Documente Academic
Documente Profesional
Documente Cultură
Over the years, Bajaj and Hero Honda have followed different paths to what they are in the Two-Wheeler industry today. While Bajaj was the unquestioned leader when the mainstay was the scooter, Hero Honda usurped the throne when the market favour turned towards motorcycles. Here we try to analyse how these two players are approaching the future.
GLOBAL MARKETS
CHINA
China's motorcycle production volume surpassed the 25 million mark in 2007. Motorcycles are the second most important means of transportation in China, after bicycles. The country has 155 motorcycle enterprises producing 400 brands. Its motorcycle production and marketing volume has risen by 10 per cent since 1993, when it became the largest motorcycle producer in the world. In 2007, China exported around 8.2 million motorcycles, accounting for around 32 per cent of total sales. There are around 50 main players in the Chinese two-wheeler market with the top 10 players accounting for around 60 per cent of the market.
INDONESIA
Europe has been a major base for powered two-wheelers. The European market had been dominated by players such as BMW (Germany), Aprilia (Italy), Piaggio Vespa (Italy) and Ducati (Italy), and Asian players such as Honda, Suzuki, Yamaha and Kawasaki. Italy, Germany, the UK, Austria and Spain are the major motorcycle markets of Europe. Countries such as France and Spain manufacture small-engine and utility machines. Conversely, Austria, Germany and the UK produce larger capacity and higher value machines. The demand for two-wheelers in Europe recovered in 2004, after declining consecutively for 4 years. Over the last few years (from 2001), motorcycles are gaining in popularity in Europe over mopeds. Increasing urbanisation, associated growth in suburban areas and longer distances has contributed to shifting demand from mopeds to light motorcycles. INDIAN MARKET SIZE AND SHARE The total size of the Indian two-wheeler industry stood at Rs 288 million in 2007-08, with total volumes of around 80 million units. The industry, which is dominated by Hero Honda, Bajaj Auto and TVS Motors, is divided into three segments - motorcycles, scooters and mopeds. Motorcycles dominate the two-wheeler industry, both in terms of volume and value. In 200708, the share of motorcycles in the domestic two-wheeler market was around 80 per cent while scooters and mopeds accounted for 15 per cent and 5 per cent share, respectively.
Figure 3 : Motorcycles - Market Share of Key Players 1,00,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
Domestic motorcycle sales registered 12.6 per cent growth in the first half of 2008-09. This growth was mainly propelled by Higher farm incomes (on the back of higher MSPs - growth in MSP for paddy, cotton, wheat, sugarcane (UP) and soya bean for 2008-09 was 32 per cent, 37 per cent, 8 per cent, 2 per cent and 48 per cent respectively.) Higher proportion of purchases made on cash sales (due to increased demand in rural areas, where transactions are mostly in cash). Increased personal disposal income in urban areas due to change in income tax slabs.
FUTURE GROWTH The domestic two-wheeler industry is expected to remain flat in 2008-09 and 2009-10 with motorcycle demand expected to remain subdued in the short term (-2 to 0 per cent in 2008-09 and flat in 2009-10). The continuing tight credit scenario, reduced cash purchases and uncertainty over growth of disposable income in the medium term are the key factors impacting the domestic demand for motorcycles in the near term. Lower dependence on finance is likely to result in the continuation of the growth momentum in the scooters segment. CRISIL Research thus expects the domestic demand for scooters to grow at 6-8 per cent in 2008-09 and 2009-10. Over the long term (2008-09 to 2012-13), CRISIL Research expects the domestic two-wheeler industry to grow at around 6-7 per cent. The value size of the domestic two-wheeler industry is
MARGINS AND PROFITABLITY The operating margins for the two-wheeler industry are estimated to have increased by around 100 basis points in 2008-09 on the back of softening raw material prices in the second half and excise duty benefits. Operating margins are estimated to increase by 350-400 basis points in 2009-10, driven by reduction in raw material prices and benefits of increased production from excise-free zones. In 2008-09, RoCE for the industry is estimated to have remained at 2007-08 levels, i.e. 25-26 per cent. We expect this to improve in 2009-10, supported by higher industry returns and low capital expenditure by the players. Key determinants for the margins of the two-wheeler industry are: Change in realisation o Change in prices o Change in product mix Change in input costs Change in other costs
We have analysed these parameters to understand margin movement in the past and estimate it for the future.
Motorcycles account for 81 per cent of the total two-wheeler sales. Over the years, there has been an increase in the two-wheeler industry realisations due to a shift in consumer preference from low priced mopeds to motorcycles and from the lower-end Motorcycles segment (Economy segment) to higher-end segments (Executive and Premium segments). In 2008-09, the Economy segment recorded a sharp decline as a result of which, its market share slipped to 26 per cent from 34 per cent in 2007-08. The Executive segment, on the other hand, gained share and rose to 62 per cent from 54 per cent in 2007-08. The changing product mix in favour of the higher segment would impact the realisations of the two-wheeler manufacturers positively.
SELLING AND ADVERTISING COSTS TO INCREASE Advertising, selling and distribution expenses are estimated to increase by 100-150 basis points in 2009-10. With moderate growth expected to continue in the overall demand for twowheelers, higher model launches and players' initiative to increasingly enhance the distribution network in rural areas and attract customers would increase the overall selling expenses for two-wheeler players. OPERATING MARGINS TO INCREASE In view of the above factors, operating margins for the two-wheeler industry are estimated to increase by 350-400 basis points in 2009-10. With reduction in raw material prices, the benefit of production from excise-free zones and change in product mix, the players will have the flexibility of reducing prices by 2-3 per cent further (after assuming a 1 per cent price reduction) in order to boost demand. Return on capital employed (RoCE) of the two-wheeler industry has declined over the past few years, but it continues to remain healthy at 25-26 per cent. We expect the RoCE of the industry to improve by 2-3 per cent in 2009-10 due to higher industry returns and low capital expenditure by the players. FINANCING CONCERNS The two-wheeler finance industry, valued at Rs 80 billion, is estimated to have declined by 29 per cent in 2008-09 on account of rising delinquencies and constrained recovery regulations. Higher operating costs due to lower ticket size and rising credit losses (due to wilful defaults
CHANGING FINANCE PARAMETERS REMAIN UNFAVOURABLE FOR TWO-WHEELERS Over the past few years, finance penetration for two-wheelers fell significantly. It reduced from 47 per cent in 2005-06E to 28 per cent in 2008-09E. This can be attributed to both, reductions in the percentage of vehicles financed and the average LTV for two-wheelers. The proportion of two-wheelers financed was 64 per cent in 2005-06E, which came down to 40 per cent in 2008-09E, average LTV also declined and reached 69 per cent in 2008-09E from 73 per cent in 2005-06E. The rate of interest has been on a rise since 2005-06. It was 18 per cent then and has reached 24 per cent in 2008-09E. GOVERNMENT POLICY From 1948 to 1991, the Indian automobile industry was governed by regulations on licensing, production, pricing and foreign investments. However, with the introduction of the New Industrial Policy of 1991, the government abolished industrial licensing for the entire automobile sector and allowed foreign investment. Since then, the ownership and utilisation of motor vehicles in India has grown sharply.
Figure 7: Hero Honda - Estimated market share in the motorcycle sub-segment. Source (CRISIL , 2009)
PLAYER ACTION
KEY MODEL LAUNCHES
In October 2007, the company launched a premium segment motorcycle, the 150cc Hunk, at a price Rs 55,000. A limited edition variant of its 100cc motorcycle Splendor Plus was launched in 2007 for Rs 41,250. Hero Honda rolled out four variants in October 2008, i.e. self-start versions of the 100cc bikes Passion, (Passion Pro Power Start) and Splendor NXG, and the new CBZ X and
Hero Honda's presence in the export market is limited. The presence of its technology partner, Honda Motor Co, in the ASEAN and Latin American regions and other large markets restricts Hero Honda's entry into these markets. As a result, the company's exports are limited to Bangladesh, Sri Lanka and Colombia (CRISIL , 2009)
CAPITAL EXPENDITURE
The company is planning to expand its Hardwar plant capacity by around 1 million units per annum by 2010. This brownfield expansion would require an investment of around Rs 1.5 billion. The company also has plans to set up ancillary units at its Hardwar plant at a cost of Rs 15 billion (CRISIL , 2009). BAJAJ AUTO LTD. Bajaj group was founded by Jamnalal Bajaj in 1926, and was consolidated by Kamalnayan Bajaj (Bajaj Auto Sites). Rahul Bajaj present chairman of the group took charge of the business in 1965. It was importer of Vespa Scooters in the beginning. In I970, Bajaj Group was able to get the license for manufacture of Scooters in India. In 1972, Bajaj launched its first home made scooter- Bajaj Chetak. It was the major Scooter manufacturer in India as well as the largest 2wheeler player in the country. In mid-80s company launched its first motorcycle with technical collaboration with Kawasaki. In 1995 the market share of total 2-wheeler segment was 48%, company focused mainly on manufacture of scooters. During 1998, company for the first time lost its market share from 48% in 1995 to 40.5%. It was the same time company was planning to shift its concentration to manufacture of Motorcycles from scooters. The manufacturing unit were fully automated and since the shift the company has been concentrating on R&D. Company also changed its marketing tagline from Humara Bajaj to Distinctly Ahead, clearly emphasising on the technology. With the launch of Hero Honda CBZ in 1996 a new segment of premium bikes was discovered. The growth rate was high and was expected to grow further. Bajaj taking the advantage of its R&D resources concentrated most in the executive segment.
Figure 8: Bajaj Auto - Estimated market share in the motorcycle sub-segments (Source: CRISIL Research)
MAJOR MODELS Bajaj XCD 125 DTS-Si, Pulsar 150 DTS-Fi, Platina, Platina 125, Discover 135 and CT 100. COMPETITION TEMPORARILY WEAKENING THE COMPETITIVE POSITION Bajaj Auto is the second largest player in the two-wheeler industry. Keeping abreast with the structural changes witnessed in the sector, the company shifted from being a predominantly scooter manufacturer to a motorcycle manufacturer. Bajaj Auto entered the motorcycle
In September 2007, the company launched XCD 125 DTS-Si, priced at Rs 41,000. In July 2008, it launched a new variant of the 135cc motorcycle Discover 135 DTS-I priced between Rs 46,248 and Rs 51,895. In September 2008, the company launched Platina 125 DTS-I, priced at Rs 39,000. The company launched XCD-135 DTS-I motorcycle in January 2009 priced at Rs 45,000 (ex-showroom Delhi).
FUTURE MODEL LAUNCHES
The company is planning to launch two sports motorcycles in collaboration with Kawasaki - a 150cc motorcycle and the Ninja 250 - in India in 2009-10. Bajaj Auto is also planning to introduce two more motorcycle models with engine capacity above 125cc in collaboration with KTM Power Sports expected to hit the market in 2009-10. Bajaj Auto is also planning to launch a heavy un-geared scooter, Blade, in 2009-10.
GLOBAL PLANS
The company's key export markets are Sri Lanka, Bangladesh, Colombia, Peru, Egypt, Bangladesh, Philippines and the UAE. Bajaj Auto also established an exclusive network to sell Pulsars assembled in Indonesia through its subsidiary PT Bajaj Indonesia, giving the company entry into the key markets of Jakarta, Java, Bali and Sulavesi. In 2007-08, the company also entered African countries such as Angola, Sudan and Uganda. Further, it has plans to develop
Bajaj Auto does not have any capacity expansion plans in the medium term. The company has commenced production from April 2007 at its Greenfield plant at Pantnagar, Uttarakhand, with a production capacity of 0.5 million units. The capital expenditure over the medium term would be mainly for setting up pro-biking showrooms across India and funding research and development (R&D) for which it would incur Rs 2.5-3.0 billion annually for a period of 2-3 years. MICRO SEGMENTATION OF THE MARKET: BAJAJ When Hero Honda took market leadership way back in 1999-2000, it made Bajaj took notice. Bajaj was suffering from Marketing Myopia and could not see limited days of the Scooter market. Thats why it had to play catch up game and always remained a Challenger. With Pulsar proving to be its biggest hit and most successful model, Bajaj seems to have found out a newer way out to survive in the market, Micro segmenting. It first launched a 125 cc bike (Between 100cc and 150cc, to create an entire new bike segment). Then when this sub-segment stagnated it created another niche- the 135 cc segments (between 125cc and 150cc). It again went ahead and launched Pulsar in 180cc segment by creating this new segment. However, Honda fit in and copied the Bajajs approach by launching Unicorn as a 165cc bike (between 180cc and 150 cc). With chances of creating market niches becoming less day by day and multiple new brands not clicking, Bajaj needs to now focus on its stronghold segment of 150cc. gradually, difference between sub segments will blur and the trick lies in getting right Positioning in minds of customers. BAJAJ DTSI: A SUSTAINED COMPETITIVE ADVANTAGE An important feature to note is that motorcycles market is huge market for each player to exist profitably and so Economies of scale rules the game. Capacity building is an important feature to rule market at lowest 100 cc end. In spite of Hero Honda having limited exposure in various exports markets and Bajaj clearly growing due to export segments growth, still Bajaj seems incapable enough to fight Hero Honda on price front.
Bajaj recently came up very sophisticated, techno whiz ads featuring and stressing the DTSi utility and need in every bike. This goes with establishing and connecting Engine with DTSi. Tomorrow if they are able to associate two words and make DTSi generic for category of bikes, this will go long way in differentiating Bajaj with the rest. Therefore, its expected competition with Honda Group, a well entrenched leader in engines and superior technology in India and abroad can decide who the fittest survivor and leader is. A lot depends on Hero Hondas ability to counter and retain its market leadership, can it sustain its volumes hold and leadership in low end bikes. Can it retain its technological exchange contract with Honda? Also, how long would Honda hold back its superior technology and wait for opportune time to arrive.