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“BAJAJ V/S HERO HONDA”
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INTRODUCTION
Peter Drucker called the automobile industry as "the industry of industries". During
the last few years, the production and management systems have been revolutionized
in the automobile industry (Karmokolias, 1990). One of the major changes in the
industry has been the opening up and growth of several emerging markets. In 1991,
the Government of India embarked on an ambitious structural adjustment programme
aimed at economic liberalization, based on the pillars of Delicensing, Decontrol,
Deregulation and Devaluation. Post-liberalization, the Government of India's new
automobile policy announced in June 1993 contained measures, such as delicensing,
automatic approval for foreign holding of 51% in Indian companies, abolition of
phased manufacturing programme, reduction of excise duty to 40% and import duties
of CKD to 50% and of CBU to 110%, and commitment to indigenization schedules.
The Indian automotive industry has been on a high growth path in the domestic
market, given strong demand-push factors coupled with an encouraging policy
environment. Changing lifestyles, increasing disposable income, deterioration of
public transport and accelerated urbanisation is leading to a growth in demand for
passenger vehicles and 2-wheelers. Improving rural income on account of the rise in
the agri-commodity prices and near normal monsoons together can boost the demand
for tractors. Domestic demands for cars are expected to grow at a double-digit rate for
the next three to four years. The brilliant performance of the automotive sector is
attributed to better performance of the economy and high all round growth leading to
robust GDP growth, improved infrastructure development, excise duty reduction on
passenger vehicles, improved financing of second hand vehicles, availability of
finance in rural and semi-urban areas and the emergence of India as a manufacturing
hub for the automotive industry. Investment upto Rs 30,000 crore has been planned
for the Sector, by leading Indian and global players, by 2010.
The Indian automotive industry consists of five segments: commercial vehicles;
multi-utility vehicles & passenger cars; two-wheelers; three-wheelers; and tractors.
With 5,822,963 units sold in the domestic market and 453,591 units exported during
the first nine months of FY2005 (9MFY2005), the industry (excluding tractors)
marked a growth of 17% over the corresponding previous. The two-wheeler sales
have witnessed a spectacular growth trend since the mid nineties.The two-wheeler
industry (henceforth TWI) in India has been in existence since 1955. It consists of
three segments viz., scooters, motorcycles, and mopeds. The increase in sales volume
of this industry is proof of its high growth. In 1971, sales were around 0.1 million
units per annum. But by 1998, this figure had risen to 3 million units per annum.
Similarly, capacities of production have also increased from about 0.2 million units of
annual capacity in the seventies to more than 4 million units in the late nineties. The
two-wheeler industry in India has to a great extent been shaped by the evolution of the
industrial policy of the country. Regulatory policies like FERA and MRTP caused the
growth of some segments in the industry like motorcycles to stagnate. These were
later able to grow (both in terms of overall sales volumes and number of players) once
foreign investments were allowed in 1981. The reforms in the eighties like
‘broadbanding’ caused the entry of several new firms and products which caused the
existing technologically outdated products to lose sales volume and/or exit the market.
Finally, with liberalization in the nineties, the industry witnessed a proliferation in
brands.
The technological backwardness of the Indian two-wheeler industry was one of the
reasons for the initiation of reforms in 1981. Foreign collaborations were allowed for
all two-wheelers up to an engine capacity of 100 cc. This prompted a spate of new
entries into the industry the majority of which entered the motorcycle segment,
bringing with them new technology that resulted in more efficient production
processes and products. The variety in products available also improved after
‘broadbanding’ was allowed in the industry in 1985 as a part of NEP. This, coupled
with the announcement of the MES of production for the two wheeler industry, gave
firms the flexibility to choose an optimal product and capacity mix which could better
incorporate market demand into their production strategy and thereby improve their
capacity utilization and efficiency. These reforms had two major effects on the
industry: First, licensed capacities went up to 1.1 million units per annum
overshooting the 0.675 million units per annum target set in the Sixth Plan. Second,
several existing but weaker players died out giving way to new entrants and superior
products.
In a consumer durables industry in which there is a proliferation of brands, we expect
the long run competitive structure at the level of the industry to be oligopolistic. This
is due to the fact that in order to survive firms must introduce new brands which
might improve capacity utilization even as this induces brand competition. This, in
turn, will cause only a few large firms in the industry to survive indicating that in the
long-run, a brand proliferated consumer durable industry will tend towards oligopoly.
We expect a general downward stickiness in prices and resultant increase of volatility
in non-price variables such as sales volumes, market-shares etc. Convergence is likely
to be absolute at the level of the segment and conditional at the level of the industry.
Competitive strategies (which include product development and other strategies
aimed at innovation and technological change) are more inter-dependent at the level
of the market-segment than at the level of the industry. This is due to the fact that
within each segment the products are, to a large extent, similar. Hence we can expect
convergence to be absolute at the level of the segment and conditional at the level of
the industry.Two-wheeler sales continue to be buoyant with a 19% growth joy, driven
by its motorcycle segment that has posted a rise of 24%. Bajaj Auto’s market share in
the domestic motorcycle market has improved from 23% in FY03 to 30% in FY06.
Hero Honda, the largest motorcycle manufacturer in India, with a domestic market
share of 50% in FY06, was down from 52% in FY05, while the market share of TVS
Motors is 18%. The Indian two-wheeler industry is entering a strong secular growth
phase, driven by increasing affordability, easy availability of finance, and accelerating
exports. The next phase of earnings growth will be driven by unit volume growth,
while the four-wheeler passenger car industry is driven by low penetration, increasing
consumer aspiration levels, increasing affordability, and proliferation of new models.
Some of the features that deserve attention in respect of the Indian two wheeler
segment are as mentioned:
The total sale of two wheelers in India has touched a figure of 7.86 million units
by March, 2007, up 11.42% from the previous fiscal figures of 7.05 million.
Production during the period reached 8.63 million units.
The production of two wheelers in India is expected to reach a staggering 17.85
million units by 2011-12, more than double of the current production level.
The two-wheeler production capacity is to reach 22.31 million units in 2011-12
compared with 10.78 million in 2006-07.
India is likely to export 1.39 million two-wheelers in 2011-12 compared with
590,000 in 2006-07.
Total investment for new capacity generation in two-wheeler segment is likely to
be more than $2.2 billion (INR10, 000 crore).
Hero Honda, Bajaj Auto and TVS Motor remain the leading players in terms of
sales and popularity of their two wheelers.
After facing its worst recession during the early 1990s, the industry bounced back
with a 25% increase in volume sales in FY1995. However, the momentum could not
be sustained and sales growth dipped to 20% in FY1996 and further down to 12% in
FY1997. The economic slowdown in FY1998 took a heavy toll of two-wheeler sales,
with the year-on-year sales (volume) growth rate declining to 3% that year. However,
sales picked up thereafter mainly on the strength of an increase in the disposable
income of middle-income salaried people (following the implementation of the Fifth
Pay Commission's recommendations), higher access to relatively inexpensive
financing, and increasing availability of fuel efficient two-wheeler models.
Nevertheless, this phenomenon proved short-lived and the two-wheeler sales declined
marginally in FY2001. This was followed by a revival in sales growth for the industry
in FY2002. Although, the overall two-wheeler sales increased in FY2002, the scooter
and moped segments faced de-growth. FY2003 also witnessed a healthy growth in
overall two-wheeler sales led by higher growth in motorcycles even as the sales of
scooters and mopeds continued to decline. Healthy growth in two-wheeler sales
during FY2004 was led by growth in motorcycles even as the scooters segment posted
healthy growth while the mopeds continued to decline. Figure 1 presents the
variations across various product sub-segments of the two-wheeler industry between
FY1995 and FY2004.
DEMAND DRIVERS
The demand for two-wheelers has been influenced by a number of factors over the
past five years. The key demand drivers for the growth of the two-wheeler industry
are as follows:
Inadequate public transportation system, especially in the semi-urban and rural
areas;
Increased availability of cheap consumer financing in the past 3-4 years;
▪ Increasing availability of fuel-efficient and low-maintenance models;
▪ Increasing urbanisation, which creates a need for personal transportation;
▪ Changes in the demographic profile;
▪ Difference between two-wheeler and passenger car prices, which makes two-
wheelers the entrylevel vehicle;
▪ Steady increase in per capita income over the past five years; and
▪ Increasing number of models with different features to satisfy diverse consumer
needs.
While the demand drivers listed here operate at the broad level, segmental demand is
influenced by segment-specific factors.
DEMAND
Segmental Classification and Characteristics
The three main product segments in the two-wheeler category are scooters,
motorcycles and mopeds. However, in response to evolving demographics and
various other factors, other sub segments emerged, viz. scooterettes, gearless scooters,
and 4-stroke scooters. While the first two emerged as a response to demographic
changes, the introduction of 4-stroke scooters has followed the imposition of stringent
pollution control norms in the early 2000. Besides, these prominent sub-segments,
product groups within these sub-segments have gained importance in the recent years.
Examples include 125cc motorcycles, 100-125 cc gearless scooters, etc.
‘Riding on Top Gear’ is what our two-wheeler update said for the first half of FY05,
wherein the industry volumes had grown over 12% on back of good monsoons. If that
was anything to be happy about, the second half of FY05 has given the industry
reasons to celebrate, with strong volume rise of nearly 16% (Apr-Feb) in motorcycles,
largely aided by faster growth in the entry level 100 cc segment. Though competition
has been on the rise in the past year, with new models and variants being launched
every alternate day, the overall market has been growing fast enough to accommodate
all of these models. The most striking feature of the year gone by was the growing
volumes in favour of the entry-level segment. Industry leaders Hero Honda and Bajaj
Auto have once again kept the other players at bay, and increased their market share
during the year. In fact, Bajaj Auto has been outperforming the industry by a good
margin for the last few months, courtesy its new launches CT100 and the Discover.
TVS Motor on the other hand has been reeling under pressure since the time its Max
100 sales started dipping at the end of FY04 while the new models are yet to taste
success in the market. Apart from the big three, the talk of the town in the past year
was the entry of Honda Motors into the Indian motorcycle segment through its
‘Unicorn’. Launched in the premium 150 cc category, the bike received spectacular
response initially with a waiting period of almost 6 weeks.
The 2-wheeler segment displayed a buoyant performance, largely attributed to Bajaj
Auto’s newly launched Platina in the entry-level segment, which has posted 1-lakh
unit sales within three months of its launch and the Discover model in the 125-cc
segment. The Company’s focus towards the executive and premium motorcycle
category has led to the expansion of the two-wheeler segment and has pushed it up the
value chain, availing better profitability. From FY06 till date, the Company has
notched up a 200-bps gain in the market share in these two segments, from 31% to
33%, respectively, eating into the market share of Hero Honda. The Company is also
likely to start manufacturing a four-wheeler low-cost goods carrier by end 2008 or
beginning 2009. Despite the strong volume growth witnessed by the industry, profits
have grown at a slower rate or even de-grown in some cases due to the cost pressures
and higher sales of economy bikes. Due to growing competition, manufacturers
resisted passing on price hikes and instead took a hit on their profits. However,
recently the companies have raised prices on most of their models by around 1-3%.
The margins for Q1FY07 for Hero Honda have been the lowest for the Company in
recent past, indicating that the margins will continue to be under pressure due to
hardened metal prices. But with hike in prices of different models, margins may show
an improvement in the current quarter as compared to last quarter’s. The Company
plans to launch seven new models in FY07, and with the launches scheduled for Q3 &
Q4, volumes are expected to grow significantly during this period. This may translate
into a richer product mix, in favour of the executive & premium segments, helping
realisations to improve. However, Hero Honda appears to be on a defensive mode,
with Bajaj Auto scoring aggressively. The first-quarter results for the automobile
sector assume great significance, given the volatility that the economy has witnessed
in the past few months. However, despite the uncertainty, the mood was upbeat
among vehicle makers and most of them posted a positive growth. With most
companies, particularly in the consumer-led 2-wheelers and passenger car space,
announcing price hikes, margins are expected to remain protected despite cost
pressures. While the Q2FY07 earnings growth should remain moderate due to the
monsoons, higher earnings are expected, Q3FY07 onwards. We advise investors to
Hold M&M, Tata Motors and Maruti, and give a BUY recommendation for Bajaj
Auto.
Globalisation is pushing auto majors to consolidate, to upgrade technology, enlarge
product range, access new markets and cut costs. Major areas of concern will remain
the high and rising prices of crude oil, rubber, steel and other metals, which put
pressure on the input costs. Increase in the interest rates and exchange rate
fluctuations may further add to the uncertainty. Though the demand outlook remains
strong, the key issue is how to increase supplies and capital expenditure, required to
ramp up the capacities, as most of the automobile companies are investing in
augmenting them. Auto Companies would have to play with their product mix and
increase their volumes in order to survive the current scenario.
MARKET HIGHLIGHTS
1. High Growth market
At just over 7.3 million vehicles sold in 2004-2005, the Indian automobile market is
one of the fastest growing in the world. Total unit sales grew 15.8% in 2004-05 over
the previous year.
2. 75- 125 cc motorbikes see most action
84% of the 4.9 million motorbikes sold in India in 2004-05 were in the 75-125 cc
range. This segment has the largest number of brands and variants in style and price.
Significantly, this segment has lost 3% share since 2003-04 to 125-250 cc
bikes.
3. Scooters grow 4%; 75-125 cc most popular
Scooters, geared and ungeared, are enjoying a revival of sorts, growing 4% since
2003-04 to under a million units. 63% of all scooters sold are in the 75-125 cc
segment, where all the major players have brands. Also, most of these are of
automatic gears as well.
4. Revival of the mopeds
Mopeds of engine capacity less than 75cc grew 4% in 2004-05 to 3.2 lakh units after
two years of falling sales.
5. Rise of the 4-stroke
4-stroke engines are now the preferred engines even though power developed is lower
than in a 2-stroke because they are more environmentally friendly, and can match the
stringent emission norms that are now in place even in India.
6. Easy Financing
Cheap loans and fast processing has made owning a two wheeler extremely easy,
thereby spurring sales as well.
Scooters dominated the Indian two-wheeler industry till the early 1990s, when
motorcycles from Hero Honda began to appear. Within half a decade, the market
shifted decisively to motorcycles, which delivered better, styling, and power and fuel
efficiency. Today motorcycles account for three quarters of all two-wheeler sales, a
total of 49.6 lakh sold in 2004-05 against 9.2 lakh of scooters. The advent of Honda
spurred the scooter market again, with a range of ungeared and geared scooters
emerging with great style and a market positioning targeting the youth- a step
between the moped (positioned for students) and the motorcycle (upwardly mobile
young men). This strategy paid dividends to every company that adopted it; today
Honda Scooters and Motorcycles (HMSI) holds a dominant share of the scooters
market. With the rapid rise of the scooter, the moped (motorized pedal cycle) as it was
known then died a sudden death in the early 1990s. However, from 2003-04 onwards,
moped sales have again begun to creep up: chiefly because the new ranges now are a
far cry in style and power from those in the late 1980s and early 1990s. 3.2 lakh
mopeds were sold in 2004-05, a rise of 4% over the previous year but still quite way
off from the 3.84 lakh sold in 2001-02. Significantly, exports have risen from around
16,000 units in 2001-02 to over 28,000 in 2004-05.
Market
The size of the Indian two-wheeler market is 62.1 lakh units in 2004-05,
increasing by 16% over 2003-04.
Motorcycles
The motorcycles segment of two wheelers has seen the greatest number of
new launches as well as the most fierce competition on every plank – pricing, style,
power, fuel efficiency, pedigree and so on. The 75-125 cc segment, also called the
economy segment, remains the driver for the industry, accounting for 84% of all sales
in 2004-05 (see table ‘ Mobikes Map’). Price points in the 75-125 cc range from a
low of Rs 38,000 to as high as Rs 65-70,000. A marginal shift towards the next higher
category of power, 125-250 cc is becoming visible in
2004-05, driven by lifestyle statements, need for speed and style, greater disposable
incomes and quite simply more variety on offer in the segment. Hero Honda’s
Karizma, for example, was one of the first to be launched in this segment at over Rs
80,000 a piece, and much to the company’s surprise, sold over 2,000 units every
month in the first year of its launch. More surprisingly, its demand was coming not
just from the metros, but the semi-urban areas in North India as well. Clearly, there
was a demand for such products. Today Bajaj Auto has its hugely successful Pulsar
positioned directly against the Karizma, while all other players are at differing levels
of power and price as well. In fact, 15% of all motorbikes sold in 2004-05 were in the
125-250 cc range, up from 10% in 2003-04.
Every second motorbike in India is from Hero Honda, which holds 51.5%
market share in 2004-05. It has gained and retained that share since 2003-04 (see
table ‘ Motorcycle market shares’). Bajaj Auto , rejuvenated into a motorbike
company now rather than a scooter one, has also been steadily gaining share, from
24.5% in 2001-02 to 27% in 2004-05. Every other player has his work cut out to
regain any share.
Scooters
Most scooter manufacturers were caught off guard by the Indian market’s
rapid shift to motorcycles. Long seen as family workhorses, scooters lost share
steadily to motorbikes all through out the 1990s. It was only when an entirely new
segment – youth- was tapped with style, power and price that things started looking
up again for scooters. Being positioned as easy to drive with all the power of a
traditional 125 cc Bajaj Chetak (the standard bearer for scooters), the new scooter
easily straddled the gap between the moped and the motorbike- providing another
competition to the geared scooter. Today, 3.2 lakh scooters – of all kinds – are sold in
India, 4% higher than in 2003-04 (see table ‘ Scooters Map’), but still some way off
from the 3.8 lakh sold in 2001-02. Scooters account for 15% of all two-wheeler sales
in 2004-05 against 17% in 2003-04. Again, it’s the 75-125 cc segment that is hot on
sales in scooters even though the segment started off with the less than 75 cc range,
but moved quickly to the middle range.
Not even a decade ago, Bajaj Auto and TVS dominated the scooters scene;
today its Honda Scooters and Motorcycles (HMSI) that holds the dominant share.
While Bajaj has reinvented itself into the higher value larger motorcycle segment,
practically giving up on the scooters front, TVS Motor has managed to do well;
launching a series of brands- which shows up in the rise in market share from 16% in
2001-02 to just below 24% in 20040-05 (see table ‘Scooters market share’)
Mopeds
The smallest segment in two wheelers is the mopeds one, at 5% of total two
wheeler sales in 2004-05, with 3.2 lakh units sold (see table ‘ Moped Map’)
Only three companies, much the same as before, remain active in the mopeds
business. This segment has seen a revival of sorts, with better styling and power. TVS
Motors absolutely dominates mopeds, with over 80% share in 2004-05, a significant
jump over the 66% it held in 2001-02 (See table ‘ Mopeds market share’)
Exports
Motorcycles, scooters and even mopeds have been doing well on the export
front- mainly to neighbouring countries in Asia like Sri Lanka, Thailand, and
Indonesia. Many of the Indian players have also set up plants in those countries. Bajaj
Auto leads in exports with a 49.6% growth in units over 2003-04 (see table ‘
Motorcycle exports’). In scooters, it’s Honda Scooters all the way (see table ‘
scooters exports’). Scooter exports overall grew 13% in 2004-05 over the previous
year.
In mopeds, Majestic Auto leads the charge with a 14% rise in exports, a slow
down from the 26% it posted in 2003-04. TVS Motors is fast catching up, though- a
89% rise in exports in 2004-05 is the highest growth rate in exports in 2004-05 (See
table ‘ Mopeds exports’)
Present scenario for motorcycle segment in the industry
Having a glance at the industry, there is an increasing demand for the latest and fuel
efficient four stroke motorcycles at the cost of a cannibalization of the traditional
scooter segment. We believe the growth in motorcycle segment has remained
consistently good due to
Rise in rural demand as the per capita income of rural people have increased
More suitability on rural road conditions, comfortable long distance riding and
ease of maintenance
The stricter emission norms increase the cost of manufacturing of two stroke
vehicles which in turn brings a shift from two stroke vehicle to four stoke
motorcycles
Option of various Finance schemes available and above all
Consumer preferences for the latest, stylish and fuel-efficient motorcycles.
INDUSTRY CHALLENGES AND OPPORTUNITIES
The Indian two-wheeler industry saw an increase of 15 percent during the
year. Two-wheeler sales crossed 7.5 million units mark, which accounted for more
than 80 percent of domestic auto sales. Motorcycles shared around 82 percent of the
entire two-wheeler sales. However, industry margins came under some pressure
during the year in review because of an increase in input prices of steel, aluminum
and rubber. Operating margins were also affected on account of erratic power supplies
and high costs of back up power. Nevertheless, the upside potential for the future is
still extremely high because of the sheer potential for volume growth. According to
NCAER, there are about 225 million people - about 22 per cent of the population-who
live in households that have an annual income range of Rs. 90,000-200,000. Large
towns (population of over 500,000) have about 30 per cent of this population, while
rural India has about half of this income group. These groups are the real growth
engines for the great Indian dream, because at these levels, a number of aspirational
and discretionary purchases (which includes two-wheelers) are within reach. Against
this backdrop, your Company should be able to comfortably sustain double-digit
growth in the medium to long term, despite increasing competition.
Inputs and Technology
Technology
Hitherto, technology transfer to the Indian two-wheeler industry took place
mainly through: licensing and technical collaboration (as in the case of Bajaj Auto
and LML); and joint ventures (HHML). A third form - that is, the 100% owned
subsidiary route - found favour in the early 2000s. A case in point is HMSI, a 100%
subsidiary of Honda, Japan. Besides the below mentioned technology alliances,
Suzuki Motor Corporation has also followed the strategy of joint ventures (SMC
reportedly acquired equity stake in Integra Overseas Limited for manufacturing and
marketing Suzuki motorcycles in India).
Technological tie-ups of Select Players
Nature of Alliance Company Product
Bajaj Auto Technological tie-up Kawasaki Heavy Industries Ltd, Japan Motorcycles
Technological tie-up Tokya R&D Co Ltd, Japan Two-wheelers
Technological tie-up Kubota Corp, Japan Diesel Engines
HHML Joint Venture Honda Motor Co, Japan Motorcycles
KEL Technological tie-up Hyosung Motors & Machinery Inc Motorcycles
KEL Tie up for manufacturing
and distribution
Italjet, Italy Scooters
LML Technological tie-up Daelim Motor Co Ltd Motorcycles
Hero Motors Technological tie-up Aprilia of Italy Scooters
Compiled by INGRES
With the two-wheeler market, especially the motorcycle market, becoming
extremely competitive and the life cycle of products getting shorter, the ability to
offer new models to meet fast changing customer preferences has become imperative.
In this context, the ability to deliver newer products calls for sound technological
backing and this has become one of the critical differentiating factor among
companies in the domestic market. Thus, the players have increased their focus on
research and development with some having indigenously developed new models as
well as improved technologies to cater to the domestic market. Further, with exports
being one of the thrust areas for some Indian two-wheeler companies, the Indian
original equipment manufacturers (OEMs) have realised the need to upgrade their
technical capabilities. These relate to three main areas: fuel economy, environmental
compliance, and performance. In India, because of the cost-sensitive nature of the
market, fuel efficiency had been an interest area for manufacturers. It is not only that
the OEMs are increasing their focus on in-house R&D, they also provide support to
the vendors to upgrade the technology and also assist them striking technological
alliances.
2-stroke v/s 4-stroke
The single most important change in the 2-wheeler market is that of the
movement from the 2- stroke to the 4-stroke engines driven by environmental and fuel
efficiency concerns. The 4-stroke engine, by virtue of burning fuel more completely
than the 2-stroke, emits lesser pollutants as well, as vital factor as emission norms
move from tail-pipe norms to engine norms and the margins themselves become
tighter. Because a 2-stroke engine gets a power stroke twice as often as a four-stroke
engine, it puts out about twice as much power (and makes twice as much noise) as a
four-stroke engine of the same size. Hence in times when emission and fuel wasn’t as
much a concern, powerful bikes used the 2-stroke engine. Secondly, a 2-stoke engine
is exposed to much more wear and tear in pressure and combustion than a 4-stroke,
with the result the 2-stroke engines need a good deal more high quality lubricating oil
than the 4-stroke. The net result is that 2-stroke engines can be quite expensive to run.
In the consumer market, the cruiser and economy segments sell much more than the
motor or premium range where the power/ weight ratio is key. The 4-stroke engine
adapts well to longer and continuously running times, combusting fully and with less
pollutants. Newer developments in fuel injection and timing in4-stroke engines have
improved power / weight ratio as well, so that many of the disadvantages of the lower
power in 4-stroke are gone now- much the same way as MPFI and common rail
injection in diesel have improved efficiencies for cars.
Emission standards
India is adopting increasingly stringent emission standards, which have a
direct implication on engine design and quality. 2-stroke engines are already passé,
while the four strokes are being continuously upgraded to reduce both tailpipe
emissions and engine emissions. Today India is adopting the Bharat II and III norms
for emissions, which are as stringent as those in the European markets.
Companies
Hero Honda
Hero Honda is India’s largest motorcycle company with 2004-05 sales of 26.2
lakh units, giving it a market share of 51.5% in motorcycles. Founded in 1984 in a
joint venture with Honda Motors, Japan, Hero Honda is one of the most profitable and
smoothly operating JVs for Honda Motors anywhere in the world, giving it a foothold
in one of the world’s largest and fastest growing two wheeler markets.
In 1985-86, Hero Honda sold just 43, 000 units, launching its business with
the CD-100; Five years later, in 2000-01, it sold over 10 lakh, and in another five
years, doubled that to over 25 lakh units. In 1987, it started the engines plant as well,
and produced with 100,000th bike that year. 1989 saw the launch of the Sleek, now
discontinued. It was in 1994 that Hero Honda introduced the Splendor, which would
go on to become the world’s single largest selling motorbike brand. In 1995, Hero
Honda was producing 800 bikes a day, 4 times the number of bikes it could produce a
day when it started up. By 1997, the company was producing 1200 bikes a day. In
2001, Joy and Passion were launched, and the Ambition was launched in 2002. Since
then, the company launched Karizma, at Rs 80000 one of the most expensive heavy-
cc bikes (250cc) in India, but which once again belied the general belief of India as a
low-price market.
The company was also surprised when demand for this expensive bike came
from rural and semi urban areas and it sold 2000 bikes a month for a few months. This
bike opened up a whole upper cc segment in bikes. Today Bajaj Pulsar is its biggest
competitor in the 250cc range. It was the first to herald the shift from scooters to
motorcycles with style, power and competitive pricing. For much of the early 1990s,
established players like TVS Motors and Bajaj Auto suffered reverses as the market
shifted to motorcycles. Today, the scenario is different as both these competitors have
brands that challenge Hero Honda, but market leadership still remains with Hero
Honda. It was also the first to create critical mass in the 75-125cc ranges, where most
brands compete. Hero Honda set a first with its dividend policy as well, announcing a
1000% dividend in 2003-04. With the motorcycle business doing well, Honda Motors
announced its own entry into India but not in the segments where Hero Honda
operated; also the technical JV was extended for another decade. Hero Honda sales
for March 2005 were Rs 7,421 crore, against Rs 5,832 crore in March ’04. Net profits
stood at Rs 810 crore against Rs 728 crore in March ’04.
Bajaj Auto
Founded in 1945 and reborn fifty years later. Bajaj auto is a revival story.
Long known for its scooters like the Chetak, which gave it over 90% of its sales for
most of the past few decades, today Bajaj Auto is more known for its motorcycles,
after reinventing itself in the late 1990s. Today its brands give the leader Hero Honda
a run for its money in every segment of the motorcycle business; while its scooters
have seen a revamp in style and power and are beginning to fight back against the
brands like TVS and Honda Scooters. Its come a long way since importing 2 and 3
wheelers in 1948. In 1959, it got its license to manufacture in India, and in 1971 it
introduced the 3-wheeler and one year later the Bajaj Chetak. 1976 saw the launch of
the Bajaj Super scooter and in 1977, the year the company sold 1-lakh units in the
year, it launched the rear engine rickshaw. In 1981 came the M-50 scooter, which
sells to this day specially in Pune and surrounding areas. In 1985, after 16 months of
its foundation, Bajaj Auto’s new plant at Waluj, Aurangabad started up. This plant
would produce the Kawasaki KB100 motorbike and M-80 scooters.
By 1990, the decline in the scooter market was visible, with the rapid increase
in motorbike sales. Bajaj was active in the motorbike market, but not as a core line of
business. As late as 1990, it launched the Bajaj Sunny, gearless scooter and until
1995, continued to upgrade and sell the scooters. From 1997 onwards, the pace of
new products ramped up- Spirit came in 1998, Legend, India’s first four stroke engine
scooter in the same year; and the Kawasaki Bajaj Caliber, its first serious attempt at
motorbikes also in 1998. The Caliber touched 1-lakh unit sales in less than 12months,
accelerating the shift towards the motorbike business in Bajaj Auto. In 2001, the
Eliminator (now discontinued) and the Pulsar- its first serious blockbuster- were
launched. But in 2003, the pace was frenetic. That year the Caliber 115 came in; so
did the Wind 125, and the Pulsar DTS-I. Bajaj Auto sold 1-lakh bikes in just one
month that year. 2004 was a brand change for Bajaj Auto, reflecting a new identity. In
May 2004, The Bajaj CT 100 bike was launched, in August the 4-stroke Chetak with
Wonder Gear and in September ’04, the Discover DTS-I. In June 2005, came the
latest launch, the Avenger. All the excitement, and the obvious improvement in
quality of Bajaj products, saw sales rise to match competition. From a market share of
24.5% in 2001-02 to 27% in 2004-05, Bajaj has gained at the expense of competitors
like TVS Motors, although Hero Honda also continues to grow its share. However, at
13.4 lakh motorbikes sold in 2004-05, Bajaj Auto is now a serious player in the
motorbike business.
In scooters, its work is still cut out. From a market share of 50.2% in 2001-02,
today it holds less than 14%; in the interval, Honda Scooters and Motorcycles (HMSI)
saw its share rise from 6.5% to 48.8%. TVS Motor took share from 16.3% to 23.7%.
Clearly, while it has its act right in motorbikes, a lot of work still needs to be done to
regain its pole position in the scooters market, which it once defined and dominated.
Bajaj Auto net sales for 2004-05 were Rs 5927 crore, against Rs 4916 crore in 2003-
04. Net profits were Rs 766 crore versus Rs 731 crore in 2003-04. It has also been
retiring surplus manpower: today 11,531 employees run it, against 17,213 in 1999-00.
A bulk of these are in the older plants, while the newest plant at Chakan, near Pune,
runs with less than 500 people with a productivity much higher than in any other
plant. One of the gains is that its gone from a net positive working capital of Rs 632
crore in 1999-’00 to a negative of 273 crore in 2003-04. Bajaj auto declared a 250%
dividend for 2004-05.
TVS Motor
The third largest motorbike company in India, TVS Motor, rolled out the TVS
50, India’s first moped (motorized pedal cycle) in 1980. It was also the first to
introduce a 100cc motorbike in India in September 1984.Another first was in 1994,
when it launched TVS Scooty, India’s first scooterrette (sub 100 cc variomatic gears
scooter). December 1996 saw the launch of India’s first motorbike with catalytic
converters for emission control, the 110 cc TVS Shogun. The 5-speed motorbike
Shaolin came in late 1997, and 4-stroke Fiero 150cc came in 2000.In August 2001
came its real blockbuster, the TVS Victor, a 4-stroke 110cc motorbike, which the
company claimed to be India’s first indigenously developed bike. Building on the
drive towards more fuel and emission efficient bikes, TVS launched its Centra, 4-
stroke 100 cc bike in January 2004. The 100 cc TVS Star came in September 2004.
The series of launches were needed as TVS struggled to maintain its lead in
the motorbike market. In the mid 1990s, Hero Honda opened up the market in all
segments, from 75-125-250 cc categories. From selling 7.1 lakh units a year in 2002-
03, to 6.82 in 2003-04 to 6.4 lakh in 2004- 05, TVS Motor has found the going hard
against Hero Honda and a rejuvenated Bajaj Auto. Its market share rose briefly to
19.2% in 2002-03 before slipping to 12.9% in 2004-05. It has primarily lost share to
Bajaj Auto over these years. One of its concerns is that it loss has been heaviest in the
key 75-125 cc segment, where its market share has dipped from 21% in 2002-03 to
17% in 2003-04 and to 12.8% in 2004-05. At the same time, it has gained market
share in the 125-250 cc range up to 14% in 2004-05 from 8% in 2002-03. Clearly, the
company is striving to move up the value chain, into a relatively less cluttered
marketplace.
TVS Motors net sales were Rs 2875 crore for the year ended March ’05 with a
net profit of Rs 137 crore, against net sales of Rs 2820 crore and net profits of Rs 138
crore in March ’04. The concern for TVS Motor comes also from the fact that falling
unit sales aren’t been shored up by any price rises and bottom line profitability is
being hit by rising raw material prices, which cant be passed on as a result of severe
competition. Operating margins have been squeezed as well, falling from 9.2% in
April-June ’04 to 4.9% in January- March ’05.It scooters business continues to do
well, where its market share went to 23.7% (2.19 lakh units) in 2004-05 from 16.2%
(1.35 lakh) in 2001-02. However this wasn’t enough to boost overall company
figures. Clearly, TVS Motor is on the lookout for a blockbuster down the road – and
not too far away either.
The outlook for the two-wheeler industry continues to remain rosy, with
motorcycles leading the growth. Top players have forecasted a growth of about 15%
for two wheelers for FY06 in their investor presentations post FY05 results. However,
this is an indicative number. It essentially means that companies expect sales to grow
in two digits. Easy finance, better and more models at same or lowering price points,
and fuel efficiency will drive growth. Rising fuel prices may in fact spur motorcycle
sales more than mopeds or scooters who offer much lesser mileage per litre. Threats
to growth of motorcycle sales are from the lowering prices of entry-level cars like the
M800 (seems a distant threat, but while motorcycles have become necessities, cars are
yet aspirational, if aspirations come within reach, they would become necessities
shortly). Growth could be impacted by the passing on of raw material price increases
to customers, as well as better scooters that take away a swathe of fence sitters
between scooters and motorcycles.
CHANGING TECHNOLOGY AND CONSUMER
BEHAVIOUR
TheTheory.
To fully understand consumer behavior we have to separate two actions by the
consumer. These two actions are interrelated. The consumer buys some goods, so she
realizes the “action of purchasing”. In this act of buying she buys several goods, at the
same time. The second action is the “action of consuming” goods. The later is related
with “experienced utility”, i.e. with the hedonistic capacity of the goods. The former
is related with the “decision utility”. The figure captures the relationships between
these two actions.
The relationship between decision utility and experienced utility is formed in
the consumer’s brain. Depending on the experienced utility, especially whether or not
she likes what she consumes, she will decide to purchase or not. Probably she will
consume most of the articles before she feels the need to purchase more goods. In
most cases the action of purchasing and consuming may be separated. Some of the
articles would be stored, and used later. For most services the two purchasing and
consuming activities are inter-related. I pay for the cinema and watch the movie right
after paying. But some of the services are enjoyed for a long time after paying for
them, like a hair-cut.
We have to think about the idea, that most of the stimuli we get over one
normal day, they do not come from the shopping. We get stimuli from our work, from
our own thoughts, from the our friends, family etc... But every now and then, we also
get stimuli from a newspaper, a new book, a new T-shirt something that we buy. But
if her arousal potential is being hold only by shopping it will mean that she needs to
keep on buying new things to feel comfortable. Novelty is a factor that is mixed in the
decision utility. Novelty makes goods important. But novelty disappears over time.
There is also the intrinsic value that a good offers to the consumer, i.e. on the capacity
to generate a positive hedonistic value. In this case the good has the potential to
become a habit. The first time somebody smokes, she does it because it is something
new for her, she wants to try. Initially there may be no addiction. But once the novelty
is gone the addictive good is still able to generate positive stimulus in the consumer.
The usual smoker does not buy cigarettes for the novelty but for the capacity that the
good in itself has to offer.
“Representation of consumer behaviour” in a model is how well the model
captures the consumer’s decision-making process in competing technologies. Models
that accurately capture consumer behaviour from empirical data are considered to be
behaviourally realistic. In addition to many financial variables about the technologies
in question, which are each technology’s capital cost and operating cost,
behaviourally realistic models can also include demographics, such as consumer
income, perceptions of risk, and the desire for new technologies. In contrast,
behaviourally weak policy models do not incorporate all of these factors in
determining technological adoption by consumers; some resort to simple decision
rules such as adopting technologies solely on the basis of financial costs.
As we approach the 21st century, the marketing function remains concerned
with serving customers and consumers effectively. While developing better marketing
processes and programs, we need to be aware that demographic shifts and emergence
of facilitating technologies in production, distribution and personal use are affecting
consumer behavior and therefore the marketing function. For example,
demographically we are witnessing the following major trends -- aging of population,
larger proportion of working women, decline of the middle class and increasing ethnic
diversity. These trends are unique that they are occurring simultaneously, have long
term impact and will effect society and the marketing function.
In the last decade, firms have been witnessing market fragmentation and
constantly evolving products and services. These changes have put pressure on the
marketing function to shift their strategies from stable markets to turbulent markets.
In fact, due largely to the evolving market place, firms have started questioning the
performance and productivity of the marketing function (Sheth and Sisodia 1993). As
firms approach the 21st century, they need to be cognizant of and anticipate changes
in customer behavior. The marketing function needs to convert anticipated customer
behavior changes into opportunities for sustained competitive advantage (c.f., Ashley
& Morrison 1997).
In the last decade there have been a rapid evolution of technologies in product
and service design and manufacturing, distribution, and personal use that have
facilitated changes in consumer behavior. For example, communication technologies
such as the internet, personal computers, and wireless communications have changed
shopping and consumption behavior. In the Indian automobile industry, consumers
(estimated at a quarter of buyers) peruse the market through various media, including
the Internet before they visit a dealer. This trend toward adopting new technologies is
expected to grow. About half of the Indian population look forward to technology
innovations.
Technology Evolution
Technological change has been extremely rapid during the past two decades,
and indications are that this rate of change will continue. The prices of most
technologies will continue to come down and the capabilities will continue to expand.
Many technologies that have already been developed will start to have
a significant impact on society (McRae 1996).
Alsop (1998) describes how technology will personalize marketing, customer
service and other areas of daily life by the year 2004. His additions include road signs
that change for each viewer, personalize electronic trading of securities, monthly
account statements from the IRS and periodicals customized for each reader. Regis
McKenna (1997) points out that current technologies produce instantaneous response
at the touch of a mouse. Consumers have changed their reference regarding sense of
time and instant satisfaction leading to an evolutionary change in judging good and
bad service. Customer expectations and satisfaction are now hyper accelerated if not
immediate for organizational response
The speed at which technologies are getting adopted has been increasing in
recent years it took 46 years for a quarter of American homes to be wired for
electricity. It took 35 years to get phones to a quarter of the population and 55 years to
get cars. Recent innovations such as the PC (16 years), cellular phones (13 years) and
the Internet (7 years) have penetrated much more rapidly (Cox and Alm 1997). The
relationship between consumer behavior and technology is a fascinating one, but has
not been examined in great detail. As Mick and Fournier (1998) point out, less than
one-fifth of one percent of studies on technology have consigned themselves with
consumer behavior. Mick and Fournier (1998) point out that technology is often
paradoxical in that it can simultaneously help and hinder customer behavior.
Facilitating Technologies and Consumer Behavior
The change in consumer behavior due to demographic trends on will be
facilitated by emerging technologies in production, distribution and personal use.
Undoubtedly, the pace of technological evolution has and will continue to have a
great impact on the lives of consumers. The new technologies are disruptive in that
they are changing consumer behavior and marketing practices at a pace not seen
earlier (Bower and Christensen 1994; Christensen 1997). Particularly, they make
incumbents vulnerable due to the impact of technology on production, distribution
and technologies for personal use.
Production Technology
Breakthroughs in production technology, such as CAD-CAM, flexible
manufacturing systems, and just-in-time production are impacting competitive
marketing in a number of ways. Other significant technologies in this area include
photorealistic visualization, groupware (e.g. conferencing systems across design
functions and across design, manufacturing and sales), virtual reality, Design-for-
Manufacturability and- Assembly databases, component performance history
databases, and 3-D physical modeling technologies such as stereolithography. These
technologies are increasing quality, reducing prices for many products, enabling a
higher level of customization and providing customers with a greater of variety.
Distribution Technology
Distribution technologies have rapidly changed in the last two decades (Ross
1996). Recent innovations in distribution technology include computer-assisted
logistics (CALS), the refinement of scanner and other product identification and
tracking technologies, electronic data interchange (EDI), point-of-sale (POS)
terminals linked to vendors, expert systems, satellite-based locational systems,
automated retail and warehouse ordering, and flow-through logistics. The benefits of
these technologies include reduced damages, reduced supplier and distributor
wholesale inventories, warehousing, transportation, administrative and manufacturing
efficiencies, reduced “forward buying”, better market coverage, fewer stock outs and
distress sales, more refined target marketing and faster response to market trends.
Technologies for Personal Use
The technologies with the fastest gains in price-performance are those
intended for personal rather than institutional use. Personal information devices have
been and will continue to ride a steep experience curve based on the unique
“economics of electronics.” One of the fundamental properties of such technologies is
their inverse economies of scale; the smaller the unit, the greater the price-
performance. This is due to the fact that smaller units can be produced in mass
quantities with very low (sometimes near zero) variable costs. Large units, on the
other hand, tend to be produced in small volumes and retain a significant proportion
of variable costs. Thus, today’s personal computers offer far more by way of “MIPS
per dollar” than do today’s mainframes or supercomputers; video games and other
lower end consumer devices tend to offer even better price-performance than that.
Consumers will rely heavily on small unit technologies, while producers will rely on a
mix of personal and institutionally-oriented technologies. As the power and
pervasiveness of the technologies at their command grow, consumers will be in the
unique and unaccustomed position of controlling a far greater share of the information
and communication flow between the buyer and seller than ever before. In other
words, customers can and will have more information about product providers in most
cases than providers will have about customers. Far from being passive “targets” of
marketing activity, customers will dictate the timing and modality of communications,
and they will determine the time and place of the resulting transaction.
The Impact on Consumer Behavior
As people start to change the way they work, communicate and spend their
leisure time, they will seek companies that will do business in the manner that they
prefer. Accustomed to always being within electronic reach of their family and
colleagues, they will seek marketers who do not demand adherence to rigidly defined
modes of commerce. Used to instantaneous response to their requirements for
information and entertainment, they will seek similar responses from marketers. With
constantly improving technology, they will seek avenues that will allow them to
acquire goods and services that require less time and effort. Future consumers will be
more demanding, more time-driven, more information intensive, and highly
individualistic. A combination of a ubiquitous broadband digital communications
network and high definition display terminals will further accelerate changes in
consumer behavior. With targeted, interactive digital media in the future, advertisers
will be able to “mass customize” their messages as well as allow for user interaction
and input. Shopping will also change. Buyers will have immediate access to a variety
of independent buying services, providing distributed expertise on demand. Because
of interactive advertising, buyers will be much more active in seeking even marketer-
provided information.
From Time and Location Bound to Time-Free and Location-Free Marketing
Commerce today, for the most part, tends to be time and location bound. That
is, transactions are constrained to occur at particular times, and/or at particular
locations (e.g., the retail store model). If the consumer is unable to transact at those
times or those locations, the transaction either does not occur at all, or occurs between
the consumer and an alternative supplier. Even if the transaction does occur, i.e., the
consumer is able to comply with the time and place requirements placed by the
supplier, it often forces undesirable tradeoffs upon the customer (e.g., higher prices at
convenience stores). For most consumers, there are alternative uses to which they
might put the same time, and the location constraint imposes an additional burden of
the time, effort and expense of making oneself physically available to transact.
Time and place constraints are slowly giving way, under the pressure of
increasingly hectic consumer lifestyles, heightened competition and myriad enabling
technologies. Behavioral barriers to the adoption of alternative modes of interacting,
be they based on engrained habits or perceived risks (Ram and Sheth 1989; Ram and
Jung 1994), have become increasingly porous and less rigid. We believe that this
forward momentum will result in a positive-feedback loop that will accelerate the rate
of consumer migration toward alternative modes of transacting. While no positive-
feedback loop can persist forever, we believe that a period of rapid, even explosive
growth lies ahead in this arena. It will subside only as a large majority of consumers
have been converted to the new model of commerce. Early examples of this
phenomena are Amazon.com and Peapod, a grocery delivery service. We are, then, in
the midst of a change from gravitational commerce (demarcated by its time and
location constraints upon customers) to an era of digital commerce, which will be
almost entirely free of those constraints. The future will see “anytime, anywhere
procurement” coupled with “anytime, anywhere consumption;” more and more
products and services will be purchased and consumed anytime, anywhere.
Consumers will demand and receive advertising and other forms of information “on
demand.”
The crucial importance of increased time and place utility is nowhere more
evident than in the banking industry. Banks face a massive dislocation in the near
future, as their vast and expensive time and location-bound distribution networks
(branches) may become obsolete. For example, Wells Fargo announced in the fall of
1995 that it planned to move 72 percent of its existing branch network into in-store
(supermarket) locations. Since in-store branches are only 20 percent to 25 percent of
the cost of conventional branches, this represents a substantial cost saving, as well as
a way to expand market coverage in terms of time as well as geography. The more
major shift, of course, is the move toward home or remote banking. This trend, still in
its early infancy, will take time and place utility to a much higher level.
With regard to supermarket retailing, the impact of increased emphasis on
time and place utility will be even greater. Already, supermarkets can offer electronic
ordering and home delivery services for relatively low start-up costs. A recent survey
indicates that over 25% of chains offer home delivery, representing more than 40% of
the population. Significant barriers to a broader adoption of home shopping are
delivery charges, which run from $7 to $10 an order. Survey research by Management
Horizons shows significant consumer resistance to any delivery charge. What is
needed is a business model that is optimized for home shopping, rather than one in
which the service is added on as an ancillary to traditional retailing. Analysis by
Management Horizons indicates substantial savings in operating a “delivery depot”
compared to a supermarket. On a typical $100 order, home delivery will cost a typical
supermarket operator an extra $10 to process, pick, check out and deliver from the
supermarket. A delivery depot can process and deliver the same order for about $10 to
$12 less in total cost than the supermarket can.
To summarize, the success of marketers in the future will be predicated upon
their ability to deliver “total customer convenience.” This includes hassle free search
(advertising-on-demand), hassle free acquisition (home delivery), hassle free
consumption (for example, products with built-in expert systems to enable maximal
value extraction) and hassle free disposal.
The future may be a balance of mass customization and mass market products
and services for two reasons. First, customers are not always looking for customized
products and they may be content in many cases with a well-designed standardized
product. Thus, the price, advertising message and/or the distribution mode may be
customized, even if the product is not. Second, new forms of aggregation of demand
will undoubtedly occur. In the past, these were driven entirely by producers. In the
future, it will become increasingly facile for the aggregation to be driven by
customers. For examples, customers who individually purchase small quantities of a
product will find it very easy to band together and pool their purchases to enjoy better
terms.
Power Shift From Marketers to Consumers
Inevitably, increased competition and greater access to more powerful
information tools will put greater power in the hands of savvy customers. As a result,
it is possible that “buyers” will increasingly be viewed as “marketers” and sellers as
“prospects” in the marketplace. Some consumers will no longer be “targets” of
marketing activity; they will be knowledgeable and demanding drivers of it.
Consumers will demand content-rich information and demonstrable product
innovations (c.f., Manu and Sriram 1996). Customer managers will be explicitly
charged with identifying, retaining and growing profitable customer relationships.
Market activity will be driven almost entirely by buyer demand as marketing
management will essentially become demand management and will entail the task of
influencing the level, timing and composition of demand in a way that will help the
organization achieve its objectives (c.f., Cahill, Thach and Warshawsky 1994).
Customer knowledge will become the cornerpiece of effective marketing, and that
knowledge will become a highly valued corporate resource (c.f., Kohli and Jaworski
1990; Ram and Jung 1990).
Consumers can already do product research online, log onto bulletin boards
and interact with other customers, provide and receive helpful hints about the product,
its use, acquisition etc. In this environment, “information invitations” may become
common; companies will have to seek permission to present their case to consumers
by inducing interest, unlike the “message clutter” of today. As
communication between marketers and customers becomes increasingly interactive,
relationship marketing will become the rule rather than the exception. Buyers and
sellers will interact in “real time.” Time and place constraints on purchase (and even
consumption of many products and services) will become obsolete. The nearly instant
gratification of customer needs will be common and lead times (e.g., for product
development, or between order placement and shipment) will have to shrink
dramatically.
The Concept of a “Personal Marketplace”
The “Personal Marketplace” (PM) is a hypothetical mechanism to make
effective use of the vast amounts of consumer and transaction data generated today.
This or a similar type of mechanism is expected to develop in the future. It is a
repository where participating marketers prepare and offer custom-tailored offerings
directly to a consumer. By selecting a particular category, the customer alerts the
market that he/she is a potential customer, and offers begin to flow in. The customer
voluntarily provides as much customizing information as needed. Participating
companies agree not to sell the data they collect outside the PM, and not to use it to
market in any other channel.
For example, the two-wheeler market today is largely comprised of
replacement buyers rather than first-time purchasers (Business Line 2002). And the
average time taken from ‘identification of need’ to ‘actual purchase’ has reduced from
months to weeks if not days. Studies examining runaway consumerism have focused
on impulse purchases, arguing that lower levels of cognition results in compulsive
often ‘mindless’ consumption. This compulsive and habitual purchase has received
much attention in terms of its negative effects manifesting as guilt, frustration,
anxiety, loss of control and even domestic dissention (O’Guinn and Faber 1989, Rook
1987). The ‘self-defining’ choice among different brands and products is assumed to
be beneficial for the individual’s identity if it is based on greater cognition and pre-
purchase information processing (Schiffman and Kanuk 2000). We argue that a
consumer who can, and does, apply a certain extent of cognition before purchase, can
yet face identity confusion rather than enhancement. The cognitive dissonance theory
(Oshikawa 1969) in the study of consumer behavior, asserts that a person has certain
cognitive elements, which are "knowledges" about oneself, one’s environment, one’s
attitudes, one’s opinions and one’s behavior. If one cognitive element follows
logically from another, they are said to be consonant to each other. They are dissonant
to each other if one does not follow logically from the other.
With increased competition, established automobile manufacturers in India are
becoming more conscious about technology and quality. These companies are
incorporating ISO 9000 certification and Total Quality Management as explicit
corporate goals. Most of the MNCs entering the Indian automobile market are
bringing in modern technology. Emission control techniques like catalytic converters
and injection technology are present in most models. The fuel efficiency of these cars
is higher than that of domestic models. Foreign models are equipped with vehicle
safety gadgets which have never been seen in Indian automobiles. In fact, some
brands in the luxury and super-luxury segments are positioning themselves on the
basis of safety and engineering excellence.
HERO HONDA- The Technological Giant
The two wheeler market in India essentially comprises of motorcycles,
scooters and mopeds. With a volume size of 84.6 lakh units in ’06-‘07 the industry
has registered a growth of 12% over ’05-’06. The industry is dominated by
motorcycles which constitute 84% of the category followed by scooters consisting of
11% and mopeds accounting for the remaining 5%. The largest player in the two
wheeler industry is Hero Honda which commands a lion’s share in the category.
With a market share of 39.4% and volume size of 33.4 lakh units in ’06-’07, the
company has registered a robust growth of 11% in volumes over ’05-’06 when it had
sold 30 lakh units. The second largest player in the industry is Bajaj Auto which
registered a growth of 18% in volumes by selling 24 lakh units in ’06-’07 compared
to 20.3 lakh units in ’05-’06. The company saw its two wheeler market share increase
marginally by 1.5% to 28.3% in the same period.
Key competition:
HMSI – HMSI launched Activa in 2001 and it was a huge success from start.
The brand enjoyed superior product and image perceptions given Honda’s
equity and global lineage. Activa was a 4 stroke, variomatic (gearless), metal
bodied offering which offered superior mileage and performance. The brand
ruled the market with a 44% market share in the gearless scooter segment.
The brand is targeted at men and family
TVS Scooty: The TVS heritage gives the brand perceptions of reliability, easy
availability of spares etc. Moreover the brand had signed up with Preity Zinta
as its endorser which further added to its popularity. The brand had entered
the market with ABS (plastic) bodied Scooty Pep (75cc) and later introduced
a more powerful Scooty Pep + (90cc). However the brand has discontinued
Scooty Pep and now focuses only on Scooty Pep +.
The brand has recently created new news by launching 99 colours for its brand
and has backed it up with a heavy media push. The brand is a clear No.2 in the
market. It had a market share of 29% before the entry of hero Honda Pleasure which
has now declined to 26.1%. While the brand is targeted at females it has tried to
maintain a unisex appeal in its advertising.
Other players: There are a number of small players in the category viz.
Eterno, Dio, Nova etc fighting for salience. It was in this scenario that Hero Honda
decided to enter the scooter market with its brand Pleasure in 2006
The Hero Honda Pleasure product truth:
ABS body
100cc
Gearless
Hero Honda Motors Ltd – is a leader in the 100 cc motorbike segment with
around 42% market share during the current fiscal 2000. During the year, the
company posted a 46.74% growth in turnover and 43.55% sales volume growth as
compared to the FY-1998-99. The company has invested in capex to bring in new
models and meet the increased market demand from internal accruals. It has posted a
sales volume growth of around 48% during the Q1 of 2000-01 as against the
corresponding period of the last year. To compare its performance with other
competitors, sales volume of July’00 for HHML (73857 units) is more than the
combined sales of Bajaj Auto (41950 units) and TVS Suzuki (28907 units). A concern
of 100% subsidiary by Honda Motors has affected HHML stock on the bourses
without really taking into account its business out performance.
At present HHML is having exclusive technology from Honda Motors. An
announcement of a 100% subsidiary company, Honda Scooters & Motors India Ltd.
(HSMIL) by Honda Motors in India has jeopardized the premium valuations enjoyed
by HHML because HHML’s excellent performance is very well backed by Honda
technology. This event adversely affected the HHML stock on the bourses and led to
a sharp fall in stock prices without giving any rating to its outstanding performance
for motorcycle segment than its peer group. As per the terms and conditions agreed
upon between Honda Motors and Munjals, this subsidiary will initially manufacture
scooters and after 2004, it will begin the manufacturing of motorbikes. So for the
medium term till 2004, HHML need not fear the competition with HSMIL. We
believe, the formation of 100% subsidiary by Honda Motors may be the emergence
out of the following reasons:
1) Honda may be not contended with the present stake of 26% in HHML
(same as Munjal family stake) due to which it is not able to dictate its
terms.
2) This can also be a negotiating tool for Honda Motors by which it may take
some steps in future i.e. post-2004 against HHML.
After 2004…the following possibilities are opening up…
1) The probability of continuation with the present scenario is medium. Honda
Motors continue with its present stake of 26% in HHML, which is same as
Munjal’s stake without disturbing the most successful world class JV because
after 2004, the growth of motorcycle segment may not be as attractive as the
present growth.
2) Honda Motors increase its stake to 52% by buying out 26% stake of Munjal
family and control the scenario in motorcycle segment. This will again place
HHML to exit with a large consideration rather than to run the show without
sound technology and a thorough research base for new products and product
upgradation. Thus, the probability of a complete takeover of HHML by Honda
Motors is also very low as that is a bit difficult task for Honda Motors and it
could also affect other JVs of Honda Motors in India.
3) Honda Motors manufacturing motorcycles in 100% subsidiary company by
exiting from the JV, which is likely to affect adversely HHML unless it gets
into a new JV or do some in-house development. But by the time Honda
Motors starts its production of motorcycles by 2004, the segment growth may
not be as attractive as today which is a negative point for Honda Motors, as
the growing requirements are going to be fulfilled by HHML upto 2004.
4) Honda Motors to increase its stake in HHML for which the probability of
Munjals agreement is very strong, which will be a win-win situation for
HHML and its investors. The following effects are likely to arise on account
of this possibility:
This would make HHML fearless on competition front in motorcycle
segment,
An assured flow of Honda Motors technology to HHML
Re-rating of HHML stock price
Honda Motors can easily control the management by dictating the
issues on its own.
The possibility of Munjal’s disagreement for the above aspect is very low.
5) It may also happen that Munjals try to increase their stake in HHML for which
the probability of Honda Motors’ agreement is very low and the vice-versa
condition may show a picture that in future HHML has to face competition
with HMSIL in motorcycle segment.
HHML has taken significant efforts to remain market leader in time to come
Due to the shift in the consumer preferences from old scooters to stylish and
the latest smart looking sleek motorcycles, the other companies like Bajaj Auto, LML,
Kinetic Motors and TVS have also begun to work hard on motorcycle segment, which
has made the competition even stronger for HHML. TVS Suzuki has launched a four-
stroke motorcycle ‘Fiero’ and Bajaj Auto is fully geared to launch ‘Eliminator’
(173.9cc), ‘Pulsar’ (150/200cc) and ‘Acer’ (100cc) in coming months of 2000. To
fight with the competitors and to dominate the market even in the future, HHML has
swiftly taken the following steps:
Expanded the production capacity of Dharuhera plant at Haryana to 3.5 lakh
vehicles from 3 lakh units to capture the upward trend of demand for
motorbikes, which it is going to fund out of its internal accruals.
‘CBZ’, a 156 cc bike with 5 gears, the only bike with a disc brake i.e. a power
bike has already become the success story of the company in the urban market.
The company has launched this hit product during year 2000 only.
HHML has also involved itself to focus on the sale of spare parts and
accessories, which has increased substantially from Rs.4.82 crore (Q1 of 99-
00) to Rs.7.69 crore (Q1 of 2000-01) which in turn has enabled the company
to maintain its net profit margins on a higher side.
It is also planning to introduce new version of Splendor by January 2001 for
which the trial production is already started in the month of Sep.’00. The
modified version of Splendor would enable the company to further capture the
market.
Hero Honda Motors Ltd., India’s largest motorcycle manufacturer reported
24.1% increase in Q2FY05 profits at Rs.1.94bn on a 39.3% increase in net sales to
Rs.17.6bn. The results have been as per our expectation on PAT levels, but higher
realisations per vehicle due to better product mix and 100bps drop in EBIDTA
margins on back of Rs.1,000 cash discount promotion offer surprised us. It has not
been all smooth sailing for Hero Honda. There have been some hiccups too. For
example, though the company claims that sales for Splendor cut across a wide
spectrum of people, Hero Honda for long did not have a bike which focused on the
entry level-segment of the market. It did launch Joy last year for the economy
segment, which did not get a very positive response. "There were two reasons for this.
First, being an entry-level product it was overpriced by about Rs 1,000. Also, that was
the time when Bajaj launched its Boxer priced at Rs 29,900, making matters worse,"
says Sobti. However, Hero Honda was quick to make amends. It phased out Joy in
less than a year, and launched Dawn as an entry-level bike. "We priced it right and we
believe that it will be the 21st century CD-100 for us. Dawn has received a great
response and has sold 10,000 pieces in the second month itself," says Sobti.
Meanwhile, the company may also phase out the CD-100 (popular during the 1985-
1995 period) at a later stage and replace it with Dawn. In 1999, Hero Honda
conducted the largest research on two-wheelers in the country covering 50,000
households, which helped the company in drawing out its strategy. "The research
helped us gauge consumer preferences and demand. It also gave us an estimate of
demand for bikes vis-à-vis scooters," says Sobti. Hero Honda has conducted a follow-
up to the research this year covering an even larger spectrum of people with an
emphasis on the rural market. Although the results of the survey are still being
compiled, it clearly shows that demand for bikes continues in the Indian market. In
fact, as per estimates, demand for bikes will continue growing in double-digit figures
in the coming years.
At one level, Hero Honda’s emergence as the largest motorcycle manufacturer
in the world’s biggest two wheeler market is the sum of two stories: the first about
how India’s middle class – used to traveling either on public transport or on scooters
—was wooed, nurtured and won in 1990s. In the 2000s, it is the continuing stories of
how college kids, and salesmen and even farmers are being enticed. In a space of 20
years, Hero Honda has not only caught up with, but has also overtaken the incumbent
in the Number 1 slot: Pune-based Bajaj Auto. At last count, Hero Honda sold 500,000
more two wheelers than Bajaj Auto in a year, according to Society for Indian
Automobile Manufacturers—the apex body for auto manufacturers in India. The
youth of India emerged as one of most important constituents for Hero Honda. They
demanded stylish and sleek products rather than those that were merely functional and
simple; and got them.
And as rural markets began to explode, motorcycles with their bigger wheels and
longer wheelbases found favour with the buyers. While the emerging trends did not
favour Bajaj Auto, Hero Honda was poised to ride the boom. By 1999-2000, bikes
formed about 43% of the two wheeler market compared with 27% just three years
ago. By 2003, they had crossed 74%. When the scooter companies saw the writing on
the wall, they sought to penetrate the motorcycle market. But they could not make
much headway. Though some of them had tremendous brand franchise with
customers and an extensive distribution network, it was Hero Honda that pulled ahead
of the pack.
For one, it had access to Honda’s latest technology and design. For another,
the company, over the years, has managed to create a strong base of 300 dedicated
vendors who supply exclusively to the company. Strong vendor support has allowed it
to localise its component manufacturing, outsource sub-assemblies, keep raw material
and component cost under control, and ensure that the domestic raw material
inventory period remains less than 3 days. Finally, the company undertook a slew of
customer-centric initiatives, even as it created a strong distribution network
comprising over 500 dealers. But most significant behind the success of Hero Honda
has been the brand equity it has been able to create with its existing and potential
customers. To start with it has retained and strengthened its youthful image by
investing considerable financial resources in sports sponsorship. “Sponsorship is a
vital part of our overall strategy of building Hero Honda as one of the leading brands
in India,’’ admits Pawan Munjal, managing director of Hero Honda.
Consumer behaviour in the category of Hero Honda Pleasure:
Analysis of market data and research threw up some interesting findings. Men
and women have different transportation need states and thus their needs from a
scooter differed too:
Men
to carry load i.e. for carrying family, delivering goods etc
preferred a scooter that was strong, sturdy and powerful
Honda Activa with its metal body and > 100cc power is the obvious choice.
Women
to move around with ease and comfort
preferred a scooter with great mileage, easy to maneuver and safe to ride
Scooty Pep / Pep + with ABS (plastic) body and <100cc power was perceived
as the best fit. This was reinforced by the fact that the dominant age band in
the <100 cc segment was 18-24 year old young women. Hero Honda with its
established equity in fuel efficiency, ABS body and styling was seen more to
be relevant for the young women rather than men.
Thus the target audience was decided as:
Demographics:
Communication audience: Marketing audience:
Young women
Age: 18-24 yrs Age: 18-34 years
SEC: A/B SEC A/B
Psychographics: She is independent and free spirited in nature and hates to trouble
her father or brother to take her wherever she has to go. A scooter that understands
her mindset and resonates with her personality would be the prefect
solution.
Sharpening the creative nuance:
At a macro level the advertising had to reflect and vibe with the changing
young women in India, who are more liberal, free spirited and experimentative. They
are actually going ahead and living the life of their dreams At a deeper level,
understanding of our target audience’s mindset showed that acquiring a pair of wheels
is an act of liberation. A liberation from dependence on family for commuting And
the ultimate high of the liberation is to be able to do all the things that ‘boys’ do i.e.
catch up friends, hang out, go where you want to, etc Thus for the first time in the
history of two wheeler advertising a product was targeted exclusively at women --
almost to the point of being ‘exclusionary’ to the predominant and traditional users of
two wheeler i.e. men. This attitude was encapsulated in the baseline ‘Why should
boys have all the fun’.
Hero Honda Pleasure today:
Hero Honda Pleasure is the third largest player in the scooter category today.
The brand has grown to a 9% market share and continues to be the only brand which
is exclusively positioned for women to the point of being exclusionary to men. Post
the launch communication the brand has signed up with popular Bollywood actor
Priyanka Chopra as its brand ambassador and the first communication featuring her is
on air.
‘Hero Honda Just 4 her’ showrooms:
The launch of Hero Honda Pleasure was coupled with the simultaneous launch
of ‘Hero Honda Just 4 her’ showrooms. The launch of these showrooms brought alive
the ‘females only’ positioning platform for the brand at an on ground level. These
showrooms exclusively sold Hero Honda Pleasure scooters and were run and
managed by women. The showrooms even had women technicians responsible for
servicing and repairing the scoters.
For more than two decades, Hero Honda created brand equity for itself by
putting together best-in-class portfolios and new technologies. Your Company also
launched new engine platforms in 125cc and 150cc categories, and is planning several
new launches in the forthcoming year. The company has already introduced cutting-
edge Fuel Injection technology in one of our products, Glamour FI, making Hero
Honda the first two-wheeler Company in India to do so. Over time, we expect to
cascade this technology across other models. Despite increasing heat of the
competition, the Hero Hondas is still trying to hold the 100 cc market through
Splendor and Passion priced at Rs 38,500 and Rs 43,960 respectively. “The Honda
bikes can be easily financed through Centurian bank at 11.75 per cent rate of interest.
The established brand name, good mileage and attractive looks are pushing more than
3000 bikes per month in the Punjab itself,” says Ms Pooja Divedi, Finance Manager at
a leading agency here. She admits that the Hero Honda bikes are preferred by
educated urban youth and executives to the ruralities, where the financiers are not
ready to take risks due to fluctuating and difficult to calculate agriculture incomes.
The bankers say that the buyers are certainly attracted by zero per cent finance and
other attractive schemes, offered by the Bajaj dealers. The wider network of dealers,
service centres and easy availability of spare parts in the market at lower rates have
also positively affected the sales of the Bajaj brands. The TVS's indigenously
developed 110 cc Viktor is also doing reasonably well, but the Yamaha seems to have
loosened its stream in the intensifying competition. The market watchers also
appreciate Kinetic's recently launched 97 cc, 4 stroke, Challenger ( Rs 41,801 ex-
showroom price ), which has additional features such as digital gear side, stand
indicator and adjustable shock absorbers. The company has also brought out Kinetic
GF 125, the only 4-stroke, 4-valve engine motorcycle, claims company, that would
give more power per cc. Its well contoured fuel tank adds to its sporty heavy look and
aerodynamic design.
In the scooter market, the company has recently introduced Kinetic ZX Zoom,
which does not have much additional features in comparison to DX model. Honda's
Activa model has already started affecting the sales to the tune of 40-50 per cent per
month in the region. The scooty market is continuously on decline by Bajaj's Safari,
TVS scooty are doing well yet. The well-informed consumers and dealers admit that
there was a lot of potential in the north India's market to increase the sales of
motorcycles and auto-gear scooters. The share of motor bikes in north Indian market
is about 46 per cent, in two wheeler market, against 71 and 61 per cent in the eastern
and western market. They say that the manufacturers would have to share the profits
with consumers, instead of just relying on advertising campaign. The entry of Chinese
bikes, which could force them to cut down prices, may have been stalled by higher
duties for the time being, but it cannot be postponed forever. They would have to
come up with more fuel efficient and cheap models that are still determining factors to
boost sales.
BAJAJ – The Master of Innovative Technology
Bajaj Auto is a major Indian automobile manufacturer. It is India's largest and
the world's 4th largest two- and three-wheeler maker. It is based in Pune,
Maharashtra, with plants in Akurdi and Chakan (near Pune),Waluj (near Aurangabad)
and Pantnagar in Uttaranchal. Bajaj Auto makes and exports motorscooters,
motorcycles and the auto rickshaw. The Forbes Global 2000 list for the year 2005
ranked Bajaj Auto at 1946. Over the last decade, the company has successfully
changed its image from a scooter manufacturer to a two wheeler manufacturer. Its
product range encompasses Scooterettes, Scooters and Motorcycles. Its real growth in
numbers has come in the last four years after successful introduction of a few models
in the motorcycle segment. The company is headed by Rahul Bajaj who is worth more
than US$1.5 billion. It has been reported that Bajaj is headed for a de-merger into two
separate companies: Bajaj Auto and Bajaj Finance. It is expected that the sum of the
parts created will be worth more that the current whole, as was the case in the de-
merger of Reliance Industries.
Bajaj Auto has taken aggressive steps to re-invent itself. From playing the
volumes game in the entry level segment, it has shifted focus to strengthening its
dominance in the premium motorcycle segment. The company has also created an
identity for Indian motorcycles in the global market, where it is targeting 10% market
share by 2010. While we expect core business profitability to improve here on, its
insurance business is a potential value driver.
Superior product mix: Bajaj Auto has a stronghold over the performance segment
(>125cc motorcycles), where it has Pulsar and Discover. Its market share in this
segment was 60% in FY07. Profitability of performance bikes is higher than entry-
level bikes and the launch of its 125cc XCD would help to strengthen the company’s
position in this segment, further.
EBITDA margin set to improve: We believe that Bajaj Auto’s EBITDA margin will
improve 2QFY08 onwards. Our view is based on the company’s improving product
mix, its reluctance to re-engage in price wars, completion of dealer inventory
rationalization, and accrual of higher DEPB benefit. We expect EBITDA margin of
14.7% in 2HFY08 and 15% in FY09 v/s 13.1% in 1QFY08.
Upgrade to Buy: Given the better business prospects, increase in insurance valuation,
and significant underperformance of the stock, we are upgrading our recommendation
to Buy. Based on the demerger scheme, we arrive at an SOTP-based price target of
Rs3,065. We have valued the auto business at Rs1,190 (15x FY09E earnings), the
financial services business at Rs683 and have assigned Rs1,191 value to the holding
company. Our SOTP valuation indicates a 21% upside.
Focus is shifting away from entry-level motorcycles…
The boom in motorcycles in FY05, FY06 and 1HFY07 was marked by the success of
entry-level products such as Hero Honda’s CD series, Bajaj Auto’s CT-100 and Platina, and
TVS Motors’ Star. Eagerness to push these entry-level motorcycles culminated in price wars,
aggressive discounts and subvention, ultimately leading to lower profitability. While we
believe that the industry would continue to be characterized by high competitive intensity, the
focus would now shift away from low-margin entry-level products. Though fuel efficiency
remains an important consideration in motorcycle purchases, an increasing number of
consumers are demanding better performance bikes. The shift in consumer preferences and
industry focus is already evident – in FY07, the share of executive and premium segment
motorcycles increased at the cost of economy segment motorcycles.
Bajaj Auto has a stronghold over the performance segment (>125cc
motorcycles), where it has its Pulsar and Discover bikes. Its market share in this
segment was 60% in FY07, down from 68% in FY06. Profitability of performance
bikes is higher than entry-level bikes. Since Bajaj Auto dominates the performance
segment, it has greater potential to expand its EBITDA margins. Bajaj auto launched
Discover 125cc motorcycle in September with an aggressive price tag. With a selling
price of Rs.43,500 on road in Pune, the 125cc vehicle has been priced Rs.1,000
cheaper than Hero Honda Splendor plus. With higher power and mileage equal to
100cc vehicle, Bajaj plans to take-on Hero Honda in
the executive segment. But considering HHML readiness to cut the prices to maintain
its leadership in executive segment, it will be difficult for Bajaj to repeat its success as
seen in entry level bikes. But the price war will push-out small marginal players from
the arena.
Bajaj Auto unveils revolutionary DTS-Si engine
Bajaj Auto, has achieved a breakthrough with the launch of new ‘Digital Twin
Spark - Swirl induction’ (DTS-Si) engine. The new 125cc engine with DTS-Si
technology will give an amazing mileage of 109 kilometers per liter under ideal test
conditions surpassing the mileage of all current 100cc motorcycles. With this
breakthrough there is a huge potential and opportunity to upgrade the 100cc customer
with a engine which offers the best of both worlds – 100cc mileage and 125cc
performance. Designed and developed completely by ‘**Ahead’, Bajaj Auto’s R&D,
the technology promises to revolutionalise the industry with India’s most fuel-
efficient two-wheeler engine. Bajaj Auto presented the DTS-Si technology at their
Corporate Headquarters in Pune today.
Digital Twin Spark ignition (DTS-i system)
The Digital Twin Spark – ignition, equipped combustion chamber takes care
of the slow rate of combustion in a simple but novel way. The cylinder head is
equipped with two spark plugs, instead of the conventional single spark plug. By
generating two sparks at either ends of the combustion chamber, (approximately 90
to the valve axis) the Air-Fuel mixture gets ignited such that, there are 2 flame fronts
created and therefore a reduction in flame travel of the order of 40% is achieved. A
fast rate of combustion is achieved leading to a fast rate of pressure rise. The obvious
outcome of this is more torque, better fuel efficiency and lower emissions. The Digital
Twin Spark - ignition or DTS- i is the mother technology for the latest Digital Twin
Spark – Swirl induction or DTS-Si technology. Thanks to DTS- i, a fast rate of
combustion and therefore the resulting fast rate of pressure rise is harnessed, by
optimally positioning this pressure, to deliver maximum possible work and hence
obtain more torque, better fuel efficiency and lower emissions. When burning lean
Air-Fuel mixtures, the two plugs provide rapid combustion, but at light loads,
opportunity exists to improve the combustion further.
Combustion efficiency in lean Air-Fuel mixture conditions can be further
improved by generating high turbulence in the combustion chamber. Combustion
chambers having low turbulence give rise to propagation of a flame front, which is
akin to that of a gradually expanding balloon. This results in a slower rate of
combustion and thus slower rate of pressure rise. End result is lower efficiency. When
high turbulence is generated and combustion takes place, the surface of the ballooning
flame front fragments itself, with projection like fingers, which increases its surface
area, thereby improving combustion further. The straight ports used in conventional
engines have limitations in generating high swirl values due to their geometry. One of
the ways to generate more swirl is to have a port configuration that promotes this
phenomena. An offset port configuration was arrived upon and optimised to generate
the required swirl numbers. Incorporated in the new engine, this results in a swirling
motion of the incoming charge, which decays itself into turbulence as the piston
moves in the Induction and Compression strokes. This results in the Air-Fuel mixture
being more thoroughly mixed and spread around the combustion chamber. Sparks
provided by the twin spark plugs ignite this highly turbulent and compressed Air-Fuel
mixture, leading to a flame front with high surface area, resulting in a rapid rise of
pressure due to rapid combustion. The values of turbulence achieved now, are
substantially higher than that of a straight port cylinder head, such as in Pulsar. A
combination of DTS-i and Swirl induction thus provides extremely rapid combustion,
resulting in high efficiency.
Bajaj had first dramatically improved on existing engine technology in 2003
when it launched the DTS-i (Digital Twin Spark-ignition) engine with two Spark
plugs located at opposite ends of the combustion chamber (as compared to a single
spark plug in conventional 4-stroke engines) to achieve faster and more efficient
combustion. The DTS-i technology offered better performance, improved fuel
efficiency with lower emissions and helped establish the Bajaj Pulsar and then the
Bajaj Discover as leaders in their respective segments. The DTS-i Engine can be
further engineered to deliver either exceptional performance or exceptional mileage.
Bajaj Auto worked on the mother DTS-i technology to design the DTS-Si engine to
deliver outstanding mileage. The DTS-Si technology gives the highest possible fuel
efficiency by introducing ‘Swirl induction’ to the DTS-i engine to create turbulence in
order to achieve extremely efficient combustion.
The DTS-Si engine is far superior to the conventional 4-stroke engines, which
dominate the 100cc segment at present. With the new DTS-Si engine the consumer
now would not have to compromise between power and mileage - he gets the best of
both. Bajaj enjoys a market share of 47% percent in the growing and profitable 125 cc
and 150 cc segments, as against a smaller share of 24% percent in the declining but
larger 100 cc segment. Says Mr. Amit Nandi, General Manager (Marketing), “Bajaj
will offer customers a value proposition much superior to the currently overpriced and
underperforming 100cc products with the launch of an all new bike with the DTS-Si
engine next month. 100cc customers will upgrade to this 125cc bike that gives
superior mileage and superior power.”
Bajaj Auto’s recent changes in the product mix we believe, will help boost
volumes but at the cost of realizations and margins. We believe that the recent run up
in the stock price has only factored in the positives without taking into account
profitability. After regaining market leadership in the Entry-level segment with the
success of the CT-100, BAL is now betting big on the voluminous Executive segment
with the recently launched 125cc Discover. This marks a strategy shift in BAL’s
product mix with premium products like Pulsar and the three wheeler segment giving
way to the high volume entry and executive segments. While this would ensure higher
volumes, earnings growth may suffer. We rate the stock an Under Performer.
Strategy shift in product mix to result in dip in realisations and leaner
margins: Post regaining its numero uno position in Entry-level bikes with the
successful CT-100, BAL is now focusing on the voluminous Executive
segment. BAL’s recently launched 125cc Discover, is a high end bike but
with the price tag of a 100cc offering in the executive segment. We expect
Discover to bolster volumes for BAL but at the cost of realisations and
margins.
Volume game fuels competition in motorcycles resulting in pressure on
margins: Competition is hotting up in the motorcycle segment and BAL’s
Discover is a pure play on increasing volumes. New products/variants across
segments are coming with superior features at aggressive pricing coupled
with attractive schemes, sometimes both. We believe that players are
bolstering volumes taking a knock on realisations and lower profits.
Margins expected to come under pressure: Spiraling steel prices, higher
marketing spend, higher proportion of low-margin entry level bikes,
aggressively priced Discover, declining proportion of premium offering
Pulsar and cash cow three-wheelers in the overall sales mix are expected to
adversely impact BAL’s margins.
Volume growth without proportionate profit growth fails to justify rich
valuations: At current levels, the scrip trades at 12.9x FY2005E and 11.7x
FY2006E earnings. We believe that the rich valuations that the stock is
commanding on account of a good volume growth is not proportionately
transforming into profit growth. We feel that the current price has only
factored in positives like the success of the CT-100 and expectation of good
volumes from Discover minus the adverse impact that they could have on
profitability. We do not see any upside in BAL from current levels and rate
the stock an Under Performer with a 12-month target of Rs870, which works
out to 10x FY2006E earnings.
Product mix shift: To result in lower realisations and margins
Post regaining its numero uno position in Entry-level bikes with the successful
CT-100, Bajaj Auto (BAL) is now focusing on the voluminous Executive segment.
BAL’s recently launched 125cc Discover, is a high end bike but with the price tag of
a 100cc offering in the executive segment. We expect Discover to bolster volumes for
BAL but at the cost of realizations and margins.
Success of CT-100 skews the product mix in favour of low-margin bikes
The runaway success of the recently launched CT-100 has resulted in the entry
level segment constituting over 60% of BAL’s motorcycle sales. The CT-100,
launched in May’04 in the highly voluminous price sensitive entry level segment, has
met with increased acceptance with the consumers. Increasing popularity of the CT-
100 has resulted in BAL’s motorcycle product mix getting skewed in favour of low-
margin bikes. While success of the CT-100 has enabled BAL regain its market
leadership in the entry–level segment, the competitive pricing is likely to have an
adverse impact on its realizations. While the CT-100 has helped BAL boost volumes,
a higher proportion of these low-margin bikes have already started showing on
revenues. Revenue growth has been lower than volume growth since the launch of
CT-100 unlike in the past. Earlier, BAL had reported a higher-than proportionate
revenue growth on the back of a healthier product mix. A higher proportion of the
premium bike Pulsar in its overall motorcycle sales combined with a steady
contribution from the three-wheeler segment helped BAL register strong growth in
revenues despite a drastic decline in scooter and step thru sales. Going forward too,
we expect revenue growth to be lower than volume growth.
Aggressively priced Discover to ensure volumes but realizations to take a knock
The 125cc Discover, the recent offering from the Bajaj stable, has been
launched with features available in a high end bike but with the pricing of a 100cc
executive bike (the displacement ranges from 100cc to 125cc). The aggressively
priced Discover would be directly pitched against 100cc models like Splendor+ and
Passion Plus, which currently dominate the executive segment. While Discover’s
aggressive pricing and superior features are likely to ensure good volumes for BAL,
we do not expect it to contribute much towards improving realizations. Competitive
positioning of the Discover in the executive segment may result in some amount of
cannibalisation of sales of BAL’s 150cc Pulsar. BAL plans to phase out the
Caliber115 and Wind 125 from the domestic market in anticipation of the Discover
cannibalizing their sales. The Wind 125 (which was also known as the World bike)
will now focus on the export markets only. We believe that positioning of the
Discover with superior features at a competitive price does not rule out the possibility
of it eating into a small portion of the Pulsar 150cc pie. The Discover (electric start)
is priced at Rs45,600 ex-showroom, Mumbai while the 150cc Pulsar DTS-i (electric
start) is priced at around Rs55,000 ex-showroom, Mumbai.
Intensifying competition in the motorcycle segment
Competition has intensified in the motorcycle segment in the past few months
with the volume game gaining dominance with increased product offerings across
segments. Players are looking at bolstering volumes through aggressive pricing
coupled with attractive schemes even if it means taking a hit on realisations and
profits. The recently launched Discover from the Bajaj stable is a high-end bike with
the price tag of a 100cc offering in the executive segment. BAL has positioned it as a
pure play on gaining volumes.
New launches across segments calls for aggressive pricing and superior features
Intensifying competition in the motorcycle segment has resulted in most
players launching new products/variants at regular intervals, which boast of superior
features or attractive pricing, sometimes both. Cut throat competition in all segments
combined with the high base has resulted in a plethora of products being launched,
with an intention to gain or maintain market share. Moreover, increasing steel prices
are exerting severe pressure on the operating margins of two-wheeler companies.
Despite aggressive cost cutting measures, most of the two-wheeler companies have
witnessed a decline in their operating margins this fiscal. With no scope for increasing
the prices of motorcycles, the two-wheeler companies are aggressively looking at
garnering huge volumes to enable them enjoy better economies of scale.
Entry level offerings – Volume drivers
The price sensitive entry level segment, which is characterised by huge
volumes and low margins, plays a very important role in the motorcycle market. Even
a small increase in market share in this segment is likely to ensure good growth in
volumes for the manufacturer. Bajaj, which used to enjoy market leadership in this
segment through Boxer, lost its dominance after Hero Honda launched the CD-Dawn
at an aggressive price. By the very price sensitive nature of this segment, Hero Honda
gained market leadership in the entry level segment and reported a good volume
growth. However, the low margins in this segment saw Hero Honda gain market
leadership at the cost of lower realizations and stagnant operating margins. In a bid to
recapture its market leadership status in the entry level segment, BAL launched the
CT-100 in May’04. Enormous success of the CT- 100 helped BAL regain its market
leadership status in the entry level segment and boost its sales volume too. However,
we feel that BAL may face similar pressures as Hero Honda did, when the latter’s
CD-Dawn became a runaway success.
Executive segment Discover – Higher market share but lower margins
BAL, a market leader in the entry level and premium segments, is now
aggressively targeting the high volume executive segment (a Hero Honda stronghold).
BAL’s past attempts to make inroads into this segment with its Caliber 115 and Wind
125 came unstuck. This time round to ensure good volumes in the executive segment,
BAL aggressively priced its 125cc bike Discover at Rs42,300 ex-showroom, Mumbai
which is comparable to a number of 100cc offerings like Splendor+ and Passion Plus.
We feel that with this, BAL will gain market share in the executive segment albeit at
the cost of lower realizations and profits. 125cc offerings: Emerging new segment
straddling executive, premium segments to see intense competition The 125cc bikes,
which are now at the nascent stages of becoming a category of their own, are likely to
see competition hot up in the near future. Most two wheeler companies have launched
125cc bikes, while others are on course to launching their offering in the 125cc range.
Market leader Hero Honda plans to launch its 125cc bike in December’04. With a
number of offerings in this segment, we are likely to witness cut throat competition
where most manufacturers will try to give the best value proposition to the consumer .
Increased competition will result in heavy ad spends, attractive pricing, increased
features at no additional costs, etc., which may adversely affect the manufacturers.
Premium segment too witnessing intense competition
The premium segment, which enjoys good margins and is mainly dominated
by the Pulsar twins, is attracting the attention of competition. Moreover, increasing
preference for high end bikes has resulted in its proportion to the overall motorcycle
market gradually increasing. Enhanced focus on this segment by competition has
resulted in BAL losing some market share to competitors. From a market share of
67% in Q3FY2004, BAL’s market share in the premium segment has steadily
declined to 41% in Q2FY2005. HMSI, the wholly owned subsidiary of the Honda
Motor Corporation, made its foray into the motorcycles market with a 150cc bike
Unicorn in September’04. Response to the Unicorn has been extremely good and
HMSI has managed to garner a 6.7% market share in the premium segment in
October’04 itself. BAL also plans to launch an upgraded version of the Pulsar to
tackle competition from the Unicorn. However, we feel that the new 150cc Pulsar
DTS-i is likely to offer better features at the existing price point. BAL also plans to
introduce the high-end Eliminator. In a bid to make Eliminator more affordable in the
premium segment, the bike would come fitted with an 180cc DTS-i engine, which is
likely to reduce its price by around Rs30,000.
Evolutinary technologies
New technologies can be classified into two general categories: “disruptive”
and “evolutionary” (Christensen, 1997). This categorization is mainly based on two
factors. The first factor is the uniqueness of the new technology relative to the
conventional technology that provides the same service. The second factor is the
transaction cost, namely, the costs pertaining to the time and money consumers and
businesses need to spend in learning and supporting these technologies. Due to these
different factors, consumers might respond differently to disruptive and evolutionary
technologies. Thus, these differing consumer responses would be important to capture
in the behavioural component of energy-economy models.
Disruptive technologies have unique attributes that are not present in
conventional technologies. Disruptive technologies may also use very different
strategies to provide a similar service as the conventional technologies. Often, the
introduction of disruptive technologies incurs high transaction costs in the form of
infrastructural changes (Jackson, 2003; Christenson, 1997). For example, the
hydrogen fuel cell vehicle is a disruptive technology in the transportation sector. A
new supporting infrastructure, including new hydrogen manufacturing facilities, new
delivery systems, new safety systems, and new maintenance procedures, will have to
be developed by the time the first hydrogen fuel cell vehicle is available for sale in
neighbourhood dealerships. Once the consumers acquire the new hydrogen fuel cell
vehicle, they will need to invest a large amount of time in learning about the vehicle
before the vehicle can be operated and maintained. Such high transaction costs are
significant barriers to the adoption of disruptive technologies in the market.
In contrast, evolutionary technologies are new technologies that represent
small improvements to the conventional technologies. Although some learning has to
take place to successfully launch evolutionary technologies, their introduction
requires low transaction costs due to their ability to take advantage of the current
infrastructure for the conventional technologies. The hybrid gas-electric vehicle
(HEV) is an example of an evolutionary technology competing with the conventional
gasoline vehicle. The HEV runs on gasoline; its internal drive mechanics are similar
to those of the conventional gasoline engine; and consumers do not need to invest a
large amount of time learning about the HEV before they can operate and maintain it.
However, the similarity of evolutionary technologies to conventional technologies
may prevent consumers from clearly understanding the additional benefits that these
new technologies may provide over the existing technologies. Hence, the lack of
uniqueness may serve as a barrier to their adoption, with consumers seeing little
benefit in making any changes to their vehicle purchase decisions.
OBJECTIVES
The present study revolves around the following objectives:
As we approached the 21st century, the marketing functions remains only
concerned with serving the customers effectively, because technological trends are
affecting the consumer behaviour and response a lot.
In this context, the broad objective of the study is to examine the impact of
technological innovations on Indian consumers and their response and how can this
phenomenon be used effectively by the companies to enlarge their capacity to
marketwise more products and to encash on this tendency. The study will be
conducted in the context of this with Hero Honda and Bajaj as case studies.
HYPOTHEIS
1. The impact of technological changes on consumer behaviour in the two
wheeler automobile segment in India will be long term and may also last generations.
2. These trends reflect a positive sign for Indian two wheeler automobile
market.
METHODOLOGY
A Research Methodology defines the purpose of the research, how it proceeds,
how to measure progress and what constitute success with respect to the objectives
determined for carrying out the research study. The appropriate research design
formulated is detailed below.
Exploratory research: this kind of research has the primary objective of
development of insights into the problem. It studies the main area where the problem
lies and also tries to evaluate some appropriate courses of action. The research
methodology for the present study has been adopted to reflect these realties and help
reach the logical conclusion in an objective and scientific manner. The present study
contemplated an exploratory research
NATURE OF DATA
PRIMARY DATA: Data which is collected through direct interviews
and by raising questionnaires
SECONDARY DATA: Secondary data that is already available and published .it
could be internal and external source of data. Internal source: which originates from
the specific field or area where research is carried out e.g. publish broachers, official
reports etc. External source: This originates outside the field of study like books,
periodicals, journals, newspapers and the Internet.
DATA COLLECTION
Primary Data:
The primary data will be collected by raising a questionnaire with a sample size of
50.
SAMPLE DESIGN
Sampling unit: Company Officials and Users of two wheelers
of the concerned companies.
Sample size: 50
SAMPLING PROCEDURE
Simple Random Sampling to select the sample from the libraries in India.
DATA COLLECTION
Sources of data: 1) Primary Data which included the input
received from directly the employees through
questionnaire and interview
2)Secondary data from the books, journals and
internet etc.
Method of collecting data: Questionnaire (Schedule) & Interview method
PRIMARY
DATA
ANALYSIS
Bio – Profile of the Respondents:-
(i) 28 percent of the officials belong to the age group of 35 and 50
(ii) 50 percent of the officials belong to the age group of 25 to 34
(iii) 22 percent of the officials belong to the age group of above 50
(iv) 74 percent are male officials
(v) 26 percent are female officials
(vi) 65 percent are graduates and above
(vii) 20 percent are those who are having technical and professional
qualifications
(viii) 15 percent are undergraduates.
(ix) 34 percent are those who are associated with the field
(x) 45 percent are those who are in the managerial and administrative posts.
(xi) 21 percent belongs to the others category
DATA ANALYSIS
1. Do you agree that the present Indian two wheeler automobile market is
more technological driven than anything else?
(i) Agree --------------------------------------- 73 per cent
(ii) Disagree ----------------------------------- 19 per cent
(iii) Do not know/ Can not say --------------- 08 per cent
Interpretation: The above response of the study suggests that the present two
wheeler market in India is a technologically driven market in which the type and the
intensity of technology has a voice over the market size and penetration of the
product.
2. Being an insider of the industry, which factor according to you has a
major role in the marketing domain of the product? You can choose more than
option.
(i) Price ------------------------------------- 43 per cent
(ii) Features ------------------------------- 40 per cent
(iii) Power of the bike/ scooter --------- 36 per cent
(iv) Colour ------------------------------------ 28 per cent
(v) Other characteristics ------------------ 15 per cent
Interpretation: Price is still the singularly dominant factor that drives the market.
But a close look of the response will give an impression that technological features
including the capacity and colour of the automobile are being gradually evolved as
prominent factors determining the market size and strength of the product.
3. Do you agree that the change in technology in the two wheeler segment has
affected the consumer behaviour in this area?
(i) Agree --------------------------------------- 87 per cent
(ii) Disagree ------------------------------------ 06 per cent
(iii) Do not know/ can not say -------------- 07 per cent
Interpretation: The above response is a clear indication that the growth and change
of innovative technology in the two wheeler segment has largely affected the
behaviour of the consumers of these products.
4. Do you agree that with the liberalization of the market and spiraling of
the products, a role reversal has taken place between the seller and the buyer as
regards the decision making in the market that the buyers dictate the rules?
(i) Agree ------------------------------------- 68 per cent
(ii) Disagree ---------------------------------- 27 per cent
(iii) Do not know/ can not say - ------------ 05 per cent
Interpretation: The spiraling of technologically innovative products along with a
liberalized market has empowered the customers who have now a greater say in the
market. There has taken place a role reversal between the consumer and the seller.
5. Do your company consider the views of the customers while formulating
its technological policy for their products?
(i) Yes ---------------------------------------------- 84 per cent
(ii) No ------------------------------------------------ 07 per cent
(iii) Do not know/ Can not say ------------------ 09 per cent
Interpretation: The customers’ views and their interests are well taken care of by the
companies while formulating their technological policy for their product innovation.
6. Do you agree that with the growth of innovative technology in the two
wheeler segment, the scooter market in India has presently shown a renovative
trend?
(i) Agree -------------------------------------- 56 per cent
(ii) Disagree ---------------------------------- 35 per cent
(iii) Do not know/ Can not say ------------- 09 per cent
7. Do you agree that the recent technological innovations has led to a shorter life
span of the automobile products as they are being frequently replaced by newer
ones?
(i) Agree -------------------------------------------- 65 per cent
(ii) Disagree ---------------------------------------- 22 per cent
(iii) Do not know/ Can not say ----------------- 13 per cent
Interpretation: With the recent technological changes and adoption of frequent
innovative measures, the life span of the automobile products in the two wheeler
segments is getting shorter.
8. What measures would you suggest to the companies for tackling the above
phenomenon?
(i) Update your technology according to market demands
------------------------------------------- 45 per cent
(ii) Brand Refreshing ----------------------------------- 42 per cent
(iii) Other innovative measures ---------------------- 13 per cent
Interpretation : Although technological upgradation by the companies according to
the market demands has been cited as a remedy by 45 per cent of the respondents, in
the shorter version of the game and in the light of the frequent technological changes,
the option may not be a suitable one from the cost angle. Hence, brand refreshing can
be seriously considered by the companies.
Both Hero Honda and Bajaj resort to these policies, as it may be seen that
Splendor becomes Splendor plus and then Super Splender. In case of Bajaj, the CT
100 and Pulser have also undergone brand refreshing.
9. How do you see the impact of technological changes on the consumer
behaviour in the two wheeler segment in India?
(i) It is a long term trend but will not last for ever --------------------- 30 per
cent
(ii) It is a long term trend and may continue till generations
___________--- 25 per cent
(iii) It is a short term market condition ---------------------------- 40 per cent
(iv) Do not know/ Can not say ------------------------------------- 05 per cent
Interpretation: The technological innovations have their impact on the consumer
behaviour in the two wheeler segment in India, but it may not be a long term
phenomenon that may last for generations, making it complex for the companies to
develop their R &D and marketing strategies.
10. Which section of the company need to be more sensitized to the frequent
technological innovations?
(i) Administrative wing ------------------------------ 18 per cent
(ii) Marketing wing ------------------------------------- 25 per cent
(iii) R&D wing -------------------------------------------- 42 per cent
(iv) Other wings ----------------------------------------- 15 per cent
Interpretation: Although 42 per cent of the respondents feel that the Research and
Development wing need to be more sensitive to the frequent technological / innovative
changes in the two wheeler segment in India, followed by the Marketing wing
( according to 25 per cent of the respondents), what we feel is that the company needs
an integrated and comprehensive approach to dealing with this phenomenon.
11. Do you agree that the trend of technological innovations and their
behavioural impact will be beneficial to the Indian market?
(i) Agree ----------------------------------------------
62 per cent
(ii) Disagree ------------------------------------------
20 per cent
(iii) Do not know/ Can not say ---------------------
18 per cent
Interpretation: Because of the sound technological position of the auto mobile
companies, they will be benefited from the above mentioned technological trend.
12. As we see more and more demand for newer innovative technological
products like the DTS I technology, do you think that mergers and
collaborations with MNCs with technological edge will benefit the domestic
companies?
(i) Yes ------------------------------------------- 58 per cent
(ii) No ------------------------------------------- 27 per cent
(iii) Do not know/ Can not say ------------- 15 per cent
Interpretation: Merger and collaboration of Indian companies with the MNCs
having technological edge can benefit the domestic companies as the integrated
technology can be a boost in the said marketing trend.
Testing of Hypothesis:
1) The impact of technological changes on consumer
behaviour in the two wheeler automobile segment in India will be long term and may
also last generations-------- Negated
2) These trends reflect a positive sign for Indian two
wheeler automobile market------------- Proved
CONCLUSION
The argument about the flow of causality between the supply and the demand
sides is an old question that has shifted economists from one side to the other along
the history. First it was Say, according to whom every supply generates is own
demand. Keynes formulated the opposite argument, suggesting that it was actually the
demand that drove the supply. A review of the earlier literature on technological
change reveals a ”supply push” argument . This argument was later countered by
“demand pull” arguments. To include a new consumption into the consumer’s choice,
first there have to be a certain amount of novelty, that will make the consumer get the
first unit of the new good. Once an unit has been bought, the novelty will affect her
for a time, but will disappear quickly. Then it will be her experienced with the good
what will make her keep on buying it or stop the consumption of this good.
With the two-wheeler market, especially the motorcycle market, becoming
extremely competitive and the life cycle of products getting shorter, the ability to
offer new models to meet fast changing customer preferences has become imperative.
In this context, the ability to deliver newer products calls for sound technological
backing and this has become one of the critical differentiating factor among
companies in the domestic market. Thus, the players have increased their focus on
research and development with some having indigenously developed new models as
well as improved technologies to cater to the domestic market. Further, with exports
being one of the thrust areas for some Indian two-wheeler companies, the Indian
original equipment manufacturers (OEMs) have realised the need to upgrade their
technical capabilities. These relate to three main areas: fuel economy, environmental
compliance, and performance. In India, because of the cost-sensitive nature of the
market, fuel efficiency had been an interest area for manufacturers. It is not only that
the OEMs are increasing their focus on in-house R&D, they also provide support to
the vendors to upgrade the technology and also assist them striking technological
alliances.
In this study, I used two wheelers exclusively for demonstrating consumer
behaviour toward “evolutionary technologies”. However, consumer behaviour
towards HEVs and other types of vehicles may not be the same as for other
evolutionary technologies. Thus, my first recommendation is that more research on
other evolutionary technologies needs to take place to identify common aspects of
consumer behaviour, so that useful generalizations about evolutionary technologies
can be made.
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