Two bulge-bracket rivals. Eyeball-to-eyeball strategy. Who-blinks-first pricing. The action in the 4.5-m units-per-annum entry-level motorcycle market is hotting up as Hero Honda Motors plans product and marketing aggression to increase marketshare while Bajaj Auto tries to redefine the pie with a new technology platform.
However, the real trigger for both is the same: creeping input costs and margin pressure in an intensely competitive marketplace.
HERO HONDA BAJAJ AUTO
Controls 50%share of 100-cc four-stroke segment Targeting high volumes via new products & price play Banking on 9m cycle users upgrading to 100-cc mobikes Retains 27%of 100-ccfour-stroke mobike market Shifting to a new product platform for better margins and share Betting on market shifting to its new platform
Up for grabs is a juicy 65% share of the motomart - a pie that mostly comprises 100-cc four-stroke mobikes. On the face of it, status is well established in the market: market leader Hero Honda lords over the segment with 50% marketshare thanks to its Splendor-Passion combo including their upgraded avatars.
Bajaj Auto, which launched the attractively-priced Platina this year, is already clocking 1 lakh units a month with the model though its overall share in the segment is 26-27%. So what's this latest bike battle all about?
The villain: Input costs
Analysts say the bad guy in the script is the creeping increase in input costs such as nickel, aluminium, rubber and, of course, steel. The price volatility of the mobike market makes it almost impossible to pass on the impact to the consumer. Which is why the bike brigade took only one price increase in the past 18 months, compared to half-a-dozen by car companies.
In a market as competitive as motorcycles, the cost pressures seriously reduce marketing and pricing elbow room. Says Hero Honda chairman Brijmohan Lall, “Our margins have been hit by commodity prices, and that will continue. We have been very efficient in our raw material management so far but we can't squeeze vendors beyond a point.”
Margins on their mind
The cost pressures have necessitated a search for margin improvement that is playing out in the form of very different strategies. Hero Honda - whose overwhelming presence in the entry-level segment means that nearly all its volumes come from there - is looking at a sharp increase in volumes through new products and price/marketing aggression.
“The volume growth will amortise fixed cost over larger numbers,” says Hero Honda VP (finance) Ravi Sud. “Just a 4% marketshare loss can hit per-unit fixed cost significantly, so we have to regain and retain marketshare.”
As for Bajaj Auto, the focus is to move away from a segment that's fast turning into a commodity. Says the company's executive director Sanjiv Bajaj, “Price and cost are two different things. We are not in a market where you do a cost-plus for pricing. That's commoditisation. There has been a lot of volatility in input costs but we can't keep changing prices. We are looking at where we can build competitive advantage.”
That quest, though, is also tied to the margin mantra in motoland. While Hero Honda is looking to retain its margins and improve marketshare through sheer volumes, Bajaj Auto wants to move the segment to a product platform that will give better returns both in terms of margins and marketshare.
“Our higher-displacement engines are more profitable though it doesn't mean that the lower-end products don't make money,” says Sanjiv Bajaj. Hero Honda counters that with the logic that its 100-cc four-stroke range still makes good money.
“The margins are highest in the entry-level segment,” said Mr Lall. “We are surviving because of them. Besides, even now our margins are very reasonable. In fact, earlier they were unreasonable and unsustainable. The world over, auto company margins hover at 9-11%.”
The scramble for an entry-level strategy is understandable. The intense rivalry between the top two companies in the mobike business has played out through some serious price muscle-flexing in the entry-level segment. Mr Sud, for instance, admits that Hero Honda's Rs 2,000-crore surplus will not grow this year due to margin pressure, and no one expects a let-up in the competitive action any time soon.
Bajaj Auto's solution to its arch-rival's market aggression is to search for a positioning that will make it immune to Hero Honda's formidable brand presence in the entry-level segment. Says Bajaj Auto managing director Rajiv Bajaj, “We feel the 65% entry-level motorcycle market will only head downwards.
In the commuter segment of 100-cc four-stroke mobikes, Hero Honda is absolute king. I don't have a compelling product argument to make the customer move away from Splendor-Passion with me-too product and technology. I have a chance only if we put out something totally different.”
That totally different stands for a product that's “neither four-stroke nor 100-cc”, says Rajiv Bajaj. “Our strategy is to focus on the other-than-100 cc-four stroke customers who are looking for something more. Our DTSi is a different technology. We want to get out of the 100 cc-four stroke game and move the entry-level customer to DTSi,” he explains.
Bajaj Auto's current strategy is as driven by its past experience as by its search for a firmer foothold in the entry-level segment whose share has come down from 90% to 65% in three years, but which still commands the biggest chunk of the mobike market.
“The brand power enjoyed by Splendor-Passion earned them a premium in the market. We tried to ape that in the past but couldn't fight the brand perception with a product that's no different techwise and specwise,” says Rajiv Bajaj.
The company reacted by moving to the higher-displacement segment that commands 35% of the total market now, with Bajaj Auto enjoying 50% marketshare. “Mobikes that sell at higher prices make more money, so this is a profitable segment for us,” says Rajiv Bajaj. However, it's still just over one-third of the total market. Hence the decision to introduce a higher-displacement, DTSi platform in the entry-level segment.
The quest for a killer product
Auto analysts say that in the end, both Hero Honda and Bajaj Auto are looking for a blockbuster product that will change the complexion of the market. “If Hero Honda's next four launches throw up one killer product, they'll be in clover,” says an auto analyst with a Mumbai-based research firm. Hero Honda officials agree and say that's the reason why the company is rolling out as many as seven new products this year.
Rajiv Bajaj, for his part, also agrees. “In the 1990s, when Hero Honda was launching Splendor and Passion, they were getting their products right - and we weren't,” he says. “Back then, there was an 18-month waiting list on the Chetak and we had no R&D to speak of.
So, we put out 20 products between early 1990s and early 2000, most of which failed. Even those like Boxer, which made volumes, didn't make money. After 2001, TVS and Bajaj Auto are hitting the sweet spot more often.”
Hero Honda officials say the nine-million bicycle users looking to upgrade to a motorcycle will still buy the 100-cc four-stroke mobike. And the transition from 100 cc to, say, 125 cc will happen, but slowly. Bajaj Auto insiders reckon the right product can make the segment shift faster, if not en masse, certainly significantly.
At any rate, an entirely different product platform will give it the chance to change the rules of the game now dominated by its arch rival. Will the tactical positioning favour the 100-cc four-stroke product? Or will the market move to another platform? Time, and the customer, will tell.