Bajaj Auto Vs Hero Honda

Producing Lowest Cost Two-Wheelers:

Bajaj Auto Vs Hero Honda

By

Ved Singh,

Abhimanyu Prabhavalakar,

Baskaran Balasubramanian,

Srikanth Gopalakrisnan

Table of Content

1. Indian Economy and Two-wheeler Industry

2. Bajaj Auto Ltd.

3. Hero Honda

4. Cost Management Analysis

1. Indian Economy and Two/Three wheeler Industry

As we write this report, there are few factors which we would like to state , just to set the context for this report, for for Indian Economy in general and then for two-wheeler industry in general -

* Consistent High Growth in Indian Economy

High Growth India appears to have acquired a ravenous appetite for growth that shows no signs of abating. A GDP growth of 9.4 percent in 2006-07 makes it the second successive year of 9 per cent plus growth. The country's GDP crossed the billion-dollar mark for the first time ever in April 2007, and India now finds itself in an elite club of trillion dollar nations.

* High Savings Rate

There is little doubt that the changing savings and investment profile is powering India's growth engine. The savings rate shot up to 32.4 per cent of GDP during the year in review This is at par with some of the top ASEAN nations.

* Manufatucting Sector Growth

Manufacturing posted a growth of over 12 percent Capacity expansion was fueled by a boom in capital goods, electronics and automobile sectors, emphasising the consumer boom.

* Young Consumers' share in population

With 30-40 million persons joining the middle class each year, demographics has emerged as a source of competitive advantage. Approximately 50 per cent of India is under 25, and it will remain this way for some time What this means is that a higher percentage of people will be in the working age till the mid-twenty-first century- which is when India is projected to take over the US as the second largest economy of the world.

* Urbanisation

Urbanisation is also becoming increasingly relevant in the growth story. Cities like Pune, Chandigarh, Kolkata, Indore, Ahmedabad, Cochin, Chennai, Hyderabad, Secuderabad, Jaipur, Rajkot, and Nagpur are gaining attractiveness primarily due to their lower operating costs relative to a Tier I city.

Let's now focus on some factors exclusively for motorcycle industry -

* Growth Rate

The base effect finally seems to be catching up with the two wheeler industry in India. After growing at 16 per cent in the previous year, the pace of growth slipped to 12 per cent in 2006-07. Total volumes were pegged at a little less than eight and a half million, an incremental addition of nearly 1 million.

* MotorCycle Industry Growth

On the bright side, however, the motorcycle industry continues to be a dominant driver of this growth, by notching volumes of 7.09 million. The segment accounted for 83.7 per cent of two wheeler sales - up from 81.9 per cent in the previous year. To understand the pace of growth in this segment, consider these facts first, in 1999-2000 motorcycles accounted for just 48% of two wheelers sold.

* Increasing percentage of people joining the earning class every year

Given the emerging demographic profile in a country, where young salary earners are Increasingly making up the workforce, the growth of motorcycles has come at the cost of scooters whose sales dipped by 1 per cent at 9,82,384 units Scooters now make up 11.6 per cent of the two wheeler segment. Surprisingly, the moped category bucked this declining trend and grew at 5 per cent during the year

There are mainly three price points in motorcycle segment -

* Entry-level Segment

After maintaining at a scorching pace of 40 per cent in the previous year, sales of entry level bikes grew at just 5 per cent during the year in review, ending with volumes of a little over 2.7 million. The modest growth meant that the share of entry level bikes in the motorcycle segment slipped to 38.2 per cent, from 41 per cent.

* Deluxe segment

Sales of deluxe bikes grew by 20 per cent, and volumes were pegged at close to 3 6 million units, or 50.6 per cent of the motorcycle market. During the previous year, the share of deluxe bikes in the overall motorcycle mix had gone down to 48.7 percent

* Premium Segment

The premium segment increased its share in the overall motorcycle mix from 10.3 per cent to 11.3 per cent, and improved its pace of growth at 25 per cent from 18 per cent last year. Given the growth in this segment, there is no doubt that in the long term, this category will play a determining role in the overall growth of the motorcycle segment.

During 2005-06, the entry bike category was the star growth performer During the year under review, it was the turn of deluxe bikes, which is the cash cow of Hero Honda by a long distance,

The recovery in market share and the 20 per cent growth in a high volume market are clear indications of robust potential and scope for category growth.

In 2001-02, there were 61 million Indians belonging to families that earned more than Rs 200,000 a year; by last year (2005-06), that number had crossed 100 million. In 2009-10, this number is projected to increase to 173 million It is safe to assume that the bulk of the buyers from these segments will opt for either entry or deluxe segment motorcycle offerings.

The premium segment increased its share in the overall motorcycle mix from 10.3 per cent to 11.3 per cent, and improved its pace of growth at 25 per cent from 18 per cent last year. Given the growth in this segment, there is no doubt that in the long term, this category will play a determining role in the overall growth of the motorcycle segment

However, in the short to medium term, most of the action is expected to take