Cover Story: Bike Wars [Pg.1]

Mobike market leader Hero Honda is troubled by old models and possible conflicts with partner Honda. Number 2 Bajaj Auto, armed with a war-chest of Rs 2,500 crore, won't find a better time to strike.

In the mid-sixties, Rahul Bajaj packed his bags and moved the headquarters of Bajaj Auto Limited from Mumbai to Akurdi, an obscure village on the outskirts of Pune city. These days, it isn't too difficult to catch the 63-year-old Chairman & Managing Director-he has now handed over the day-to-day operations to an eight-member a team, headed by elder son Rajiv-in a nostalgic mood. ''I insisted that my children study with the workers' children in a village school, rather than sending them to one of those fancy ones in Pune,'' recollects Bajaj.

Some 35 years after Bajaj made the move to Pune, it was the turn of one of his illustrious competitors-Hero Honda Motors-to train its sights on the city. No, its 78-year-old Chairman & Managing Director, Brij Mohan Lall Munjal hasn't decided to shift base from the capital to Bajaj territory. Rather, the Munjals zeroed in on Pune for a celebration-Hrithik Roshan in tow-to which 3,000 Hero Honda motorcycle owners were invited. There was adequate reason to party. In the first four months of 2001-2002, Hero Honda's sales had raced ahead of those of Bajaj Auto, plus subsidiary Maharashtra Scooters, by almost 40,000 vehicles. What this means is that for the first time in 45 years, Bajaj has lost pole position in two-wheelers in the April-July period. Last year, the Munjals succeeded in pipping Bajaj at the post, but if you included Maharashtra Scooters' sales the Pune major was still ahead by 30,000 vehicles. However, if only motorbikes are considered, Hero Honda sold almost two bikes for every one Bajaj did last year.

Four months may not make a summer, but indications are that by March 31, 2002, Hero Honda should at best do 1.4 million bikes. Bajaj, if all goes well, should end the year at 1.2 million. What this also means is that Hero Honda's motorcycle sales (including a stepthrough) will be more than all the scooters (geared and ungeared), stepthroughs and motorcycles that Bajaj is able to sell. ''This year's been lost,'' concedes R.L. Ravichandran, Vice-President (Business Development & Marketing), Bajaj Auto. Rahul Bajaj, ever the fighter-he's quick to remind you that he was a champion southpaw in his younger days-admits that ''there is a distinct possibility that Hero Honda will be No. 1 by the year-end, but there are no guarantees.''

What The Others Are Doing:

TVS-SUZUKI
A 110cc motorcycle-- Victor-was launched in the first week of September. Plans to introduce four-stroke versions of all its existing two-stroke bikes by mid-2002. The 147.5cc motorcycle-Fiero is number one in its segment and sells around 6,000 units a month.

LML LTD
Launched two 110cc variants of Adreno and Energy, AdrenoFX and EnergyFX. These are sold only in New Delhi, and are priced at Rs 51,151 and Rs 43,842. Plans to launch two motorcycles next year, one would be 125cc, the other 175cc. LML sells 3,300 bikes per month.

KINETIC ENGINEERING
Launching two motorcycles in technical collaboration with Hyosoung of South Korea in 125cc and 150cc engine capacities in September-GF125 and GF150. A high-powered 175cc motorcycle is also in store, but the may be launched only in 2003.

ROYAL ENFIELD MOTORS
Recently launched a new variant of the 350cc, 4-stroke Bullet, called Bullet Electra. This variant is priced at Rs 56,931 (in Chennai) and sports a new CDI engine. Also plans to launch a new variant of Lighting shortly. However, it has postponed the launch of its 650cc motorcycle.

YAMAHA MOTOR INDIA (P) LTD
Launched a variant of its 106cc motorcycle- Crux-on August 1. The variant CruxR, is priced at Rs 41,000. Crux, launched in December 2000, sells 7,500 units a month. The next model will come only next year. It plans to launch a new model each year for the next three year.

HONDA MOTORCYCLE & SCOOTERS
The wholly-owned subsidiary of Honda of Japan launched 102cc, 4-stroke scooter-Activa-in July. It plans to launch one new scooter model each year till 2004. And after that the company will almost certainly enter the motorcycle segment.

It's a war out there, as both giants slug it out for the top slot. There may be many others in the fray like TVS Suzuki, Yamaha, LML, and Kinetic, who all have plans of their own. But clearly it's a two-horse race today, with Hero Honda and Bajaj between them lording over three fourths of the market. Munjal tries to downplay the achievement by pointing out that his company was just chasing a goal fixed by it. ''We respect Bajaj Auto and are nowhere in comparison. They have reserves of Rs 1,700 crore (the Bajaj annual report shows over Rs 2,500 crore)! What do I have?'' asks Munjal. The modesty notwithstanding, by popping the champagne in Bajaj territory the Munjals would surely have enjoyed driving home a point: that the lion had been bearded in its den.

Yesterday's King of the Road has been dethroned, and Hamara Bajaj has made way for Hero Honda's Suhana Safar. Bajaj Auto may still be king in scooters, but that's a pie that's shrinking fast, by almost 15 per cent a year. In the market that's growing-motorcycles, at 25 per cent-Hero Honda rules the roost with a 50 per cent share, and Bajaj commands just about half of that. Motorcycles today make up 60 per cent of the 3.2 lakh a month two-wheeler market, and will count for two-thirds in three years. Bajaj may still be dominant in 50 per cent of the two wheeler market, but it is losing out completely in one-third of it, which Rajiv Bajaj calls the ''executive segment,'' where Hero Honda calls the shots.

All these figures clearly queer the pitch in favour of the Munjals. Hero Honda ceo Pawan Kant Munjal says his biggest challenge isn't to maintain the lead but to ''increase it further.'' But it would be foolish to assume that Bajaj has reconciled itself to the No. 2 slot, which probably explains why Munjal is playing down the current victory. ''We're not used to being No. 2,'' says Rajiv Bajaj. ''Emotionally, I'll say that I want to be No. 1 yesterday. But practically, I'll tell you that we have a huge opportunity till 2004. The next two years will be the decider.'' Ravichandran might admit that the current year is ''lost,'' but he says: ''Wait and see what happens after that.''

If you're wondering what's sacrosanct about 2004, well that's when Honda's joint venture with the Munjals comes up for review, and the Bajajs don't rule out an onslaught from the Japanese major, with the Hero prefix or without it. ''Till 2004, Honda Motorcycle & Scooter Limited. (the wholly-owned subsidiary Honda flagged off two years ago) will make scooters. After that it will diversify into other two-wheeler categories, including motorcycles,'' warns Haruo Takiguchi, President and CEO of Honda Motorcycle.

Rajiv will remind you-and himself-about how serious the Honda threat is by recollecting what the Japanese numero uno did to Yamaha in the Japanese market in 1982. When Yamaha publicly announced its intention of grabbing pole position, Honda responded by launching 113 bikes in 18 months! The war ended when Yamaha, which by then had 1 million of stock lying unsold, called off the war and accepted Honda as numero uno. And you can't rule out the Japanese giant displaying similar aggression in India, which after all is the second largest market (after China) in the world for two-wheelers, with some 2 lakh motorcycles being sold every month.

Don't also rule out the threat from the Chinese manufacturers-there are some 400 of them producing 10 million two-wheelers annually, or close to half of the world market. Quingqui is the largest with an annual capacity of 1.6 million, followed by Jialing, and the Bajajs feel that there are at least three more Chinese producers capable of turning out a price-competitive, quality product in India.

That's why the Bajajs are keen to take on Hero Honda before the Japanese number one and the Chinese unleash their might. They're doing so with a series of products that flank Munjal's current breadwinners-the Splendor and the Passion, which account for a little over 80 per cent of Hero Honda's sales-as well as with a couple that are directly targeted at these bikes. Hamara Bajaj has gone out the window. Today, the tag line is Planet Bajaj, to reflect the Pune major's presence at every point, be it in motorcycles or scooters. At the same time, on the operational front, Bajaj Auto is frenetically cutting costs to ensure as the company chases market share, its margins aren't eroded in that endeavour.

You could easily ask: why did Bajaj Auto have to wait so long? Fact is, Bajaj was slow in reading the shift from scooters to motorcycles. Hero Honda on the other hand surveyed the market in 1998 via IMRB-the base of the survey was 25,000 samples. The results of those survey? Scooters are fast getting out of fashion. ''It's thanks to that survey that today we sell over a million motorcycle in a year,'' says Atul Sobti, Senior Vice-President (Marketing & Sales), Hero Honda. Ravi Sud, Vice-President (Finance), Hero Honda, attributes a part of his company's lead in motorcycles to the fact that it had set up a second plant in Gurgaon way back in February 1997. ''So, with additional capacity, we found it easier to cash in on the trend in favour of motorcycles. Bajaj, on the other hand, remained preoccupied with scooters,'' says Sud.

A candid Rajiv agrees. ''Until 1995 we were extremely focused on scooters and three-wheelers. '' Over the years, as Bajaj expanded its mobike range, customers didn't have any particular reason to to switch to Bajaj, as their bikes were looked upon as me-toos. Yet, Bajaj has made ample progress in bikes since it launched its first one in 1985. Till 1995 it was No 4. By 1997 it had shot ahead of Yamaha to reach third position. And three years later, it dislodged TVS Suzuki from the second slot.

Of course, all this counts for nothing if Bajaj is losing its premier status in two-wheelers. And that's what the junior Bajajs-Rajiv, President, and Sanjiv, Vice-President (Finance)-are aiming to avoid. At the root of the strategy is the belief that Hero Honda's bikes are too expensive.

So the first prong of the strategy is to flank the Splendor and the Passion with two different products: one that is cheaper but offers the same features and another in the same price range that offers more. In the meantime, there will be a couple of products to take the Hero Honda bikes head-on.

If Bajaj's gambit is to attack with a flurry of launches and carve up the consumer base, the Hero Honda tack is, well, a bit different. ''Our surveys tell us that the customer will be happy with two products, if they are close to what he is looking for,'' says Hero Honda's Sobti. So, after flagging off CBZ, Passion and Joy (in that order) between 2000 and early 2001, the next new product-A100cc-plus motorcycle-is coming only in mid-2002. While Joy was launched this year to check the drop in sales for its low-end bikes-CD100 and CDSS (both are more than 15 year models)-Passion was introduced to protect Splendor.

Back to Bajaj, which believes that a 100 cc bike for Rs 45,000-which is the price tag on the Splendor-is expensive by at least Rs 5,000.

''Nowhere in the world does a reliable, durable, quality 100 cc bike cost more than Rs 40,000,'' says Rajiv, adding that this is what explains the high margins at Hero Honda (an operating margin of 14.7 per cent last year).

Enter the Boxer range (at and CT), in the sub-Rs 40,000 range. Boxer AT is the cheapest 100 cc motorcycle in the market, at Rs 33,691 (ex-showroom, Delhi). Hero Honda's lowest-priced mobike-the CD 100-costs Rs 5,000 more. ''We can't launch a motorcycle at that price,'' says Hero Honda's Sobti. Since launch two years ago, sales of the Boxer have spurted from 3,000 a month to 30,000, and the plan is to touch 40,000 by the year-end. So, one part of the flanking game plan is clearly working. Or is it? Sales may be happening, but competitors point out that at this price, Bajaj isn't making any money, which is reflected in the dip in operating margins (from 19 per cent in 1999-2000 to 9.8 per cent last year), and partly responsible for the huge dip in profits last year (from Rs 635 crore to Rs 263 crore).