Bajaj Auto sales have fallen a quarter in this financial year. Can Managing Director Rajiv Bajaj turn the company around?
In November 2006, Bajaj Auto Managing Director Rajiv Bajaj took a daring bet: He said he would wean away customers from entry-level, 100cc bikes on which he made very little money to more powerful bikes which will be as affordable as the 100cc bikes. Thus, Bajaj Auto would stop making the 100cc Platina in the next two or three years. “The 100cc, 4-stroke motorcycle is as outdated today as the 150cc, 2-stroke scooter was ten years ago,” Bajaj had claimed then.
It was, by any standard, a bold move. The 100cc bikes made up no less than 80 per cent of the market. And 45 per cent of Bajaj Auto sales were in the entry segment (defined as 75-125 cc by the industry). Yet, he thought customers would prefer more power and style for a little extra price.
Bajaj had everything going for him and could hardly be faulted for his aggression in 2006. Though a late entrant to the motorcycle market, Bajaj Auto had in a few short years closed the gap with market leader Hero Honda with some great products and sleek advertising campaigns. Bajaj was just a stride away from glory.
Cut to the present: Bajaj Auto sales fell 17 per cent in February 2008, though Hero Honda was up 24 per cent and TVS Motor over 13 per cent. The gap between Hero Honda and Bajaj Auto, which had shrunk to around 30,000 bikes in mid-2006, widened to almost 2,00,000 in February 2009. The manufacturer still makes the 100cc Platina, though it has discontinued its other offering in the entry segment, the Boxer, and the CT100, more recently.
Statistics provided by the Society of Indian Automobile Manufacturers, the lobby group for the automobile industry, show that Bajaj Auto’s motorcycle sales have plummeted almost a quarter between April 2008 and January 2009 — the latest period for which sale numbers are available — as compared to the same ten-month period in the previous financial year.
The company’s numbers fell in both the categories: By over 40 per cent in the entry segment and close to 11 per cent in the deluxe segment (125-250 cc). As a result, its share in the entry segment fell from 18.16 per cent in April-January 2007-08 to 11.21 per cent in April-January 2008-09. In the deluxe segment, it fell from 61.8 per cent to 51.46 per cent in the same period. There is a third category of 250 cc and above where its share is less than 1 per cent.
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A closer scrutiny of the numbers also shows that Bajaj Auto alone is responsible for dragging down motorcycle sales in the country. Overall, sales fell 0.3 per cent in April 2008-January 2009. But if you exclude Bajaj Auto, sales during the period were up almost 10 per cent!
Hero Honda focused its energies on the entry segment and has reported good sale numbers month after month. Bajaj Auto, the leader in the deluxe segment, appears to be in pain. Did Rahul Bajaj take the wrong call? How can he resurrect the sagging sales of his company?
Deluxe focus
Bajaj says his November 2006 call still holds good and customers are shifting to more powerful bikes but not at the pace he would have liked. Three years back, bikes in the deluxe segment accounted for around 20 per cent of all motorcycle sales; today they account for 28 per cent. The entry segment still lords over 71 per cent of the market.
“Has the shift happened fast enough? No, I would like it (the deluxe segment) to be 65 per cent,’’ says Bajaj. His move was endorsed by competitors, all of whom have launched bikes in the deluxe segment and none of them have brought in a new 100cc bike. “The shift is happening every year and increasingly so,’’ adds Bajaj.
Bajaj believes that a rival as strong as Hero Honda can be dislodged with a dissimilar product — a 150cc bike, or a Nano — and not by another 100cc bike. “To that extent there’s a technology issue. Unless I come up with something different, the customer has no motivation to come to me,’’ he says, weaving in a Chinese proverb: “There are many ways to win. Sometimes you have to lose before you win. Our strategy intends this sacrifice.’’
In the past, Bajaj Auto has often been accused of reacting late to a development. For instance, it was the last to enter the motorcycle market, though it was clear that customers had started preferring it over the scooter. Is history going to repeat itself? “We took a break last year. We said instead of trying to push sales, we have to create the ‘pull’ by developing such products, which can address the value (mid) segment,’’ says Bajaj.
By August, Bajaj Auto will launch six bikes that will offer more style, power, features than 100cc bikes and yet match their price and mileage that appeal to commuters who are largely Hero Honda’s customers. These will be 125cc-plus bikes and will be priced between Rs 40,000 and Rs 45,000 — close to what Hero Honda’s entry-level bikes cost.
In January, Bajaj Auto launched the first of these bikes, the XCD 135, which has been received well, according to dealers. It sold 20,000 in February. Bajaj says this makes it the second-largest selling bike in the 125cc-plus segment after his Pulsar.
“The XCD 135 and our forthcoming bikes will share our fundamental brand-led design strategy of drawing upon our 125cc-plus brands Pulsar and Discover. The bikes will be priced at a small premium to competition, just like the Pulsar and Discover, to signify the better value that they offer,’’ says Bajaj.
“Similarly, all advertising, irrespective of the specific motorcycle, will be based on our fundamental differentiator, the DTS-Si technology, which is intrinsic to all our bikes. It will be articulated as ‘Bajaj DTS-Si, the world leader in twin-spark technology’ in the interest of both customer confidence and aspiration,” says Bajaj.
Every advertising rupee spent will thus work in a cumulative way to build the performance benefits of this technology in the mind of the customer so that Bajaj Auto is consistently perceived as the maker of DTS-Si bikes which are positioned as better than 4-stroke bikes. “This justifies a higher price for our bikes and reduces our advertising cost since a smaller budget suffices when the message is singularly focused,” says Bajaj.
“I need 60,000 people in the deluxe segment to feel that price and mileage being the same, Bajaj is an equally good name with faster, bigger and solid bikes,” says Bajaj. The mid-segment has 3,50,000 buyers as of now. “The dichotomy is that when I am targeting a Hero Honda customer, on the one hand, I have to match the price and mileage of its bikes, yet I must have an X-factor in the product, which Hero Honda doesn’t have. So, we are offering style, features, power, performance and a lot of sex appeal in our motorcycles.’’
Entry unguarded
What about the entry segment? Some rivals say that Bajaj is paying the price of alienating the customers for entry-level 100cc bikes. “When the company said it will focus on 125cc-plus bikes, some entry-level customers were worried. Should they buy entry-level bikes from Bajaj Auto at all? What will happen to spare parts? Their ads made fun of 100cc bikes. These were both self goals. These bikes still account for over two-thirds of the market,” says a rival.
Bajaj says that his sales in this segment were hit badly by the credit crunch. Credit was denied by all financiers primarily to customers of this segment because default rates were much higher than in the deluxe and premium segments. Faced with rising defaults (which went up to an alarming 5 per cent of the book against 1.5 per cent that is acceptable) financiers like ICICI Bank and Citi Financial began withdrawing.
Here, Hero Honda has an advantage. Less than a quarter of its customers take loans to buy motorcycles. In Bajaj Auto’s case, the number is between 40 per cent and 50 per cent. Many Bajaj Auto customers are first-time urban buyers and take loans (which means low down-payment) to buy bikes, while Hero Honda is popular in many agrarian markets like Uttar Pradesh or Andhra Pradesh where buyers are cash-rich and depend less on finance. Good harvests, high procurement prices and the farm loan waiver have added a zip to the rural markets. Also, farmers in the country do not pay income tax.
“People who saved money to buy a bike continue to be there in the market but those who looked for finance to buy a bike have gone away,’’ says a former two-wheeler marketer.
Bajaj thinks much is made of the rural-urban divide in the motorcycle market. “I personally don’t believe there is any such thing as urban and rural: There are only people who wish to own a bike. I have never seen evidence of the so-called urban and rural customers responding differently,” he says. “In other words, a product or marketing idea that works for one has always worked for the other too and one which doesn’t succeed doesn’t succeed anywhere.”
Still, Bajaj has an ace up his sleeve which he can use in the entry segment or the rural markets. Bajaj Auto has been working with Chinese suppliers to develop a bike for the bottom-end of the world market (with an estimated size of 14 million bikes per annum). These bikes are sold for $500 or less (around Rs 25,000) and the Chinese dominate this market. “We cannot address the market with the Bajaj brand. We will develop a new brand, which should be profitably sold at these prices,’’ says Bajaj.
The company has completed the design of the motorcycle in India, while the entire development and manufacturing is being done in China. To bring down costs, Bajaj has adopted a platform strategy like carmakers that aims to generate volumes and economies of scale by using the same platform for mid-segment bikes and low-end Chinese bikes. Though Bajaj says that the bike will be launched in markets like Africa, it can be sold in India too if the need arises.
Scooter, anyone?
Critics point to another loophole in Bajaj’s strategy to straddle a bigger share in the two-wheeler market. It has nearly vacated the scooter segment which is showing signs of a revival.
SIAM data shows that 9,58,265 scooters were sold in the country during April-January 2008-09, up 8.42 per cent from 8,83,831 in the same period of the previous year. All indications are that sales will cross the 1-million mark in the current financial year — roughly a fifth of the projected bike sales. During the same period of growth in the scooter segment, Bajaj Auto’s share has slipped from 2.17 per cent to below 1 per cent.
The leader in this market is Honda Motorcycle & Scooter with a market share of 60 per cent. The surprise in the package is Hero Honda which has quietly gained double-digit market share with a sleek product and some clever positioning.
Hero Honda’s scooter named Pleasure was promoted as a scooter for women (“Why should boys have all the fun,” says the punch line.), complete with all-women sale outlets. Still, 30 per cent of its customers are men. In January, Hero Honda sold 15,789 scooters — way ahead of Bajaj Auto which sold 8,862 in the ten months to January. Is it again time for Bajaj to rethink his strategy?