our own thoughts, from the our friends, family etc... But every now and then, we also get stimuli from a newspaper, a new book, a new T-shirt something that we buy. But if her arousal potential is being hold only by shopping it will mean that she needs to keep on buying new things to feel comfortable. Novelty is a factor that is mixed in the decision utility. Novelty makes goods important. But novelty disappears over time. There is also the intrinsic value that a good offers to the consumer, i.e. on the capacity to generate a positive hedonistic value. In this case the good has the potential to become a habit. The first time somebody smokes, she does it because it is something new for her, she wants to try. Initially there may be no addiction. But once the novelty is gone the addictive good is still able to generate positive stimulus in the consumer. The usual smoker does not buy cigarettes for the novelty but for the capacity that the good in itself has to offer. “Representation of consumer behaviour” in a model is how well the model captures the consumer’s decision-making process in competing technologies. Models that accurately capture consumer behaviour from empirical data are considered to be behaviourally realistic. In addition to many financial variables about the technologies

in question, which are each technology’s capital cost and operating cost, behaviourally realistic models can also include demographics, such as consumer income, perceptions of risk, and the desire for new technologies. In contrast, behaviourally weak policy models do not incorporate all of these factors in determining technological adoption by consumers; some resort to simple decision rules such as adopting technologies solely on the basis of financial costs.

As we approach the 21st century, the marketing function remains concerned with serving customers and consumers effectively. While developing better marketing processes and programs, we need to be aware that demographic shifts and emergence of facilitating technologies in production, distribution and personal use are affecting consumer

behavior

and

therefore

the

marketing

function.

For

example,

demographically we are witnessing the following major trends -- aging of population, larger proportion of working women, decline of the middle class and increasing ethnic diversity. These trends are unique that they are occurring simultaneously, have long term impact and will effect society and the marketing function. In the last decade, firms have been witnessing market fragmentation and constantly evolving products and services. These changes have put pressure on the marketing function to shift their strategies from stable markets to turbulent markets. In fact, due largely to the evolving market place, firms have started questioning the performance and productivity of the marketing function (Sheth and Sisodia 1993). As firms approach the 21st century, they need to be cognizant of and anticipate changes in customer behavior. The marketing function needs to convert anticipated customer

behavior changes into opportunities for sustained competitive advantage (c.f., Ashley & Morrison 1997). In the last decade there have been a rapid evolution of technologies in product and service design and manufacturing, distribution, and personal use that have facilitated changes in consumer behavior. For example, communication technologies such as the internet, personal computers, and wireless communications have changed shopping and consumption behavior. In the Indian automobile industry, consumers (estimated at a quarter of buyers) peruse the market through various media, including the Internet before they visit a dealer. This trend toward adopting new technologies is expected to grow. About half of the Indian population look forward to technology innovations.

Technology Evolution Technological change has been extremely rapid during the past two decades, and indications are that this rate of change will continue. The prices of most technologies will continue to come down and the capabilities will continue to expand. Many technologies that have already been developed will start to have a significant impact on society (McRae 1996). Alsop (1998) describes how technology will personalize marketing, customer service and other areas of daily life by the year 2004. His additions include road signs that change for each viewer, personalize electronic trading of securities, monthly account statements from the IRS and periodicals customized for each reader. Regis McKenna (1997) points out that current technologies produce instantaneous response at the touch of a mouse. Consumers have changed their reference regarding sense of time and instant satisfaction leading to an evolutionary change in judging good and

bad service. Customer expectations and satisfaction are now hyper accelerated if not immediate for organizational response The speed at which technologies are getting adopted has been increasing in recent years it took 46 years for a quarter of American homes to be wired for electricity. It took 35 years to get phones to a quarter of the population and 55 years to get cars. Recent innovations such as the PC (16 years), cellular phones (13 years) and the Internet (7 years) have penetrated much more rapidly (Cox and Alm 1997). The relationship between consumer behavior and technology is a fascinating one, but has not been examined in great detail. As Mick and Fournier (1998) point out, less than one-fifth of one percent of studies on technology have consigned themselves with consumer behavior. Mick and Fournier (1998) point out that technology is often paradoxical in that it can simultaneously help and hinder customer behavior. Facilitating Technologies and Consumer Behavior The change in consumer behavior due to demographic trends on will be facilitated by emerging technologies in production, distribution and personal use. Undoubtedly, the pace of technological evolution has and will continue to have a great impact on the lives of consumers. The new technologies are disruptive in that they are changing consumer behavior and marketing practices at a pace not seen earlier (Bower and Christensen 1994; Christensen 1997). Particularly, they make incumbents vulnerable due to the impact of technology on production, distribution and technologies for personal use. Production Technology Breakthroughs in production technology, such as CAD-CAM, flexible manufacturing systems, and just-in-time production are impacting competitive

marketing in a number of ways. Other significant technologies in this area include photorealistic visualization, groupware (e.g. conferencing systems across design functions and across design, manufacturing and sales), virtual reality, Design-forManufacturability and- Assembly databases, component performance history databases, and 3-D physical modeling technologies such as stereolithography. These technologies are increasing quality, reducing prices for many products, enabling a higher level of customization and providing customers with a greater of variety. Distribution Technology Distribution technologies have rapidly changed in the last two decades (Ross 1996). Recent innovations in distribution technology include computer-assisted logistics (CALS), the refinement of scanner and other product identification and tracking technologies, electronic data interchange (EDI), point-of-sale (POS) terminals linked to vendors, expert systems, satellite-based locational systems, automated retail and warehouse ordering, and flow-through logistics. The benefits of these technologies include reduced damages, reduced supplier and distributor wholesale inventories, warehousing, transportation, administrative and manufacturing efficiencies, reduced “forward buying”, better market coverage, fewer stock outs and distress sales, more refined target marketing and faster response to market trends. Technologies for Personal Use The technologies with the fastest gains in price-performance are those intended for personal rather than institutional use. Personal information devices have been and will continue to ride a steep experience curve based on the unique “economics of electronics.” One of the fundamental properties of such technologies is their inverse economies of scale; the smaller the unit, the greater the price-

performance. This is due to the fact that smaller units can be produced in mass quantities with very low (sometimes near zero) variable costs. Large units, on the other hand, tend to be produced in small volumes and retain a significant proportion of variable costs. Thus, today’s personal computers offer far more by way of “MIPS per dollar” than do today’s mainframes or supercomputers; video games and other lower end consumer devices tend to offer even better price-performance than that. Consumers will rely heavily on small unit technologies, while producers will rely on a mix of personal and institutionally-oriented technologies. As the power and pervasiveness of the technologies at their command grow, consumers will be in the unique and unaccustomed position of controlling a far greater share of the information and communication flow between the buyer and seller than ever before. In other words, customers can and will have more information about product providers in most cases than providers will have about customers. Far from being passive “targets” of marketing activity, customers will dictate the timing and modality of communications, and they will determine the time and place of the resulting transaction. The Impact on Consumer Behavior As people start to change the way they work, communicate and spend their leisure time, they will seek companies that will do business in the manner that they prefer. Accustomed to always being within electronic reach of their family and colleagues, they will seek marketers who do not demand adherence to rigidly defined modes of commerce. Used to instantaneous response to their requirements for information and entertainment, they will seek similar responses from marketers. With constantly improving technology, they will seek avenues that will allow them to

acquire goods and services that require less time and effort. Future consumers will be more demanding, more time-driven, more information intensive, and highly individualistic. A combination of a ubiquitous broadband digital communications network and high definition display terminals will further accelerate changes in consumer behavior. With targeted, interactive digital media in the future, advertisers will be able to “mass customize” their messages as well as allow for user interaction and input. Shopping will also change. Buyers will have immediate access to a variety of independent buying services, providing distributed expertise on demand. Because of interactive advertising, buyers will be much more active in seeking even marketerprovided information. From Time and Location Bound to Time-Free and Location-Free Marketing Commerce today, for the most part, tends to be time and location bound. That is, transactions are constrained to occur at particular times, and/or at particular locations (e.g., the retail store model). If the consumer is unable to transact at those times or those locations, the transaction either does not occur at all, or occurs between the consumer and an alternative supplier. Even if the transaction does occur, i.e., the consumer is able to comply with the time and place requirements placed by the supplier, it often forces undesirable tradeoffs upon the customer (e.g., higher prices at convenience stores). For most consumers, there are alternative uses to which they might put the same time, and the location constraint imposes an additional burden of the time, effort and expense of making oneself physically available to transact. Time and place constraints are slowly giving way, under the pressure of increasingly hectic consumer lifestyles, heightened competition and myriad enabling technologies. Behavioral barriers to the adoption of alternative modes of interacting,

be they based on engrained habits or perceived risks (Ram and Sheth 1989; Ram and Jung 1994), have become increasingly porous and less rigid. We believe that this forward momentum will result in a positive-feedback loop that will accelerate the rate of consumer migration toward alternative modes of transacting. While no positivefeedback loop can persist forever, we believe that a period of rapid, even explosive growth lies ahead in this arena. It will subside only as a large majority of consumers have been converted to the new model of commerce. Early examples of this phenomena are Amazon.com and Peapod, a grocery delivery service. We are, then, in the midst of a change from gravitational commerce (demarcated by its time and location constraints upon customers) to an era of digital commerce, which will be almost entirely free of those constraints. The future will see “anytime, anywhere procurement” coupled with “anytime, anywhere consumption;” more and more products and services will be purchased and consumed anytime, anywhere. Consumers will demand and receive advertising and other forms of information “on demand.” The crucial importance of increased time and place utility is nowhere more evident than in the banking industry. Banks face a massive dislocation in the near future, as their vast and expensive time and location-bound distribution networks (branches) may become obsolete. For example, Wells Fargo announced in the fall of 1995 that it planned to move 72 percent of its existing branch network into in-store (supermarket) locations. Since in-store branches are only 20 percent to 25 percent of the cost of conventional branches, this represents a substantial cost saving, as well as a way to expand market coverage in terms of time as well as geography. The more

major shift, of course, is the move toward home or remote banking. This trend, still in its early infancy, will take time and place utility to a much higher level. With regard to supermarket retailing, the impact of increased emphasis on time and place utility will be even greater. Already, supermarkets can offer electronic ordering and home delivery services for relatively low start-up costs. A recent survey indicates that over 25% of chains offer home delivery, representing more than 40% of the population. Significant barriers to a broader adoption of home shopping are delivery charges, which run from $7 to $10 an order. Survey research by Management Horizons shows significant consumer resistance to any delivery charge. What is needed is a business model that is optimized for home shopping, rather than one in which the service is added on as an ancillary to traditional retailing. Analysis by Management Horizons indicates substantial savings in operating a “delivery depot” compared to a supermarket. On a typical $100 order, home delivery will cost a typical supermarket operator an extra $10 to process, pick, check out and deliver from the supermarket. A delivery depot can process and deliver the same order for about $10 to $12 less in total cost than the supermarket can. To summarize, the success of marketers in the future will be predicated upon their ability to deliver “total customer convenience.” This includes hassle free search (advertising-on-demand), hassle free acquisition (home delivery), hassle free consumption (for example, products with built-in expert systems to enable maximal value extraction) and hassle free disposal. The future may be a balance of mass customization and mass market products and services for two reasons. First, customers are not always looking for customized products and they may be content in many cases with a well-designed standardized

product. Thus, the price, advertising message and/or the distribution mode may be customized, even if the product is not. Second, new forms of aggregation of demand will undoubtedly occur. In the past, these were driven entirely by producers. In the future, it will become increasingly facile for the aggregation to be driven by customers. For examples, customers who individually purchase small quantities of a product will find it very easy to band together and pool their purchases to enjoy better terms. Power Shift From Marketers to Consumers Inevitably, increased competition and greater access to more powerful information tools will put greater power in the hands of savvy customers. As a result, it is possible that “buyers” will increasingly be viewed as “marketers” and sellers as “prospects” in the marketplace. Some consumers will no longer be “targets” of marketing activity; they will be knowledgeable and demanding drivers of it. Consumers will demand content-rich information and demonstrable product innovations (c.f., Manu and Sriram 1996). Customer managers will be explicitly charged with identifying, retaining and growing profitable customer relationships. Market activity will be driven almost entirely by buyer demand as marketing management will essentially become demand management and will entail the task of influencing the level, timing and composition of demand in a way that will help the organization achieve its objectives (c.f., Cahill, Thach and Warshawsky 1994). Customer knowledge will become the cornerpiece of effective marketing, and that knowledge will become a highly valued corporate resource (c.f., Kohli and Jaworski 1990; Ram and Jung 1990).

Consumers can already do product research online, log onto bulletin boards and interact with other customers, provide and receive helpful hints about the product, its use, acquisition etc. In this environment, “information invitations” may become common; companies will have to seek permission to present their case to consumers by inducing interest, unlike the “message clutter” of today. As communication between marketers and customers becomes increasingly interactive, relationship marketing will become the rule rather than the exception. Buyers and sellers will interact in “real time.” Time and place constraints on purchase (and even consumption of many products and services) will become obsolete. The nearly instant gratification of customer needs will be common and lead times (e.g., for product development, or between order placement and shipment) will have to shrink dramatically. The Concept of a “Personal Marketplace” The “Personal Marketplace” (PM) is a hypothetical mechanism to make effective use of the vast amounts of consumer and transaction data generated today. This or a similar type of mechanism is expected to develop in the future. It is a repository where participating marketers prepare and offer custom-tailored offerings directly to a consumer. By selecting a particular category, the customer alerts the market that he/she is a potential customer, and offers begin to flow in. The customer voluntarily provides as much customizing information as needed. Participating companies agree not to sell the data they collect outside the PM, and not to use it to market in any other channel. For example, the two-wheeler market today is largely comprised of replacement buyers rather than first-time purchasers (Business Line 2002). And the

average time taken from ‘identification of need’ to ‘actual purchase’ has reduced from months to weeks if not days. Studies examining runaway consumerism have focused on impulse purchases, arguing that lower levels of cognition results in compulsive often ‘mindless’ consumption. This compulsive and habitual purchase has received much attention in terms of its negative effects manifesting as guilt, frustration, anxiety, loss of control and even domestic dissention (O’Guinn and Faber 1989, Rook 1987). The ‘self-defining’ choice among different brands and products is assumed to be beneficial for the individual’s identity if it is based on greater cognition and pre-purchase information processing (Schiffman and Kanuk 2000). We argue that a consumer who can, and does, apply a certain extent of cognition before purchase, can yet face identity confusion rather than enhancement. The cognitive dissonance theory (Oshikawa 1969) in the study of consumer behavior, asserts that a person has certain cognitive elements, which are "knowledges" about oneself, one’s environment, one’s attitudes, one’s opinions and one’s behavior. If one cognitive element follows logically from another, they are said to be consonant to each other. They are dissonant to each other if one does not follow logically from the other. With increased competition, established automobile manufacturers in India are becoming more conscious about technology and quality. These companies are incorporating ISO 9000 certification and Total Quality Management as explicit corporate goals. Most of the MNCs entering the Indian automobile market are bringing in modern technology. Emission control techniques like catalytic converters and injection technology are present in most models. The fuel efficiency of these cars is higher than that of domestic models. Foreign models are equipped with vehicle safety gadgets which have never been seen in Indian automobiles. In fact, some

brands in the luxury and super-luxury segments are positioning themselves on the basis of safety and engineering excellence.

HERO HONDA- The Technological Giant The two wheeler market in India essentially comprises of motorcycles, scooters and mopeds. With a volume size of 84.6 lakh units in ’06-‘07 the industry has registered a growth of 12% over ’05-’06. The industry is dominated by motorcycles which constitute 84% of the category followed by scooters consisting of 11% and mopeds accounting for the remaining 5%. The largest player in the two wheeler industry is Hero Honda which commands a lion’s share in the category. With a market share of 39.4% and volume size of 33.4 lakh units in ’06-’07, the company has registered a robust growth of 11% in volumes over ’05-’06 when it had sold 30 lakh units. The second largest player in the industry is Bajaj Auto which registered a growth of 18% in volumes by selling 24 lakh units in ’06-’07 compared to 20.3 lakh units in ’05-’06. The company saw its two wheeler market share increase marginally by 1.5% to 28.3% in the same period. Key competition: •

HMSI – HMSI launched Activa in 2001 and it was a huge success from start. The brand enjoyed superior product and image perceptions given Honda’s equity and global lineage. Activa was a 4 stroke, variomatic (gearless), metal bodied offering which offered superior mileage and performance. The brand

ruled the market with a 44% market share in the gearless scooter segment. The brand is targeted at men and family •

TVS Scooty: The TVS heritage gives the brand perceptions of reliability, easy availability of spares etc. Moreover the brand had signed up with Preity Zinta as its endorser which further added to its popularity. The brand had entered the market with ABS (plastic) bodied Scooty Pep (75cc) and later introduced a more powerful Scooty Pep + (90cc). However the brand has discontinued Scooty Pep and now focuses only on Scooty Pep +.

The brand has recently created new news by launching 99 colours for its brand and has backed it up with a heavy media push. The brand is a clear No.2 in the market. It had a market share of 29% before the entry of hero Honda Pleasure which has now declined to 26.1%. While the brand is targeted at females it has tried to maintain a unisex appeal in its advertising. •

Other players: There are a number of small players in the category viz.

Eterno, Dio, Nova etc fighting for salience. It was in this scenario that Hero Honda decided to enter the scooter market with its brand Pleasure in 2006 The Hero Honda Pleasure product truth: •

ABS body

•

100cc

•

Gearless Hero Honda Motors Ltd – is a leader in the 100 cc motorbike segment with

around 42% market share during the current fiscal 2000. During the year, the company posted a 46.74% growth in turnover and 43.55% sales volume growth as compared to the FY-1998-99. The company has invested in capex to bring in new

models and meet the increased market demand from internal accruals. It has posted a sales volume growth of around 48% during the Q1 of 2000-01 as against the corresponding period of the last year. To compare its performance with other competitors, sales volume of July’00 for HHML (73857 units) is more than the combined sales of Bajaj Auto (41950 units) and TVS Suzuki (28907 units). A concern of 100% subsidiary by Honda Motors has affected HHML stock on the bourses without really taking into account its business out performance. At present HHML is having exclusive technology from Honda Motors. An announcement of a 100% subsidiary company, Honda Scooters & Motors India Ltd. (HSMIL) by Honda Motors in India has jeopardized the premium valuations enjoyed by HHML because HHML’s excellent performance is very well backed by Honda technology. This event adversely affected the HHML stock on the bourses and led to a sharp fall in stock prices without giving any rating to its outstanding performance for motorcycle segment than its peer group. As per the terms and conditions agreed upon between Honda Motors and Munjals, this subsidiary will initially manufacture scooters and after 2004, it will begin the manufacturing of motorbikes. So for the medium term till 2004, HHML need not fear the competition with HSMIL. We believe, the formation of 100% subsidiary by Honda Motors may be the emergence out of the following reasons:

1)

Honda may be not contended with the present stake of 26% in HHML (same as Munjal family stake) due to which it is not able to dictate its terms.

2)

This can also be a negotiating tool for Honda Motors by which it may take some steps in future i.e. post-2004 against HHML.

After 2004…the following possibilities are opening up… 1) The probability of continuation with the present scenario is medium. Honda Motors continue with its present stake of 26% in HHML, which is same as Munjal’s stake without disturbing the most successful world class JV because after 2004, the growth of motorcycle segment may not be as attractive as the present growth.

2) Honda Motors increase its stake to 52% by buying out 26% stake of Munjal family and control the scenario in motorcycle segment. This will again place HHML to exit with a large consideration rather than to run the show without sound technology and a thorough research base for new products and product upgradation. Thus, the probability of a complete takeover of HHML by Honda Motors is also very low as that is a bit difficult task for Honda Motors and it could also affect other JVs of Honda Motors in India.

3)

Honda Motors manufacturing motorcycles in 100% subsidiary

company by exiting from the JV, which is likely to affect adversely HHML unless it gets into a new JV or do some in-house development. But by the time Honda Motors starts its production of motorcycles by 2004, the segment growth may not be as attractive as today which is a negative point for Honda Motors, as the growing requirements are going to be fulfilled by HHML upto 2004.

4)

Honda Motors to increase its stake in HHML for which the probability

of Munjals agreement is very strong, which will be a win-win situation for HHML and its investors. The following effects are likely to arise on account of this possibility: → This would make HHML fearless on competition front in motorcycle segment, → An assured flow of Honda Motors technology to HHML → Re-rating of HHML stock price → Honda Motors can easily control the management by dictating the issues on its own. The possibility of Munjal’s disagreement for the above aspect is very low. 5)

It may also happen that Munjals try to increase their stake in HHML

for which the probability of Honda Motors’ agreement is very low and the vice-versa condition may show a picture that in future HHML has to face competition with HMSIL in motorcycle segment. HHML has taken significant efforts to remain market leader in time to come Due to the shift in the consumer preferences from old scooters to stylish and the latest smart looking sleek motorcycles, the other companies like Bajaj Auto, LML, Kinetic Motors and TVS have also begun to work hard on motorcycle segment, which has made the competition even stronger for HHML. TVS Suzuki has launched a four-stroke motorcycle ‘Fiero’ and Bajaj Auto is fully geared to launch ‘Eliminator’ (173.9cc), ‘Pulsar’ (150/200cc) and ‘Acer’ (100cc) in coming months of 2000. To fight with the competitors and to dominate the market even in the future, HHML has swiftly taken the following steps:

•

Expanded the production capacity of Dharuhera plant at Haryana to 3.5 lakh vehicles from 3 lakh units to capture the upward trend of demand for motorbikes, which it is going to fund out of its internal accruals.

•

‘CBZ’, a 156 cc bike with 5 gears, the only bike with a disc brake i.e. a power bike has already become the success story of the company in the urban market. The company has launched this hit product during year 2000 only.

•

HHML has also involved itself to focus on the sale of spare parts and accessories, which has increased substantially from Rs.4.82 crore (Q1 of 9900) to Rs.7.69 crore (Q1 of 2000-01) which in turn has enabled the company to maintain its net profit margins on a higher side.

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It is also planning to introduce new version of Splendor by January 2001 for which the trial production is already started in the month of Sep.’00. The modified version of Splendor would enable the company to further capture the market. Hero Honda Motors Ltd., India’s largest motorcycle manufacturer reported

24.1% increase in Q2FY05 profits at Rs.1.94bn on a 39.3% increase in net sales to Rs.17.6bn. The results have been as per our expectation on PAT levels, but higher realisations per vehicle due to better product mix and 100bps drop in EBIDTA margins on back of Rs.1,000 cash discount promotion offer surprised us. It has not been all smooth sailing for Hero Honda. There have been some hiccups too. For example, though the company claims that sales for Splendor cut across a wide spectrum of people, Hero Honda for long did not have a bike which focused on the entry level-segment of the market. It did launch Joy last year for the economy segment, which did not get a very positive response. "There were two reasons for this.

First, being an entry-level product it was overpriced by about Rs 1,000. Also, that was the time when Bajaj launched its Boxer priced at Rs 29,900, making matters worse," says Sobti. However, Hero Honda was quick to make amends. It phased out Joy in less than a year, and launched Dawn as an entry-level bike. "We priced it right and we believe that it will be the 21st century CD-100 for us. Dawn has received a great response and has sold 10,000 pieces in the second month itself," says Sobti. Meanwhile, the company may also phase out the CD-100 (popular during the 19851995 period) at a later stage and replace it with Dawn. In 1999, Hero Honda conducted the largest research on two-wheelers in the country covering 50,000 households, which helped the company in drawing out its strategy. "The research helped us gauge consumer preferences and demand. It also gave us an estimate of demand for bikes vis-à-vis scooters," says Sobti. Hero Honda has conducted a followup to the research this year covering an even larger spectrum of people with an emphasis on the rural market. Although the results of the survey are still being compiled, it clearly shows that demand for bikes continues in the Indian market. In fact, as per estimates, demand for bikes will continue growing in double-digit figures in the coming years. At one level, Hero Honda’s emergence as the largest motorcycle manufacturer in the world’s biggest two wheeler market is the sum of two stories: the first about how India’s middle class – used to traveling either on public transport or on scooters —was wooed, nurtured and won in 1990s. In the 2000s, it is the continuing stories of how college kids, and salesmen and even farmers are being enticed. In a space of 20 years, Hero Honda has not only caught up with, but has also overtaken the incumbent in the Number 1 slot: Pune-based Bajaj Auto. At last count, Hero Honda sold 500,000

more two wheelers than Bajaj Auto in a year, according to Society for Indian Automobile Manufacturers—the apex body for auto manufacturers in India. The youth of India emerged as one of most important constituents for Hero Honda. They demanded stylish and sleek products rather than those that were merely functional and simple; and got them. And as rural markets began to explode, motorcycles with their bigger wheels and longer wheelbases found favour with the buyers. While the emerging trends did not favour Bajaj Auto, Hero Honda was poised to ride the boom. By 1999-2000, bikes formed about 43% of the two wheeler market compared with 27% just three years ago. By 2003, they had crossed 74%. When the scooter companies saw the writing on the wall, they sought to penetrate the motorcycle market. But they could not make much headway. Though some of them had tremendous brand franchise with customers and an extensive distribution network, it was Hero Honda that pulled ahead of the pack. For one, it had access to Honda’s latest technology and design. For another, the company, over the years, has managed to create a strong base of 300 dedicated vendors who supply exclusively to the company. Strong vendor support has allowed it to localise its component manufacturing, outsource sub-assemblies, keep raw material and component cost under control, and ensure that the domestic raw material inventory period remains less than 3 days. Finally, the company undertook a slew of customer-centric initiatives, even as it created a strong distribution network comprising over 500 dealers. But most significant behind the success of Hero Honda has been the brand equity it has been able to create with its existing and potential customers. To start with it has retained and strengthened its youthful image by

investing considerable financial resources in sports sponsorship. “Sponsorship is a vital part of our overall strategy of building Hero Honda as one of the leading brands in India,’’ admits Pawan Munjal, managing director of Hero Honda. Consumer behaviour in the category of Hero Honda Pleasure: Analysis of market data and research threw up some interesting findings. Men and women have different transportation need states and thus their needs from a scooter differed too: Men •

to carry load i.e. for carrying family, delivering goods etc

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preferred a scooter that was strong, sturdy and powerful

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Honda Activa with its metal body and > 100cc power is the obvious choice.

Women •

to move around with ease and comfort

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preferred a scooter with great mileage, easy to maneuver and safe to ride

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Scooty Pep / Pep + with ABS (plastic) body and