Honda arms trade in profits for better future.

Digging in for the long haul, the two local subsidiaries of the Japanese automobile major Honda Motor are sacrificing profits in the short-term as it builds scale through new products, manufacturing capacities ramp-ups and promotional spends in India.

Honda Motorcycle & Scooter India (HMSI), the Honda subsidiary that makes two-wheelers, posted its first decline in profit in the last five years, and its car subsidiary Honda Cars India saw losses swell to Rs 1,000 crore for 2012-13.

 Honda Motorcycle and Scooter India's net profit for FY13 declined over 5.54% to Rs 389.31 crore versus Rs 412.18 crore posted by the company in FY12, whereas for Honda Cars India losses jumped over 85% to Rs 1,109 crore.

While Honda Cars has accumulated losses of Rs 1,300 crore, Honda's two-wheeler arm is sitting on a surplus of Rs 1,100 crore. Honda Cars India grew volumes by over 35% in FY13 to 73,483 units with a market share of 2.74%, whereas HMSI posted a healthy volumes growth of 31% to 2.75 million vehicles.

Analysts reckon that a large part of the pressure on the bottom line for the car company has been on account of volatile yen due to significant imports, and also due to the unutilised second plant in Tapukara. This along with higher depreciation, costs and rising costs on promotions on account of the overall market slowdown has indeed cramped margins.

Barring the Amaze which was launched in FY14, all its other models declined in line with the market trend in FY13. As for the two-wheeler subsidiary, the increasing share of lower margin mass market motorcycles, rising ad spend with the company hiring film star Akshay Kumar as its brand ambassador, increase in man power cost and raw material cost took a toll on the company's profits and margins.

To be sure, HMSI's volumes grew at over 20-30% in the last three to four years, the margins shrunk over 350 basis points to 10.1% in FY13. In FY14, the company tied-up with HDFC Bank to sell Dream Yuga at an attractive finance offer and in some markets, the company had schemes running of 0% processing fee.

When contacted, HMSI spokesperson said the company has been on an aggressive expansion overdrive since FY10.

"To realise this huge sales growth, appropriate investments and expense on capitalisation of 2nd plant at Tapukara, Rajasthan, due to which depreciation costs have significantly risen and PAT has been impacted. Increase in expense is due to proportionate increase in new manpower to support our expansion. Increase in advertisement and branding expenses. Increase in material cost due to increase in input prices of steel, aluminum, plastics etc," the spokesperson explained.

The spokesperson for Honda Cars India added: "At any time, there are internal and external factors at work which impact a company's performance and recent currency weakening is one of the reasons at play. With a clear product strategy and expansion plans we are confident of a new phase of growth for Honda in India."

HMSI said attributing falling margins and profits to the increasing share of motorcycle sales would be inappropriate. "Primarily, heavy investments for additional production capacity resulted in moderation of margins," the company explained.

 According to Deepesh Rathore co-founder, EMMAAA, an automotive consultancy firm, the drop in profits and margins for brand Honda (two-wheelers and cars) is on expected lines.

"On the two-wheeler front, Honda wants to be number 1 and is running behind volumes and market share. So, higher spend on advertising, promotions are a given and it is taking Hero head on, in their turf, so the margins are expected to be lower. Eventually once they reach a scale, margins and profits will come back. On the cars front, apart from Amaze, the other models were falling in line with the market. So, the company had to shell out more for promotions, relatively unutilised Tapukura plant and diesel engine plant expansion too took a toll on the company's profits," said Rathore.

But such pain is only in the short term. About the future, Rathore feels the best is yet to come, "The next two to three years for both cars and two-wheelers is going to be extremely good," he added.

Bajaj Auto bike sales decline 14.69% in November

Bajaj Auto  Ltd (BAL) on Tuesday reported a decline of 14.69 per cent in motorcycle sales at 2,78,703 units in November 2013.

The company had sold 3,26,727 units in the corresponding month last year, Bajaj Auto Ltd (BAL) said in a statement.

BAL said exports were up 8 per cent during the month at 1,33,731 units compared to 1,24,115 units in November 2012.

In the commercial vehicles category, the company said its sales stood at 31,888 units as against 45,566 units in the same month last year, a decline of 30 per cent.

Total vehicle sales of the company last month stood at 3,10,591 units as compared to 3,72,293 in the same period a year ago, a decline of 17 per cent, the statement said. The stock of the company closed  at Rs 1,954  or 0.55 per cent down on the BSE. 

Hero Fights Honda to Sate Female Scooter Demand: Corporate India

Hero MotoCorp Ltd. (HMCL), India’s largest motorcycle maker, plans to unveil additional models in February to woo women customers for its scooters and fight Honda Motor Co.’s surge in the two-wheeler market.

Rising demand for personal transport in India’s villages and small towns, especially among women, is spurring the 18 percent growth in the nation’s scooter sales, Anil Dua, New Delhi-based Hero’s senior vice-president for sales and marketing, said in a Nov. 27 interview in the city. Hero also aims to tap the expanding 125cc motorcycle segment, Dua said.

Tokyo-based Honda Motor Co. is seeking to overtake Hero MotoCorp Ltd. after ending a joint venture with the Indian company in 2010. Photographer: Prashanth Vishwanathan/Bloomberg

“My clear mission is to grow faster than the market,” said Dua. “The only two segments that are growing at double digits are scooters and 125cc.”

The two categories offer Dua some respite from a slowdown in Indian economic expansion that has reduced demand for the 100cc bikes, which account for about 73 percent of Hero’s sales. In scooters, Dua is seeking to close the gap to Honda (7267), which sold more than 1 million units in the segment for April through October versus Hero’s 393,468. Scooters are seeing a resurgence, spurred in part by purchases by working women.

Tokyo-based Honda is seeking to overtake Hero after ending a joint venture with the Indian company in 2010, banking on a lack of public transportation in rural areas of the country of 1.2 billion people. Honda, the world’s biggest motorcycle maker, became India’s second-largest two-wheeler seller in the year ended March.

Aspirational Customers

Hero and Honda also want to take advantage of customers moving up to 125cc bikes from smaller runabouts as incomes rise, a shift being driven by increasingly aspirational Indian consumers, according to Emerging Markets Automotive Advisors.

“Scooters will help Hero offset increasing competition in motorcycles,” said Yaresh Kothari, an analyst with Angel Broking Ltd. in Mumbai. “While scooters are growing fast in urban and semi-urban markets, people are gradually moving to higher capacity motorcycles, and the 125cc segment offers a good mix of looks as well as fuel efficiency.”

Hero has climbed 9.3 percent this year, compared with the 7.6 percent increase in the S&P BSE Sensex Index. (SENSEX) The stock, which Kothari rates at neutral, rose 1.2 percent to 2,077.55 rupees at 1:30 p.m. in Mumbai.

Hero, which targets a doubling of its sales to 12 million units by 2020, expects to spend about 1.5 percent of annual revenue on research and development, Dua said. The company will introduce the first models with Hero-developed engines at the New Delhi Auto Expo motor show in February, he said.
Research and Development

“When we split up with Honda, we had no R&D capabilities of our own,” said Dua. “Now, we are filing patents and are adding new technology to our motorcycles.”

Hero’s second-quarter profit rose 9 percent to 4.8 billion rupees ($77 million) from 4.4 billion rupees a year earlier.

The company sold 41 percent of the 8.53 million two-wheelers sold in India in the seven months through October. Sales of its 100cc bikes dipped about 3 percent in the period from a year earlier.

The company has two scooter models -- starting at about 43,000 rupees for the Pleasure and Maestro, targeted at women and men respectively. Honda offers three scooter models, starting at 45,506 rupees, according to the companies’ websites.

Companies including Yamaha Motor Co. (7272), TVS Motor Co. Ltd. (TVSL) and Piaggio & C. SpA (PIA) have added scooter models in the last two years.

“Hero MotoCorp is banking on its revamped existing brands to claw back some of its lost market share,” wrote Surjit Singh Arora, an analyst at Prabhudas Lilladher Pvt., in a note dated Oct. 23. “Hero has made a strong comeback in the recent months on the strength of its strong brands and distribution.”

New Models

The average motorcycle engine displacement in India has risen to 125.61cc for the first 10 months of 2013, compared with 116.3cc in 2005, according to a Nov. 27 report by New Delhi-based Emerging Markets Automobile Advisors. Two-wheeler sales in India are expected to be about 22 million units in 2018, driven by motorcycles as well as scooters, according to the report.

“There’s a huge penetration potential in India,” said Dua. “We have been bringing out new models at a pace of once or twice a year. That pace is going to accelerate.”

High-end bikes & electric cars made in India for China

In what may come as a surprise to many, India is quietly becoming a production hub of high-end vehicles meant for export to China. Iconic US motorbike maker Harley Davidson, Austrian motorcycle manufacturer KTM and Mahindra & Mahindra have preferred to set up manufacturing facilities in India than in the relatively low-cost China and export the output.

KTM, 48 per cent owned by Bajaj Auto, has identified two of its products under the Duke brand for export to China as completely knocked-down (CKD) units. The initial target is to sell over 10,000 CKD units of these high-end bikes annually. Exports are expected to commence in 2014. The two bikes are Duke 200 (Rs 1.35 lakh, ex-showroom, Delhi) and Duke 390 (Rs 1.88 lakh) manufactured at Chakan in Pune as part of the company’s joint development programme with Bajaj Auto. The KTM strategy is to sell high-power bikes from Europe and low-power ones from India. The bikes would be assembled at an outsourced facility in China.

Confirming the plans, S Ravikumar, senior vice-president (business development), Bajaj Auto, said, “The China strategy for KTM is clear. They want to target the niche upper end of the motorcycle market in China. They are not interested in the lower end where there are many players and huge volumes. We expect there to be a large market for high-end bikes in China.” The China thrust is part of the joint strategy of Bajaj-KTM to treble exports to around 70,000 units per annum from India, from about 25,000 currently. That effectively means about 13 per cent of the exports would come from selling to China.

Stefan Pierer, CEO, KTM Motorcycles AG, said, “We are in the process of setting up an assembly unit in China, which is expected to be commissioned sometime next year.” Keeping KTM company will be Harley Davidson, which has lined up for export models developed on the recently unveiled Street platform from its facility in Bawal (Haryana). Currently, Harley does not have any plants outside the US, except in Brazil and India, and it wants to leverage those plants for export to China. Anoop Prakash, managing director, Harley Davidson India, said, “Harley Davidson has developed the Street platform after a gap of 14 years. Both Street 750 and Street 500 will be manufactured in India, the only other production hub for the models apart from Kansas in the US.

These bikes will be exported from India to markets in Europe and Asia, including China.” Production and export of both models on the Street platform are expected to commence in India mid next year. Prakash, however, declined to specify a timeline for starting exports to China.

Abdul Majeed, partner and leader (automotive practice), PricewaterhouseCoopers (PwC) explained, “Both India and China are key markets in terms of two-wheeler sales. Given that customer requirements in both countries are largely similar, two-wheeler makers operating out of India only stand to gain in cost leadership if they are able to attain quality parameters while exporting to China.”

The potential to gain volumes in electric vehicles has drawn Mahindra & Mahindra to explore opportunities in China. The discontinuation of government incentives on green vehicles has meant the Mahindra e2o has sold only about 400 units since its launch in March — numbers the company was expecting to clock monthly.

Mahindra & Mahindra group company Mahindra Reva Electric Vehicles (MREV) is developing a variant of the electric car for exports scheduled to commence in early 2014. While the export variant would be first shipped to countries in the European region, MREV is additionally looking at opportunities to tap the growing market for electric vehicles in China. Chetan Maini, chief of strategy and technology, MREV, had told Business Standard earlier, “The export variant would be ready by early next year. We are looking at exporting the e2o to all markets we previously exported the Revai. We will also explore possibilities in China.”

According to industry estimates, the Chinese market has the potential for sales of five million electric vehicles by the end of the decade. Nearly half the 4,750 units of the Revai manufactured since inception were sold in 24 countries, mostly across Europe and West Asia.

Bajaj Auto drafts global roadmap for quadricycle

There is just one final notification due from the Government which will give Bajaj Auto the go-ahead to operate the RE60 on Indian roads. While this is scheduled to happen within the next two months, there is no telling if the launch could be delayed even further.

From the company’s end, there are no production glitches but as Rajiv Bajaj, Managing Director, says, there are “some members of the industry” who are still opposed to the RE60 and the quadricycle concept. Should they seek legal intervention to delay its debut here, there is little that can be done.

Bajaj is categorical, though, that he is not going to wait forever to launch the RE60 even if it means India is out of the reckoning. Markets such as Nigeria, Sri Lanka, Colombia and Indonesia would “be more than delighted” to have the four-wheeler on their roads, he says.

Yet, the final notification from the Indian Government is critical because it will allow the company to be better aware of the specifications for the quadricycle and plan an aggressive global strategy.

In the meantime, reports are doing the rounds that a passenger version is ready and being tested overseas. It is believed to be ‘sleek and top-class’ but Bajaj refuses to comment on this piece of news. Thus far, it is only one version that has been displayed even though it was amply clear that the platform would spawn other options, including a personal mode of transport.

“From my point of view, the issue boils down to urban mobility which has become a challenge not only in India but across the world right from South America to Southeast Asia,” Bajaj says.

It is here, he adds, that the quadricycle is the best bet to overcome problems of traffic congestion which is fast becoming a global problem.

Hence, even while cities are evolving mobility solutions like the metro or BRTS, Bajaj believes the quadricycle will meet the important requirement of last-mile connectivity. “In most parts of the world, it is the ideal solution for intra city transport. It is compact, light and cannot go beyond a certain speed,” he says. And with a fuel efficiency of nearly 35 km/litre, it is light on the pocket too.

This is precisely why a quadricycle would work in markets like Europe too where age demographics are changing coupled with falling incomes. It explains why smaller motorcycles are being sought after and, as an extension, why the quadricycle could emerge a practical solution.

However, back home in India, the argument is not cutting much ice with the likes of Tata Motors, Maruti and TVS Motor. Carmakers could be concerned that the quadricycle will eat into their own businesses especially when it is likely to be competitively priced at under Rs 2-lakh.

Bajaj is flummoxed why everyone has got the issue “by the tail where the number of wheels has become an obsession”.

“Cars are a different play compared to this puny thing. Crash norms make the car beefier and heavier, affecting emissions and mileage as a result,” he had told this paper on a previous occasion.

As for safety concerns, which a section of industry believes is relevant to the RE60, Bajaj had said, “How a four-wheeler can be considered unsafe beats me when you acknowledge the presence of two- and three-wheelers on the road.”

Hero inks pact with Italian firm

Hero MotoCorp today announced a joint venture with Italy-based component maker Magneti Marelli to make fuel-injection systems and powertrains in the country.

Hero MotoCorp will hold 60 per cent in joint venture HMC-MM Auto Limited, and the duo will invest $27 million over 10 years. Magneti Marelli had reported a turnover of 5.8 billion euros in 2012.

“We have decided to form a joint venture with Magneti Marelli for next-generation fuel injection systems. A total equity injection of $8.5 million in the ratio of 60:40 will be invested in the JV over a period of three years,” Hero MotoCorp managing director and CEO Pawan Munjal said.

The joint venture will target sales of around $100 million in the first five years. “We believe that this development will help the cause of Hero products and engines immensely. It will improve the drivability of our products. It will also help in meeting environmental regulations,” Munjal said.

On the terms of the agreement, Munjal said, “The joint venture is also open to supply to other manufacturers and would not be an exclusive supplier to Hero MotoCorp.” The joint venture will bring in key engine-related technology within the Hero group, thereby reducing the dependence on external vendors, he added.

The new company will start manufacturing by the end of 2014. At present, only two models from Hero MotoCorp — ZMR and Glamour 125cc — have advanced fuel injection systems.

Magneti Marelli CEO Eugenio Razelli said the aim was to partner Hero MotoCorp to equip all Hero motorcycles and scooters with advanced powertrain solutions.

“We believe in partnerships and we care a lot about the new joint venture. We hope to be a great asset for the Hero group,” he added. The venture will help to build electronic fuel injection systems, which will benefit engines used in Hero two-wheelers,” Razelli said.

Hero had recently unveiled 15 two-wheelers, which will hit the market within this fiscal. The company said it would enter Turkey and Egypt in the next few months and was also working on a low-cost entry-level bike.

Stricter Emission norms for two-wheelers on the anvil

The government is set to drive in stricter emission norms for two-wheelers which will make motorcyles and scooters less polluting but costlier by . 1,500-10,000.

New emission norms for twowheelers to be sold in the country from 2015 have been finalised and will be notified shortly, a senior government official told ET. “We have carefully scrutinised the requirements for the Indian market. The Indian emission norms for two-wheelers are unique since we don’t follow the European Union as we do in the case of bigger vehicles like cars, trucks and buses,” said the official, who did not wish to be named.

The new norms are likely to cut down emissions from twowheelers by about a quarter and are expected to make a significant contribution to containing vehicular pollution since two-wheelers account for more than 75% of the country’s automotive market.

Two-wheeler makers will have to go in for engine improvements, after-treatment devices and evaporative emission control to conform to the new norms, experts said. This will lead to an increase of about . 1,500 in the price of the mass market two-wheelers and about . 10,000 in the price of superbikes.

The new norms will take vehicular technologies to the next level, an official said, explaining that besides the regular combustion improvements in engines to make them cleaner and an improvised exhaust catalytic converter, all motorcycle manufacturers will also have to meet a new evaporative emission regulation. Therefore, all two-wheelers will come with a mandatory evaporative emission control unit.

At present, fuel tanks of motorcyles have a small opening that allows flow of the fuel to the engine from the tank. However, when the motorcycle is parked, especially in hot summers, a small amount of petrol evaporates and escapes from the opening. This results in evaporative emissions. Under the new norms, this evaporative loss of fuel from twowheelers in stationary position will be regulated by an evaporative emission control unit. The equipment has been a mandatory requirement in cars since 1996.

A new testing procedure, called Worldwide Harmonised Testing Cycle (WMTC), will also come in force as per the new norms. “Until the last applicable emission norms notified in 2010, we were following our own Indian cycle that was unique and crafted specially for India. Now, we will adopt the global pattern of testing and regulating the emission norms for twowheelers that will take them closer to the global norms followed in Europe and other markets,” the official said.

Emission norms are being gradually made more stringent in the country every five years or so and most companies are prepared for it. Hero MotoCorp, the world’s leading two-wheeler manufacturer, has already started the process of upgrading its products to confirm to the upcoming norms. “Hero MotoCorp has always complied with all applicable emission regulations. The new norms, when notified, will also be complied with well ahead of time,” said a Hero MotoCorp spokesperson.

Experts said manufacturers would be forced to phase out several models as they move ahead to comply with the new norms.

Parameters Determining Emission from Vehicles

• VEHICULAR TECHNOLOGY

• DRIVING CYCLE

• AFTER-TREATMENT DEVICES LIKE CATALYTIC CONVERTER

• FUEL QUALITY

• INSPECTION AND MAINTENANCE OF IN-USE VEHICLES
ROAD AND TRAFFIC MANAGEMENT