Honda is cutting into a market which is dominated by Hero, its former partner
The factory at Manesar, on the road from Gurgaon to Jaipur, is spread over 52 acres. Over 7,000 workers and executives alike are dressed in the traditional white jacket and trousers of the company. The plant can produce 1.6 million two-wheelers a year and is working three shifts — two for production and one for maintenance. Every sixth minute, a bike or a scooter rolls off the production lines. This is the flagship factory of Honda Motorcycle & Scooter India. (A second plant that can make 1.2 million two-wheelers a year is operational at Tapukara in Rajasthan, and a third, of similar capacity, will come up in Karnataka at an investment of Rs 1,000 crore.) The reception area has on display three Honda motorcycles, polished to a gleam, and a simulator where you can test your driving skills. The place is buzzing with outsiders — some of them look like prospective dealers, eager to impress Honda executives.
That’s understandable. In the last year, the company has appointed close to a hundred dealers — one almost every fourth day. That has started to show in the numbers. Till August, the last month for which the Society of Indian Automobile Manufacturers has put out numbers, Honda had sold 1.05 million scooters and motorcycles, ahead of Bajaj Auto, which sold 1.01 million. This catapults Honda to the second slot in the market, ahead of heavyweights like Bajaj and TVS and behind former partner Hero MotoCorp.
Bajaj, to be sure, has said that it does not chase market share or volumes blindly — its focus is profits. “As the world’s third-largest motorcycle manufacturer and by far the most profitable manufacturer, we are indifferent to someone else’s sale of scooters and mopeds, and that too at undisclosed profit levels,” K Srinivas, Bajaj’s president (motorcycle business), told Business Standard recently. Is Honda, in an attempt to establish itself in the world’s second-largest two-wheeler market, ready to give up profits for volumes? Does it sell at a loss to gain market share? Yadvinder Singh Guleria, vice-president and operating head (sales & marketing), doesn’t give out numbers (because Honda is an unlisted company and need not put out its profit and loss statement in the public domain) but discloses that the company is in profit.
What explains Honda’s good run thus far? Honda ended its 26-26 partnership with the Munjals of Hero after an association of close to 25 years. Hero Honda, and now Hero MotoCorp, was the undisputed market leader. Its mantra for success was fairly straightforward: It came out with products that were inexpensive to buy, operate and maintain, and therefore commanded high resale value; positioned the brand as an aspirational one; and put in place a widespread distribution network. Honda, it seems, is using the same formula to succeed.
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The long association with Hero has given Honda a significant presence in the consumer’s mind. So, when it came out on its own 11 years back with scooters, it didn’t have to build its brand from scratch. And last year, when it broke away from Hero, it had a great brand that could be leveraged to good effect. Guleria claims that Honda is amongst the top two two-wheeler brands in the country so far as awareness is concerned; even in the rural markets, it is amongst the top three. “Initially when we started in 2001, brand awareness was low but now Activa has become a household word. Everybody today recognises CB Shine,” says he.
Hero’s strength is in the entry-level commuter segment — it has six motorcycles in the price range of Rs 36,000 to Rs 45,000. Hero accounts for three of every four motorcycles sold in the mass commuter segment. The category contributed over 70 per cent of the 10 million motorcycles sold in the Indian market in the last financial year. To gain ground in enemy territory, Honda introduced its first ‘serious’ mass offering earlier in May this year. The 110cc Dream Yuga, tagged at Rs 48,125, is the cheapest motorcycle Honda has in its portfolio globally. Honda President & CEO Keita Muramatsu has hinted at more workhorses to build the ranks over the next two years. To connect with the masses, Honda for the first time has appointed a brand ambassador, Akshay Kumar, with the launch of the Dream Yuga.
While India is largely a motorcycle market, the bulk of Honda’s sales come from scooters. Last year, 2011-12, as much as 60 per cent of its volumes were scooters. Indeed, its market share in scooters is in excess of 51 per cent. Guleria says the Dream Yuga will ensure that the company ends the current year with equal sales of scooters and motorcycles. So far in 2012-13, from April to August, motorcycles contribution to total stands at 43 per cent. Crucially, all Honda’s production lines are fully flexible — they can switch from scooters to motorcycles, and vice versa, almost instantly. This gives Honda enough elbow room to adjust production to demand.
Guleria knows that three factors are vital in India: price, mileage and maintenance. If he is to be believed, Honda already has an edge over its rivals — its products see 30 per cent value erosion in three years, compared to 40 per cent or more in other brands. Still, to drive down costs and keep the market buzzing with new products and features, Honda is investing in an integrated technology centre at its Manesar facility. A primary mandate of the research and development team is to collaborate with vendors and reduce the cost of components. Automotive companies in India have seen margins come under pressure due to rising input costs in recent times and Honda isn’t willing to lose its edge in pricing its products competitively by passing on rises in raw material costs to customers. “Some work is already under way and our teams are meeting targets. The CBR150R, for instance, has some imported content. Though costs went up due to the depreciation of the rupee, we have been able to arrest the increase from being passed on to consumers. Our customers paid only the increased excise duties,” says Guleria.
Some of the R&D work Honda currently carries out at its bases in Thailand and Japan will eventually be taken up by the team in India, Guleria says. “While the engineers will focus on developing products for the Indian market, they will scale up contribution from the country to Honda’s global business.” The Indian subsidiary’s contribution to the global revenues of parent Honda Motor Corporation’s two-wheeler venture is expected to more than double to 30 per cent by 2020. The complementing volumes would come in from both urban and rural markets, from premium as well as mass products.
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The core strength of the Munjals of Hero is their relationship with their dealers, nurtured carefully over long years. All dealers are handpicked by patriarch Brijmohan Lall. It is said that he knows each one by name. Every year, the dealers are flown to exotic locales across the world. Hero has over 4,500 touch points — dealers, sub-dealers and service centres — across the country. Customers in the vast unsaturated rural markets thus don’t have to travel a long distance to buy a Hero bike or get it serviced. Hero also has a dedicated team of over 1,000 salesmen to focus on rural markets. Thus, nearly 45 per cent of its annual sales of 6 million units came from non-metro areas last year.
Others aren’t far behind. To cash in on the potential in semi-urban and rural regions, Bajaj drove in its “Bharat Bike” — the Boxer — in August last year. Though the product did not find much favour among consumers in such areas, the company has left no stone unturned to extend accessibility, with 600 dealers and 2,400 sub-dealers.
To get close to the customers, Honda has set up zonal offices across the country. Three such offices have already come up in Bhopal, Chennai and Ahmedabad. Another seven will be put in place in the current financial year. The numbers will nearly double to 19 by 2014. A senior executive at Honda says that the zonal strategy has been particularly formulated to respond faster to demands and challenges at the regional level. The zonal offices have additionally been entrusted with the responsibility of expanding the distribution network. “Dealers were previously appointed by the head office but over the last two years appointments have been done at the regional level,” says Guleria.
He clarifies, however, that the company is cautious and monitors the selection procedure to ensure that “speed does not clash with quality”. The dealer appointment committee, which includes executives from a non-marketing background, is headed by Guleria himself. The committee follows certain set guidelines, all interactions with prospective distribution partners are documented and analysed, and the evaluation of the net worth requirement for becoming a Honda dealer is done by an independent agency to maintain objectivity. “We identify people who are at one with our philosophy — people who have money, who believe in footwork and have direct involvement in the business. But it was a surprise for us that even in Tier II and III cities there is so much interest,” Guleria says.
The company claims that Honda dealers are the most profitable among distribution partners of two-wheeler manufacturers. Dealers usually break even within three years of operations and receive “good” returns on investment thereafter. Honda currently has over 1,500 touch points across the country comprising 551 dealers, 534 sub-dealers and 448 authorised service centres. The target is to put in place another 500 touch points by the end of the current year. “To bring in numbers from rural markets, we need the right products which we have done with the Dream Yuga. We are backing this up by expanding our distribution network,” says Guleria.
Next target? Hero?
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