Cover Story: Bike Wars [Pg.2]

So, has Bajaj been buying market share, at the cost of margins? Well, yes and no. Yes, because that's how the the Boxer was flagged off-at a discount of Rs 1,500. There were only two ways that the Bajajs could compete with Hero Honda: one, to launch an out-of-this-world product, which is near-impossible (for Bajaj at least); or, two, to compete on price, which was the way it went. ''When you want to jumpstart volumes, the only thing that works is price,'' explains Sanjiv Bajaj, who estimates that the company would have taken a Rs 30 crore hit because of the discounts.

When Bajaj Auto first introduced the discounts last July, its operating margins suffered heavily, dropping from 12.4 per cent to 7.1 per cent in the second quarter. But thanks to the upsurge in volumes coupled with cost efficiencies, the company has been able to bring the operating margins back into the 12 per cent range.

The increase in motorcycle volumes via the Boxer also gave Bajaj the opportunity to reduce costs at the vendor end. The vendor base itself has been pruned from 1,000 to 800 and should reach 400 by April. ''This assures that those left get more business, and this increase in confidence serves as an incentive for them to invest in technology and reduce costs,'' adds Sanjiv. Aiding in offsetting the discounts offered is a higher level of indigenisation. The entire carburettor, the crankpin and the engine bearing of the Boxer will soon be made locally.

All these measures should help Bajaj up its margins to close to 15 per cent by the year-end. In the process, Bajaj has at last ensured that it makes money from motorcycles: so it doesn't matter what Bajaj sells today; a bike today is as profitable as a scooter.

The Boxer range might have opened up a new segment for Bajaj-and other two-wheeler manufacturers-but the biggest battle is to take on the Splendor and the Passion. The Caliber Chroma and Aspire, essentially me-toos of the Splendor and Passion, will play their role for Bajaj, but the company doesn't expect these products to be major breadwinners. Rajiv will be more than happy if the two tot up sales of 25,000 by the year-end.

To hit Hero Honda where it really hurts, the Bajajs are pinning their hopes on the Pulsar, to be launched in October. Priced at roughly Rs 47,000 (which is what Hero Honda's Passion will cost you), the Pulsar is, to use a car analogy, a step-up from a Maruti 800 to a Zen-at the same price of the Maruti 800. Rs 47,000 for a 100 cc bike is just too much, feel the Bajajs.

So they're rolling out a 150 cc and 180 cc for around that price. But it's not just a bigger engine that the consumer gets: he'll also get a five-speed gear box, a longer wheel base, a tachometer, electric start and disc brakes.

Rajiv likes to compare the success of the Splendor with, ironically, the supremacy enjoyed by the Bajaj Chetak scooter for so long, but not any more. To ensure that doesn't happen is of course the task of Hero Honda CEO Pawan Kant Munjal. Yet, relying on one or two horses to win the race might be a risky strategy. What's more, the Hero Honda product range is largely limited to 100 cc bikes. Pawan Kant admits that the company has so far ignored the above 100 cc segments.

In fact, the 1998 IMRB survey had pointed out two lacunae in Hero Honda's strategy: one, it didn't have a presence in the power bike segments; and, two, its products lacked styling and design. The first gap was filled with the CBZ, and the second with Passion. But the CBZ hasn't exactly set the roads on fire. Although it sold 6,000 units at the time of launch, monthly sales are now down to half that figure.

As for the segments it has ignored, Pawant Kant says ''We have been working on both the below and above 100 cc ranges for some time now,'' but that's all he's willing to say as of today. By 2002, Hero Honda hopes to have a motorcycle in the 100cc-150cc segment.

If Bajaj Auto believes that the path to the consumer is by providing them choice, Hero Honda is pursuing good old customer satisfaction. The recently launched passport programme-Suhana Safar-gives Hero Honda motorcycle owners points each time they get their bikes serviced and every time they buy accessories and spares. It already has 1,50,000 members.

Still, this is a war which won't be decided in a hurry. Although Hero Honda and Bajaj Auto may contesting the big fight today, the equation could alter drastically in a couple of years. Will Bajaj be able to take on a solo Honda? Or what will happen if one of the Chinese majors launches a blitz? There are no easy answers. But over the next two years Bajaj Auto's objective is clear: to ensure that Hero Honda has fewer reasons to celebrate-in or or outside Pune.

The Partner Aspect

Haruo Takiguchi, CEO, Honda: 2004-AHOY!

As you read this, American Honda is hosting an event, dubbed Honda's Red Hot Summer, to push its models. On offer are sweet deals for all kinds of bikes. Honda Motorcycle and Scooters India (HMSI), the wholly-owned Indian subsidiary of the Japanese giant, flagged off operations by launching a scooter. You'd probably also get a deal on a scooter on the American Honda website, but Honda selling only scooters and no mobikes is a bit like Colgate selling only soap and no toothpaste.

There is of course a reason for this quaint aberration. Honda already has a joint venture with the Munjals, Hero Honda, for producing bikes. Why, then did Honda need to opt for a wholly-owned subsidiary? The answer to that lies in Honda's ambitions. As Rahul Bajaj says, Honda aims for half of any market it enters. Indeed, Haruo Takiguchi says as much: ''Our objective is to see 50 per cent of India's two-wheeler market in the hands of Honda (HMSI along with Hero Honda) by 2010.''

As per an agreement between the two companies, HMSI can't launch mobikes and Hero Honda can't flag off scooters before 2004. The Munjals also insist that they have the option of picking up a 26 per cent stake in HMSI. Takiguchi admits that HMSI will make mobikes after 2004, ''if there is demand.''

Rahul Bajaj doesn't rule out Honda putting pressure on the Munjals in a bid to increase its stake (from 26 per cent currently). ''If they can't do that, they will go ahead and make motorcyles.''

What then will happen to Hero Honda? ''In the long-term, I definitely see a threat to the joint venture (Hero Honda) from Honda,'' says Hormazd Sorabjee, editor of Autocar India. After 2004, the emission norms will get stricter. Technology for such norms won't come cheap. And all the new Honda launches will be via the subsidiary post-2004.

''You have to wonder how much value the Munjals add to the JV to justify their stake,'' says John Band, CEO, ask-Raymond James, who feels the best option for the Munjals is to allow Honda to go up to 51 per cent.

The Hero Honda brass rubbishes this view. ''If Hero Honda is number one only because of Honda, then why isn't Honda Siel Cars the number one car company in the country?'' questions Atul Sobti, Senior Vice-President (Marketing & Sales), Hero Honda.

Bajaj may not have such partner problems-it only has a technological alliance with Kawasaki-but then neither does it get the clout that a Honda possesses. Kawasaki today ranks No 4 behind Honda, Yamaha and Suzuki and, what's more, it has earned its spurs only in the 250 CC and above category.

Kawasaki's top priority today is to use India as a manufacturing base for export markets. The company is developing a motorbike in 125-150 CC segment, which will be produced at Bajaj's plant in Aurangabad, roll out in 18 months and be sold all over the world (and in India too). ''There is a mutuality in the relationship, which transcends formalities like JVs,'' explains Rajiv Bajaj, President, Bajaj Auto. Competitors, though, point out that that Kawasaki has flagged off its brand in India-via Bajaj-without any investment in the alliance, which makes it easier for the Japanese major to enter India on its own, or start importing into the country. But if it is getting access to a high-quality low-cost manufacturing base via Bajaj, there might be little reason for Kawasaki to take that route.