Cruising along: Not only is India home to the world's largest bikemaker, but also the second largest two-wheeler market

In 1983, when Japanese two-wheeler giant Honda wanted to enter the Indian market, it made its first stop at Bajaj Auto. The reason was a no-brainer: Bajaj Auto was the scooter king of India, accounting for a 75 per cent share of the Indian two-wheeler market and an enviably long queue of customers who were prepared to wait as long as eight-nine months for allotment of the Bajaj Chetak, its most popular model, which owed its heritage to the Italian Lambretta of the 1950s. Honda, which wanted to launch its motorcycles first in India, figured Bajaj Auto would be the best joint venture partner it could have. But Bajaj Auto was then on a high and Rahul Bajaj, founder and then managing director, was betting big on scooters and not on mobikes, at least then. The Honda overtures were spurned and the Japanese company forged a JV with the Ludhiana-based Hero Cycles.

In hindsight, Bajaj made a bit of a mistake then. He read the market wrong. It belonged to motorcycles, not scooters. Today, Bajaj's son, Rajiv, admits as much. At a recent dealer conference, he admitted that Bajaj Auto had missed the seismic shift of consumers from scooters to motorcycles (he doesn't regret the lost opportunity with Honda though!). Back in 1995, the Indian two-wheeler market comprised 1.2 million scooters and just 760,000 motorcycles. In 2004-05, it's the other way around: 0.92 million scooters and 4.96 million motorcycles.

"Rural buyers are extremely aspirational; they know the latest trends, but are more conscious of price and fuel economy" Sanjiv Bajaj Director (Finance)/Bajaj Auto

A 10-million Bike Market

It wasn't that the entry of motorcycle manufacturing JVs like Hero Honda Motors or Yamaha's erstwhile JV with Escorts or Suzuki's with TVS changed the market overnight.

It was gradual. The new four-stroke motorcycles launched by Hero Honda, in particular, offered greater fuel economy (which made them attractive to consumers at a time when fuel costs were rising) and unmatched reliability. Hero Honda's memorable, "Fill it; Shut it; Forget it" advertising slogan said it all. Buyers took the bait. By 1998-99 things had changed very dramatically. What had been a scooter market was now becoming a motorcycle market. For the first time, motorcycle sales exceeded those of scooters-1.36 million as against 1.29 million, which, incidentally, is the all-time high for scooters.

Drama happened elsewhere too. By 2002-03, Hero Honda had vaulted past Bajaj Auto to become India's largest two-wheeler company. And this year, the company's annual sales are expected to be close to three million units, larger than what the entire motorcycle market was in 2001-02. The pace of growth of motorcycle sales has been remarkable, clocking a compounded annual growth rate of over 20 per cent over the decade between 1995-96 and 2004-05. And there's no sign of a let-up in that pace. In the first seven months of last year, motorcycle sales grew 18.83 per cent. (Cars grew 6.9 per cent.)

The world's largest two-wheeler manufacturer Honda is so excited about the prospect of India being a growth market that it has started a second two-wheeler company in India, Honda Motorcycle & Scooter India (HMSI). Its Managing Director Yukihiro Aoshima believes that it is not a question of if India will become a 10-million motorcycle a year market, but when? Quite soon, perhaps. If the market for motorcycles continues to grow at the current rate, that could happen in the next five or six years. However, Pawan Munjal, Managing Director, Hero Honda, the world's largest single manufacturer of motorcycles, believes it could happen before that. "Just look at the rate the market has been growing at, and there are no reasons for the growth to slow down. I believe that we will cross the 10-million mark before 2010," he says.

"A motorcycle is still a very aspirational product in small towns and cities. It is the ultimate symbol of an India on the move" Satya Sheel Managing Director/Suzuki Motor India

Revving Up In Rural India

No one's more bullish than the players in the industry. Suzuki Motor Company might be better known in India as being the largest carmaker Maruti's parent company, but across Europe and America it is better known as a maker of motorcycles and, after divorcing its Indian partner TVS almost four years ago, it is on the verge of making a return to the Indian market. "A motorcycle is still a very aspirational product; in smaller towns and cities when people buy a motorcycle it gives them a certain feeling of prestige. And most importantly it gives people a sense of freedom, it opens up opportunities, which is why people will continue to buy motorcycles. The motorcycle is the ultimate symbol of an India on the move," says Satya Sheel, Managing Director, Suzuki Motor India.

With swathes of rural India, where 70 per cent of the population lives, yet to be targeted by marketers, and the growth of roads in the countryside, two-wheeler sales are expected to keep growing. Besides, with rising incomes and youth dominating the demography-by 2011, a quarter of the population will be in the 15-24 age group (according to the 2001 Census)-everything seems to be in favour of two-wheeler manufacturers. "Rural roads will be the biggest driver of two-wheeler growth," says Arindam Bhattacharya, Director, Boston Consulting Group. "There are some 25 million motorcycles on Indian roads. So you can work out how under-penetrated the market is. A lot of the motorcycles on roads today have been sold in urban areas, but the bulk of two-wheeler sales in the future will come from rural areas. In fact, I find it surprising that no one has actually tried to make another 'Rajdoot' (a popular rugged motorcycle in the 1980s) in India."

Rural markets already account for almost a third of all motorcycle sales but, according to Munjal, rural users account for at least half of all motorcycle users, "Many buyers go into big towns to buy motorcycles, so a company like ours can't treat the rural consumer lightly." The problem is one of reach. "We're not an FMCG company that can reach every nook and cranny of the country. We're an engineering company. No matter how reliable and efficient you make a product, it might need to go to a workshop and you can't possibly establish workshops everywhere," says Munjal. Still, Hero Honda is developing an innovative way around that by starting mobile workshops.

Japan Rules In scooters, the Japanese sun has risen over the son of the soil.

Financing The Rural Buyer

Although motorcycle manufacturers and dealers point out that the majority of sales (in rural markets) are cash purchases, often as part of the dowry during weddings, finance options for rural buyers of two-wheelers are growing. Overall, while 95 per cent of car deals are financed, only around 60-65 per cent of motorcycle purchases are financed. However, unlike cars, motorcycle sales have a few problems. "The ticket size is quite small, which means that interest rates can be quite high-in the 16-18 per cent range," explains Sachin Khandelwal, General Manager (Auto Loans), ICICI Bank. The other problem is that even banks like the State Bank of India, which has 6,600 rural and semi-urban branches, don't have the reach or resources needed to service rural motorcycle loans. "It doesn't make sense to go someplace where only one or two people will buy the product in a year," argues Khandelwal, "We do reach over a thousand cities and small towns, but reaching the village level is not happening right now."

That is why Khandelwal feels that the best way for two-wheeler finance in rural areas might be via the self-help group and micro-finance route. A route that Bajaj Auto is already taking. "We have tied up with NABARD (National Bank for Agriculture and Rural Development) to help more rural consumers buy our products without breaking their back in the process," says Sanjiv Bajaj, Director (Finance), Bajaj Auto. But Bajaj also feels that rural buyers present a dichotomy to manufacturers. "Rural buyers are extremely aspirational; they watch TV so they know the latest trends in style and design, but they are far more conscious of price and fuel economy," he points out. Bajaj Auto, which struck gold with its entry-level model, the ct100 knows this aspect well. But as Hero Honda's Munjal points out: "The entry-level segment is growing, and with motorcycles today priced as low as Rs 29,000, it will continue to grow. But with input costs rising, margins are under a lot of pressure. Reductions can still be made in the distribution and marketing structure, but I believe that prices of motorcycles have gone as low as they can possibly go."

"Just look at the rate the market has been growing at. I believe we will cross the 10-million mark before 2010" Pawan Munjal Managing Director Hero Honda Motors

According to players like Munjal and others, the meat of the market will continue to remain what the industry dubs the 'executive commuter' segment. Hero Honda, which dominates this segment with its Splendor and Passion models, believes that the biggest chunk of the market will remain in this segment for the foreseeable future. "There is a gradual shift of consumers towards higher-powered bikes, but most consumers will upgrade towards a 125cc product, not 150cc and upwards," says Munjal.

Despite the entry of new players like HMSI and Suzuki, which is expected to launch its bikes later in 2006, and older players like TVS Motor, Yamaha and LML, the motorcycle market is a game of two, Hero Honda and Bajaj Auto, who together account for 80 per cent of the domestic market. Add TVS Motor to that club and it controls 90 per cent of the market. "Do I think Hero Honda can hold on to a 50 per cent market share? Difficult, but not impossible," says Munjal. His arch rival Bajaj Auto, still smarting after being dislodged from its numero uno position, is not one to give up. At a recent summit, Rajiv Bajaj highlighted his single-point agenda: to regain top spot. Both companies are ramping up their capacities to take advantage of the coming boom and, of course, to continue their cut-throat battle. You can be sure, 2006 won't be a dull year for the two-wheeler market.