New arena for 2-wheeler firms

With global markets open to the Hero Group after its split with Japan’s Honda Motor, the next battleground for Indian two-wheeler companies could be overseas. Until now, the joint venture was restricted from exporting freely to other markets and was forced to ship to a handful of countries through Honda subsidiaries.

Nigeria is one lucrative opportunity. It is the largest two-wheeler market in Africa, at around 1.5 million units a year, and is dominated by Chinese brands. The market leader is a Chinese company, which sells around 30,000 motorcycles a month. Bajaj Auto, which launched sales six years ago, already sells 21,000 made-in-China bikes a month and fetches a 50 per cent premium over models sold by Chinese manufacturers.

Between 2012 and 2015, Nigeria and the rest of Africa will continue to boom. But the Chinese and Bajaj Auto will face serious competition from Honda, which is developing a $600 bike for emerging markets.

Bajaj Auto, the largest two-wheeler exporter from India, ships around 900,000 bikes a year to South Asia, Africa, Central and South America, and the Far East. With exports of 200,000 three-wheelers, it plans to target an export turnover of about $1 billion. Exports accounts for 30 per cent of Bajaj’s sales. Eventually, it wants exports to contribute 70 per cent.

Hero is planning to export motorcycles to markets in Latin America and Asia, said Anil Dua, head of sales & marketing at the company, in a conference call last week. “South Asia and Latin America have a huge potential, and so does West Asia, Africa and Southeast Asia. The exact timing of entry is part of our comprehensive strategic plan, which we can’t share,” Dua had said.

A day later, Hero Honda MD Pawan Munjal asked his vendors to gear up for an export thrust, even as it plans to launch a new brand and market it internationally. The company exports 100,000 bikes a year to Bangladesh, Nepal, Bhutan and Myanmar. Hero is still chalking out its strategy and didn’t want to share much at this point, but it will have to compete with Chinese and Japanese brands, besides Bajaj and TVS Motors.

Bajaj, which wants to grow volumes in these markets, doesn’t mind the competition. “Over time, competition will increase; it’s not a solo ride even today,” said Ravi Kumar, Bajaj’s senior vice-president for business development.

The export opportunity

The 50-million-units-a-year global two-wheeler market is dominated by Japanese brands like Honda, Suzuki, Yamaha and Kawasaki in the $1,000-$3,000 mid-market (22 million units a year). The Chinese dominate the bottom of the pyramid (21 million). Chinese bikes, sold for $1,000 or less, often cost $300-$400 to make.

There is no way an Indian or Japanese manufacturer can match these prices. The Chinese market alone accounts for 9-10 million a year, Africa accounts for another 4 million, Bajaj Auto MD Rajiv Bajaj had told Business Standard in an earlier interview.

The top end of the market (4 million units) is dominated by niche players like Harley Davidson (200,000 a year), BMW (100,000 a year), KTM (90,000 a year), Ducati and Piaggio. Though the Japanese also make and sell bigger bikes (600cc and above), American and the European specialists command pricing power as consumers are highly brand conscious.

While the US and Europe are largely leisure markets, it’s in utility markets where a bulk of bikes are sold. Within utility, there are two types of markets: Mature markets like Thailand, Indonesia, Philippines and Brazil, where even the Chinese find it difficult to enter and customer expectations of quality and reliability are very high; and emerging markets in Africa and Asia, where the Japanese didn’t have a direct presence and the Chinese made strong inroads.

“Indian bikes fare better in quality and reliability than Chinese bikes, but are 30 per cent cheaper than Japanese bikes,” said an expert. “Africa is a growing market; and there’s opportunity in SAARC countries, where Hero can immediately start exporting. But in Latin America, Honda is a strong player. Don’t expect Hero to duplicate the success of Bajaj overnight,” said a former marketing head of a two-wheeler company. Bajaj’s exports are ten times those of Hero Honda and it has a presence in many emerging markets.

In Africa, distribution is key. “In markets like Africa, customers don’t demand much service. If you have a good distributor and the product is available, you can tap into it quickly,” said an expert.

On the other hand, there are markets like Indonesia, where Japanese brands rule. Besides brand, customers seek reliability and assurance, and the cost of entry is very high. Yet, TVS decided to take a plunge and set up an assembly plant to make bikes locally.

Unlike India, Africa or Latin America, what sells in Indonesia — and much of Southeast Asia — are step-throughs (like the Honda Cub, which was launched as the Street in India, but did not click with consumers). In three years, TVS’s Indonesian subsidiary has sold 30,000 bikes, half of them last fiscal, and has started exporting to other Asian markets.

Though it has improved gross margins from 5 per cent to 17 per cent in 2009-10, the company also reported a loss of Rs104.49 crore. TVS now plans to focus on building its brand, increasing its distribution and targeting monthly sales of 10,000 vehicles. ‘‘Indonesia has been a tough market where we have tough competition,’’ said H S Goindi, president (marketing & sales), TVS Motors.
Hero’s likely strategy

Given the challenge in markets like Brazil or in Southeast Asia, it will be not be surprising if Hero goes after emerging markets first. “It will be a long haul. It will take the company at least a year to set up a distribution network. It also has to decide on positioning and find the right niche. It won’t be the market leader, but a third- or fourth-ranked player,” said an industry expert.

Any country that doesn’t have a good public transport system is a potential market for Hero. “Russia could be a potential market, as you don’t have much of a public transport system beyond Moscow. Pakistan is a potential market. There are many markets where the Japanese have not penetrated yet,” said an expert.

The bigger challenge for the Munjals will be R&D, quality and product development. “Exports should be an easy one for the Munjals. It’s about business, where the Munjals have been a bigger contributor than Honda. It’s about relationships, positioning and pricing,” said a two-wheeler expert who has known the Munjals for three decades.

More importantly, exports could be a great de-risking strategy for Hero if something goes wrong in the Indian market, said an expert.