TVS-Suzuki: The Third Coming
The two-stroke wave that powered TVS-Suzuki's meteoric rise is now proving to be its nemesis. To stay its ground, the company is overhauling its product portfolio.
By Suveen K. Sinha
For Venu Srinivasan, the past year has been everything the limelight-shy CEO of TVS-Suzuki is known to hate. For one, his 19-month-old role as the hi-profile President of the Society of Indian Automobile Manufacturers has meant constant shuttling between Chennai and Delhi, and less time for the workaholic's first love: strategising and solving problems at his motorcycle plant at Hosur, near Bangalore.
Then, the 45-year-old-who is fiercely proud of snatching TVS-Suzuki back from the jaws of death in the early 1990s-has seen the sales of his two-stroke motorcycles almost stagnate. In the first half of this fiscal, sales grew a bare 6 per cent, although the segment itself grew by 28.6 per cent. Worse, Dalal Street has declared the company's situation grim, pummelling its stock down to Rs 155.10 on November 10, 2000 from a 52-week high of Rs 607. Some analysts say that what's needed now is another turnaround, as effective-if not as desperate-as the first.
Srinivasan is unfazed by the doomsayers though. In his characteristic no-nonsense style, he admits to making mistakes. He says matter of factly: ''The last financial year was a problem year. We saw the market differently. Sometimes strategies misfire''. In the same breath, though, he says that the situation is much less alarming than it is made out to be. Is it?
For Two Strokes More
Yes, if you consider that with 8,36,000 two-wheelers rolling out of its factories last year, it is second only to Bajaj Auto. And no, if you consider that it is just a fringe player in the fastest growing four-stroke market where competition is hotting up. Every two-wheeler manufacturer worth its two wheels-be it Bajaj, LML, or Kinetic-is betting on motorcycles, simply because the scooter market is stagnating. Even where new scooters are being launched-like by Honda Motorcycle and Scooter India-the focus is only on four-stroke technology.
The attraction of the four-stroke technology was earlier limited to fuel-efficiency, while two-stroke held its own by offering better performance and easy maintenance. But thanks to the enforcement of India 2000 emission norms beginning April 1, this year, the less polluting four-stroke has become the preferred technology. The two-stroke technology can also meet the existing norms, but only when supplemented by catalytic converters-an option that is both costly and short-sighted.
But given the high stakes, it's critical that the company make the switchover to a cleaner and more efficient technology. Says a report by Anish Damania of HSBC India: ''A shift from two-stroke motorcycles to four-stroke motorcycles is inevitable and TVS-Suzuki will be the biggest loser. The company was late to realise the shift in product preferences, and introduction of a four-stroke model (Fiero) has been a year or two late.''
The stricter emission norms have already claimed two victims from the TVS-Suzuki stable. Shogun, which sold 33,500 units between February, 1993, and March, 2000, and Shaolin, which sold 14,500 units between July, 1997, and March, 2000, were phased out this year because the models could not comply with the new norms. Explains Srinivasan: ''We did not want to re-engineer them ourselves or ask Suzuki to do it. Given their volumes, the cost would have been too high.''
A Rough Ride
A four-stroke motorbike, the Fiero, did roll out early this year. But, by industry standards, it was almost two years late in coming, mainly because the Japanese collaborator, Suzuki, is not known for its four-stroke technology. In fact, globally, Suzuki is positioned as a power-bike manufacturer, for which reason it has virtually no four-stroke motorbikes. Therefore, the 150 cc Fiero had to be developed specifically for the Indian market.
Now does the Indian partner have enough R&D muscle to pull off a new technology project. In fact, its efforts at developing its own four-stroke technology proved quite painful. TVS Spectra, the company's first scooter and four-stroke offering, is as good as dead-its sales having dwindled to 20 in the last month against the targetted 800-even though the company insists its production has not been stopped. That's unfortunate for Srinivasan for several reasons. For one, the Spectra-in which the company invested Rs 120 crore-was expected to turn the company into a complete two-wheeler giant, just like Bajaj Auto. Curiously enough, while Srinivasan misread the technology shift in motorcycles, he got it bang on in scooters. The Spectra was designed to be India's first four-stroke scooter, but it was pipped to the post by the Bajaj Legend. Incidentally, in October, 1997, Srinivasan's key marketing man R.L. Ravichandran had crossed over to Bajaj to head a similar function.
But to Srinivasan's credit, the four-stroke technology for the Spectra was developed without any help from Suzuki, and has given the Indian partner invaluable lessons in product development and marketing. In fact, some believe that the Spectra was streets ahead of its competitors in terms of styling, fit, and finish. But apparently what didn't go down well with consumers was, ironically, Spectra's looks. Says a competitor: ''The preponderance of plastic in the Spectra did not find favour among the buyers.''
In contrast, Bajaj Auto priced its Legend much below the Spectra and thus consolidated its early start. The result? The Spectra sold merely 502 units in 1999-2000-a far cry from the target of 96,000. Even a price cut failed to boost sales. Now it's as good as history. Says Motilal Oswal analyst, Abhay Kantak: ''The rapid pace at which the scooter sales declined caught them by surprise.''
On The Mend Bend
The lessons have been learnt. For some time, Srinivasan talked of relaunching Spectra, with new styling, less plastic, less weight, and more power. Not anymore. ''I can't see myself making a geared scooter,'' he says. A variomatic scooter of the kind Kinetic makes could still be an option, but his voice lacks the usual emphasis when he says it.
The saving grace is that much of the Rs 120 crore invested in Project Neon, the code name for the Spectra initiative, will continue to be useful. Only Rs 20 crore of this was specific to the scooter, while the rest was in a new plant with a 2,50,000-a-year capacity. ''We needed a modern plant anyway,'' points out Srinivasan.
As the second lesson, Srinivasan has embarked on a 30-month programme envisaging investments of Rs 100 crore each year till 2003. At the end of the programme, in April, 2003, TVS-Suzuki will have an overwhelming majority of its vehicles-70-80 per cent-powered by four-stroke engines.
There has been apprehension within and outside the industry over the graded launch of the Fiero, but there was little option. Perhaps chastened by the Spectra experience, TVS-Suzuki did not expect the Fiero to sell more than 60,000 a year. And at 5,000 a month, there is an average waiting period of three weeks in the 11 states (Maharashtra, Tamil Nadu, Karnataka, Goa, Kerala, Rajasthan, Delhi, Haryana, Punjab, Madhya Pradesh, and West Bengal) where the vehicle is available. Any more and the waiting lists would zoom, giving rise to black-marketing and customer discontent. This will change by December 15, when Fiero's production will rise to over 7,000 a month.
At present, talks are on between the two partners to introduce a variant of Fiero every year. Srinivasan is a bit reluctant to talk much about future models, except for saying that they will be four-stroke motorcycles with engine capacity below 100-cc, besides 75-cc mopeds. An improved version of the fast-selling scooterette, Scooty, has already hit the road as has a new moped, Sport.
The Grip Is Firm
Srinivasan will be greatly aided in his efforts to effect a second turnaround by the inherent strengths of TVS-Suzuki. It has reasonably strong financials, posting a 17.3 per cent jump in sales to Rs 922 crore during the first half of the current financial year as volumes increased 7 per cent to 4,43,235 units. The return on capital employed is about 27-28 per cent, while the return on net worth is about 28 per cent. Scooty continues to do well with 26 per cent growth in volumes to 77,479 during April-September against 61,713 in the corresponding period of last year.
The company hopes to save about Rs 60 crore this year through value-engineering, re-engineering of manufacturing, and by working with suppliers. This can offset the hike in fuel prices that have led to a 2-3 per cent escalation in material costs.
The encouraging response to Fiero has also led to an increasing presence of TVS-Suzuki in the Delhi-Punjab market, traditionally a sore point with its marketing team. About 600 of its vehicles now sell in the region every month, compared to 200 a couple of years ago.
The delay in four-stroke means that the Fiero comes at a time when competition is at an all-time high. It is targeted at a segment that is enamoured of Hero Honda's CBZ. Soon, it will be quite a crowd when Kinetic and LML bikes, targeting the same segment, hit the road.
TVS-Suzuki's motorcycle volumes have grown by only 6 per cent to 1,71,462 in the first half of the current financial year, even as the total motorcycle sales vaulted by 28.6 per cent to 10.1 lakh units. Sales of its mopeds, which account for about 40 per cent of total volumes, grew only 2 per cent to 1,94,294.
There is another flip-side to those strong financials. Operating profit margins during the second quarter recorded a 200 basis point decline to 8.5 per cent owing to a rise in material costs necessitated by product changes undertaken to meet tighter emission norms. The net profit during the first half also declined by 11.2 per cent from the previous corresponding period's Rs 40.8 crore. The profitability may get squeezed further. Kantak of Motilal Oswal predicts a declining trend in mopeds, a high-margin product-segment for TVS-Suzuki, in the coming years.
And then there are the uncertainties over Suzuki as a partner, as the Japanese company is believed to nurture ambitions beyond the joint venture. It is said to be interested in Scooters India Ltd, which is on the government's disinvestment list, as well as in a wholly-owned subsidiary, a la Honda.
Srinivasan doesn't look too worried, though. He says the joint venture will continue so long as the two partners can provide value to each other. Besides, technology in the automotive world is increasingly available off the shelf. A confident Srinivasan says that 2001-02 will see the re-emergence of TVS-Suzuki, adding: ''That alone will silence the critics.'' But, as the maxim on the company's website says: success can be measured by time alone.
© Living Media India Ltd