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Facing the Heat - Views on News from Equitymaster
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  • Nov 9, 1999

    Facing the Heat

      Think of Bajaj Auto, and what comes to mind is an endearing image of a traditional Indian couple with their two little kids in tow on their reliable, sturdy Bajaj scooter. Not surprising for a company that provided Indians with one of the cheapest modes of transport and fuelled the boom in scooter demand in India for over two decades.

      In the beginning there was only Bajaj...
      Over the years, Bajaj Auto has come to occupy a place of pride amongst the world's largest manufacturers of scooters. The company by using completely indigenous technology is also credited with being the most economical manufacturer of scooters in the world - an achievement unmatched even by the Japanese and Italian producers despite their efficiency and technological excellence. Its flagship models - Chetak and Super, although low on styling made their mark as sturdy, efficient, scooters.

      The sleeping giant
      Prior to 1994, Bajaj Auto ruled the Indian scooter segment with its market share exceeding 80 percent. This near-monopolistic market structure may have created a sense of complacency in the company. Product launches were far and wide, and product upgrades were virtually unheard of. Then the competition stepped in. LML- a turnaround company, fresh from its resurrection launched a flurry of products in the premium segment. Hero Hondaand TVS Suzuki rolled out their range of sleek motorcycles - with Japanese technology. The consumer finally had a choice and he chose others over Bajaj Auto. Over the next two years, Bajaj Auto's market share plummeted to less than 70 percent.

      Speedbreakers on the way...
      The competition woke up Bajaj Auto from its slumber, making it more proactive and consumer responsive. But the going wasn't all that easy. Over the past two years, consumer preferences had shifted from scooters to motorcycles. This hit Bajaj where it hurt the most - scooters, which until then was its bread and butter business. The company found it difficult to handle this structural shift in the two-wheeler segment. Motor cycles were an alien product for the company and for the first time Bajaj found itself on unfamiliar territory. Besides the competition (read Hero Honda and TVS Suzuki) innovated much faster to market changes thanks to their Japanese parentage, making things more difficult for Bajaj Auto.

      While competition made the consumer smile, BAL frowned, and not without reason. In July 1999, its market share in scooters was 64 percent (66 percent in 1997), motorcycles - 26 percent (31 percent), mopeds - 6 percent (10 percent) and three-wheelers 85 per cent (95 per cent).

      Competition is the mother of innovation...
      But everything happens for the better so they say, and even Bajaj Auto may agree with that. In the face of competition, it was forced to innovate, and some of its products have done very well, giving the competition a run for its money. Caliber - a four stroke motorcycle gave many a sleepless night to Hero Honda's Splendor, Legend was India's first four-stroke scooter to counter LML, while Bravo and Spirit were well-researched, well-marketed scooterettes in response to TVS Suzuki's products. But as if 2-wheelers weren't enough, Bajaj has also got 3-wheelers to worry about. Greaves (Garuda), has begun invading what was hitherto Bajaj's territory and has already cornered 10 percent market share, at its expense.

      Where do we go from here...
      Bajaj can take heart from its future launches, which should see it face competition on an even keel. Lined up are a series of products, viz. Prowler - a 125cc, 4-stroke motorcycle, Saffire - a 100cc automatic 4-stroke scooterette and a host of scooter and moped upgrades. Launch of the Boxer AT is expected to counter competition on fuel-efficiency, while financial year 2000 will witness a slew of launches in the premium scooter segment, in collaboration with Tokyo R&D and Kagiva of Italy. In the future, Kawasaki (its technology partner for motorcycles) is expected to play a pivotal role in quality assurance and process development, which should help benchmark the company's production systems to international standards.

      With the large investments that the company is currently holding onto, its nebulous position on what it intends to do with this, as also the yet to be proven success of its new products, some analysts seem to be taking a wait and watch approach before re-rating the stock

      However, as far as Bajaj is concerned, the company still believes that it can pull itself out of the rut it is in. New product launches apart, it still has an enviable sales and distribution network, a huge cash kitty, low cost of production and economies of scale - all factors that are crucial to beat the competition. Bajaj Auto hasn't given up yet. As they say, when the going gets tough, the tough get going.



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