BAJAJ AUTO LIMITED

THE COMPANY

Bajaj Auto Limited was the largest two-wheeler manufacturer in the country till 2000.
Only few years back, in 1995, it had a dominating 70% market share in scooters
(including sales of subsidiary Maharashtra Scooters), 29.5% in motor cycles, 7% in
mopeds and a leading 86% market share in three-wheelers. However, BAL has been
losing market share in all the two wheeler segments.

By 1998-99, Hero Honda was the clear number one in the motorcycle segment with a
38% market share. Bajaj had slipped to a lowly second with a 27.4% share. Chennai-
based TVS Suzuki was fast catching up. During this period, it improved its presence
from 15.5% to 19.2%.

The scooter story is even worse. Between 1995 and 1999, Bajaj's market share shrunk
from 70% to 65%. And the scooter market itself has shrunk. In 1995-96, scooters made
up 45% of the total two-wheeler market. By 1998-99, it had shrunk to 36%.

Bajaj Auto had the lowest growth in 1999-2000. The company’s sales had grown at just
4.62 per cent to Rs 3,811 crore against Rs 3,642 crore in the previous year. During the
same period, its net profit has risen 13 per cent to Rs 614 crore.

In scooters, at the end of 1999-2000, the company’s market share had dropped two per
cent since the previous year. Being a major player in the scooters segment the company
has had a tough time, since the scooter market is shrinking. Against 13.25 lakh scooters
sold in 1998-99 the sales in this segment had fallen to 12.53 lakh in 1999-2000.

In motorcycles, at the end of 1999-2000 Bajaj’s market share fell further to 24 per cent
from 27 per cent, and was trailing the industry growth. While the motorcycle segment
grew at 28 per cent in 1999-2000, Bajaj’s motorcycle sales grew by just 12 per cent.

Since September 2000 Hero Honda has quietly stolen march over Bajaj Auto by selling
more two-wheelers. For the first time since its inception in 1984, Hero Honda finished
the financial year 2000 - 2001as the country’s largest two-wheeler company. Hero
Honda has crossed the magic figure of sales of one million motorcycles in the financial
year ended March 2001. Nearly all of Hero Honda’s sales come from motorcycles, the
fastest growing segment among the two-wheelers. On the other hand Bajaj’s mainstay is
scooter and scooter sales are going down. By March 2001, the share of the scooters in
the two-wheeler market has come down to 27% (scooters 16% and scooterettes 11%)
and that of motor cycle has grown to 54%.

Bajaj was slow in reading the shift from scooters to motorcycles. Hero Honda on the
other hand surveyed the market in 1998 via IMRB - the base of the survey was 25,000
samples. The results of the survey showed that scooters are fast getting out of fashion.
''It's thanks to that survey that today we sell over a million motorcycle in a year,'' says
Atul Sobti, Senior Vice-President (Marketing & Sales), Hero Honda. Ravi Sud, Vice-
President (Finance), Hero Honda, attributes a part of his company's lead in motorcycles
to the fact that it had set up a second plant in Gurgaon way back in February 1997. ''So,

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with additional capacity, we found it easier to cash in on the trend in favour of
motorcycles. Bajaj, on the other hand, remained preoccupied with scooters,'' says Sud.

A candid Rajiv agrees. ''Until 1995 we were extremely focused on scooters and three-
wheelers. '' Over the years, as Bajaj expanded its mobike range, customers didn't have
any particular reason to switch to Bajaj, as their bikes were looked upon as me-toos. Yet,
Bajaj has made ample progress in bikes since it launched its first one in 1985. Till 1995 it
was No 4. By 1997 it had shot ahead of Yamaha to reach third position. And three years
later, it dislodged TVS Suzuki from the second slot.

Hero Honda’s breadwinners in 2001 were the Splendor and the Passion, which
accounted for a little over 80 per cent of Hero Honda's sales. At the root of the Bajaj’s
strategy to take on Hero Honda was the belief that Hero Honda's bikes were too
expensive. So the first prong of the strategy was to flank the Splendor and the Passion
with two different products: one that was cheaper but offers the same features and
another in the same price range that offered more. In the meantime, there would be a
couple of products to take the Hero Honda bikes head-on.

Bajaj believed that a 100 cc bike for Rs45000 - which was the price tag on the Splendor
- was expensive by at least Rs5000. ''Nowhere in the world does a reliable, durable,
quality 100 cc bike cost more than Rs40000,'' said Rajiv, adding that this was what
explains the high margins at Hero Honda (an operating margin of 14.7 per cent last
year).

Caliber 100

Accordingly, Bajaj attacked Hero Honda's Splendor and Passion head-on with Caliber
Chroma. Caliber had generated a lot of interest but the bike could not pull in big
volumes. It sells around 18,000 units per month against Hero Honda’s Splendor sales of
over 60,000 units despite the fact that it is cheaper than Splendor by a few thousand
rupees.

Boxer

Entered the Boxer range (AT and CT), in the sub-Rs40000 range. Boxer AT was the
cheapest 100 cc motorcycle in the market, at Rs33691 (ex-showroom, Delhi). CD 100 -
Hero Honda's lowest-priced mobike - costed Rs5000 more. ''We can't launch a
motorcycle at that price,'' said Hero Honda's Sobti. Since launch, sales of the Boxer had
spurted from 3,000 a month to 30,000 within a period of two years. But competitors
pointed out that at this price, Bajaj was not making any money, which was reflected in
the dip in operating margins (from 19 per cent in 1999-2000 to 9.8 per cent in 2000 -
2001), and partly responsible for the huge dip in profits during 2000-2001 (from 635
crore to Rs 263 crore).

So, had Bajaj been buying market share, at the cost of margins? Well, yes and no. Yes,
because that's how the the Boxer was flagged off-at a discount of Rs 1,500. There were
only two ways that the Bajajs could compete with Hero Honda: one, to launch an out-of-
this-world product, which is near-impossible or, two, to compete on price, which was the
way it went. ''When you want to jumpstart volumes, the only thing that works is price,''
explains Sanjiv Bajaj, who estimates that the company would have taken a Rs 30 crore
hit because of the discounts.

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The increase in motorcycle volumes via the Boxer also gave Bajaj the opportunity to
reduce costs at the vendor end. The vendor base itself had been pruned from 1,000 to
800 and was cut down further to 400. ''This assures that those left get more business,
and this increase in confidence serves as an incentive for them to invest in technology
and reduce costs.

The Boxer range might have opened up a new segment for Bajaj - and other two-
wheeler manufacturers - but the biggest battle was to take on the Splendor and the
Passion. The Caliber Chroma and Aspire, essentially me-toos of the Splendor and
Passion, would play their role for Bajaj, but the company did not expect these products
to be major breadwinners

Pulsar

To hit Hero Honda where it really hurts, the Bajajs pinned their hopes on the Pulsar,
which was launched in November 2001. Priced at roughly Rs47,000 (which is what Hero
Honda's Passion will cost you), the Pulsar is, to use a car analogy, a step-up from a
Maruti 800 to a Zen-at the same price of the Maruti 800 - a 150 cc and 180 cc for around
the price of Passion. But it's not just a bigger engine that the consumer gets: he'll also
get a five-speed gear box, a longer wheel base, a tachometer, electric start and disc
brakes.

Developed by the Product Engineering division of Bajaj Auto in association with

Japanese design house Tokyo R & D, Pulsar is manufactured at Bajaj Auto's Chakan
plant, which is near Pune. Bajaj Auto rolled out its 5,00,000th Pulsar from the state-of-
the-art Chakan plant, within 30 months of its launch in November 2001. The Pulsar
today leads the premium motorcycle category.

Targeted at the youth, Bajaj Pulsar has been designed and styled as a 'mean, masculine'
robust machine with dazzling looks and advanced DTSI technology that offers great
performance. The symmetries between the muscular fuel tank, side panels and the rear
panels give a very distinctive feel to Pulsar.

The Pulsar has won the 'Bike of the Year' award, jointly constituted by ICICI Bank and
Overdrive magazine for 2003 and 2004 and the BBC World Wheels Award for the 'Best
two wheeler' and its 'viewers choice two wheeler of year' rating for 2003. Pulsar has
become a Rs-1,200-crore brand since its launch in November 2001. With export
revenues of Rs550 crore, BAL is India's largest exporter of two-wheelers today. And in
2003-04, it made the maximum net profit among two-wheeler companies in India - Rs
738.39 crore as compared to Hero Honda's Rs 728.32 crore (though its revenues were
Rs 1,000 crore lower than Hero Honda's).

Caliber 115

Developed under the Kawasaki product platform, Bajaj launched Caliber 115 in March
2003. The Caliber 115 is priced at an attractive Rs 40,215 (ex-showroom Pune). Stung
by competition from the TVS Victor and with the intent of distinguishing the Caliber from
its kind in the 100cc category, Bajaj has given the bike a new niche positioning in the
115cc category. The effort at re-launching the motorcycle with a slightly larger engine is
aimed at catering to the average buyer's (in that segment) need for more power, without
compromising much on fuel efficiency.

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The Caliber 115 is obviously pitted against the Hero Honda Splendor and will try to score
brownie points over slightly bigger competitors such as the TVS Victor and Hero Honda
Ambition. In addition to the punch in the details, Bajaj has also managed to complete the
package with a penetrative Rs 44,500-plus on-road price tag.

The new variant of the Caliber, which itself was built on the original Kawasaki 4S
platform, has been given a larger profile. The larger fuel tank, the aluminum die-cast
grab rail, the broader Zapper tyres and the comfortably wide, moulded, anti-slide seat
give the bike the feel of a larger motorcycle. The wider, aerodynamically-designed bikini
fairing, housing the `optoprism' halogen headlamp and the cluster of meters (for rpm,
speed and fuel) give the bike a more impressive profile.

Bajaj's technical alliance with Kawasaki has also helped it develop the 111.6cc K-Tec
engine for the new Caliber 115 — the earlier avatar of the Caliber was 99cc. The new
four-stroke, single-cylinder engine packs in a punch at 9.5 bhp, enabling the bike to
reach a maximum cruising speed of 100 km per hour.

The new engine is also rated to offer a mileage of 90 km per litre of petrol. As with the
claims of all other bike manufacturers, this rating is also based on performance under
standard test conditions. Expect fuel efficiency to be only 75- 85 per cent of the rating,
that is 65-75 kmpl under city driving conditions.

In terms of engine power, the 9.5 bhp of the Caliber115 compares favourably with the
7.5 bhp of the Hero Honda Splendor, the 7.7 bhp of the Boxer and the 8.1 bhp generated
by the TVS Victor.

On the lines of the economy and power modes available on the TVS Victor, the Caliber
115 has been fitted out with an optimum riding indicator, which shows the rider the
optimum rpm range for achieving the maximum mileage from the bike. The engine also
integrates the company's throttle responsive ignition control system (TRICS) to enable
users to get a balance of power and mileage. For increased safety, given the higher
power of the engine, the Caliber 115 comes with 130mm drum brakes in both the front
and rear wheels, compared to the conventional 110mm drums offered in bikes in this
class. The new bike's wheelbase, at 1,245mm, has also been increased slightly to offer
more stability. Bajaj has also strengthened the rear suspension of the bike to increase
load-carrying capacity and improve comfort vis-à-vis the previous Caliber version.

The bike features a four-speed gearbox. The flat torque spread helps boost the bike's
fuel efficiency and, at the same time, the top speed is better than that of its peers such
as the Splendor, Boxer and Victor. The gearbox's ratios also enable the engine to offer
knock-free performance even at relatively low speeds. However, the shift quality, in
terms of smoothness and ease of use, is not up to the mark. Caliber 115's build quality is
definitely better than its predecessors. Bajaj is also offering front crash guard, integrated
sidestep and sari guard as standard fitment.

Interestingly, while the company's product literature for the Caliber 115 has the name
Bajaj featured prominently, on the bike itself, the decals on the fuel tank, the signature
on the chrome heat guard of the silencer and the fairing prominently display the
Kawasaki brand, with the Bajaj logo next to it.

Says Bajaj Auto president Rajiv Bajaj: “Bajaj Auto has achieved undisputed leadership in
the entry level segment with a market share of 47 per cent by the Boxer series

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complimented with the new 100 km per litre BYK and also in the premium segment with
a market share of 40 per cent by the Bajaj Pulsar.

“Now, with the introduction of the Caliber 115, we are all set to make a clear dent in the
executive bike segment. This is our first major initiative towards the leadership in the
executive bike segment and we are confident to achieve the leadership in the overall
motorcycle market in the near future.”

CT 100

After the muted success of the Boxer series, Bajaj has been under pressure to come up
with a more energetic and economical entry-level bike. Target the economy and value-
for-money conscious young bike buyer, offer new technology features but carefully so as
not to raise the on-road price of the two-wheeler, offer build quality and trim levels closer
to bikes in the higher price ranges and at the same time price it as close as possible to
the price of a traditional metal-bodied scooter.

The company's research and development department discovered a new way to boost
the bike's fuel efficiency without tinkering much with the engine. As a result, the USP that
was built into the CT 100 revolves around these mileage-boosting features. After all, with
rising petrol prices, the need to squeeze the most out of every litre of fuel is fast
becoming the key determinant for choosing a bike.

The CT 100's design clearly takes a cue from the Bajaj Caliber's original looks. In fact,
except for the more rectangular fuel tank construction, the design of the CT 100 is
heavily accented towards the original "fairingless" looks of the Caliber.

The build quality is a big plus that Bajaj has managed to bring in to the bike. This is also
a crucial feature that buyers in this segment are beginning to expect despite the obvious
restraint of a competitive price. Though the quality of plastic parts and the finish are not
on a par with bikes in the higher price range, it is definitely a notch better than the others
in the Rs 28,000-32,000 range.

The CT100's unique ride control switch enables the rider to select between the economy
and power mode. It effectively gives the rider two options to choose — the economy
mode for outstanding mileage or the power mode for pick-up and performance. The 'ride
control switch' acts like a ' virtual instructor ' for the rider.

CT 100 also comes with a 2-year & 30,000 Km warranty and offers superb ride comfort -
thanks to its HD suspension. Priced at about Rs 31,500 (ex-showroom), the CT 100 is,
as yet, Bajaj's best bet at taking on the strong presence of the Hero Honda CD-Dawn,
though the latter is priced a shade lower at Rs 31,000.

The CT 100 had the right package of good looks, new-age technology (though not in the
league of its DTSi) and high mileage features that were attractive for the entry-level bike
buyer. It has revolutionized the entry-level segment, and has met with overwhelming
consumer response with sales crossing the 1 lakh mark within 81 days of launch in May
2004, according to a press release from the company.
According to the company the outstanding success of CT 100 is not surprising as the
bike comes with stylish, inviting & premium looks along with mileage of more than 70
KMPL in actual driving conditions. Its superior knock-free engine performance with
extremely smooth transmission has made it an instant hit among bike lovers.

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Ravichandran said, "The impressive sales figures reflect capability of Bajaj Auto to fully
live up to its promise of delivering a world-class product at an affordable price. The
rationale behind the introduction of new Bajaj CT 100 was to redefine the standards of
the entry-level segment and also to take volumes from the large executive segment. To
achieve this, we have actually offered an executive bike at an entry-level price. This bike
has thus provided the consumer with outstanding value at an astonishing price. This new
introduction is thus seen as great value offering by the consumer for its style &
performance. No wonder the CT 100 has received an incredible response from all over
India," he added.

Discover 125

Bajaj Auto had been trying to challenge Hero Honda's dominance in executive segment
of motorcycles through launch of new bikes in the segment. The executive segment
remains the largest category accounting for over 60% of total motorcycles and it is
dominated by Hero Honda (HHML). Bajaj has only very low market share in the
executive segment where it has only 10% share.

In November 2004, Bajaj Auto launched nationally a new bike called Discover - a 125 cc
vehicle in the executive segment. This was Bajaj's third attempt at the executive
segment after the lukewarm response to Caliber 115 and Wind 125 in 2004. Even
though BAL has proved its superior product development capabilities in the past, many
analysts feel that making an inroad into Hero Honda's stronghold will be a tough task.

Discover's design draws several cues from the best-selling Pulsar twins. Its competition
in the domestic market includes the TVS Victor and Yamaha Fazer.

Discover 112

Bajaj introduced a new variant of the Discover in December 2005, adding another bike to
its portfolio of motorcycles such as CT100, Pulsar DTS-i, Avenger DTS-i and Discover
DTS-i.The new Discover has been completely developed in-house at the company's
research and development (R&D) department.

The 112 cc Discover comes with alloy wheels — the first in its category — and has the
latest features such as the ExhausTEC technology, SNS suspension and a ride control
switch. The Discover has been introduced to increase Bajaj Auto's market share in the
`Executive' segment of motorcycles, a release said, adding that the company intends to
leverage the success of the Discover brand. Bajaj Auto sold a total of 77,000 of the
existing 125 cc Discover DTS- i in the festive months of October and November 2005.

The new 112 cc Discover is an addition to the existing 125 cc Discover DTS-i. "Since
high fuel economy is a critical requirement among the executive segment customers, in
addition to style and ride feel, we are introducing the new 112 cc Discover, which is
designed towards giving the rider the best mileage of 101 kmpl (under standard test
conditions), while retaining the look and feel of the 125 cc DTS-I version," Mr S.
Shridhar, Vice-President Marketing and Sales (Two Wheelers), said.

The new Discover is priced at Rs 39,000 ex-showroom Pune. The production of

Discover has started at Bajaj Auto's Akurdi plant. With the launching of 112-cc model in
the Discover range, Bajaj Auto Ltd would like to take the lead in the mid-segment of the
motorcycle market. Once the national rollout is completed, the company expected to sell
60,000 units of the Discover variant a month.

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Avenger

Bajaj introduced Avenger in June 2005. The Avenger is a sibling to the company's top-
end Eliminator model (now phased out) fitted with the Pulsar's 180 cc DTS-I engine and
a reworked frame designed to give it a better drive. And, unlike the Eliminator, which had
a Rs 90,000-price tag, the Avenger cost a more affordable Rs 60,000. "The idea is to get
into high-performance bikes in the premium segment, which is where the margins are,"
Mr Bajaj said.

Platina

Bajaj Auto Ltd launched in April 2006, a new 100cc bike `Platina' with an aim to garner
higher margins in the entry-level segment. "Platina is a high functionality, low
maintenance bike and offers much better margins than CT100," the Managing Director,
Mr Rajiv Bajaj, said.

The bike, whose two variants are priced at Rs 34,000 and Rs 36,000 (ex-showroom
Delhi), is the company's latest entry-level offering where it also sells the popular `CT100'
model. The company expects to sell 70,000 to 75,000 units per month and around 25
lakh units of the Platina this fiscal, and gradually make it the largest selling bike in its
portfolio. Mr Bajaj is of the view that the launch will result in almost 50 per cent diversion
of sales from CT100 to Platina.

Baja Auto is also setting up a new plant in Uttaranchal where it hopes to produce
additional 10 lakh units of the Platina.

For Bajaj Auto, the Splendor has been a challenge and the company's current entry-level
bike, the CT100, has only been able to make a small dent on the market share of the
leader. However, on the other side, the Bajaj commuter bike has also seen fresh attacks
from TVS' barracks, with the TVS Star City's numbers threatening to rise in Bajaj's
traditional stronghold markets.

Further, both the Splendor Plus and the TVS Star City have pushed up the benchmark
for fit finish quality levels amongst entry-level bikes and the CT100 must have felt the
heat. So, a better-built, more attractive entry-level bike that can wean away customers
from the Splendor Plus has been due from Bajaj. The new Bajaj Platina has its work cut
out. With its swank new colours and elaborate decals for the body panels, the Platina will
clearly be the looker in the entry-level segment. But if its looks reminds you of a bike that
has already been weather-beaten on rough Indian roads, you won't be wrong.

The Platina is a near replica of the Bajaj Wind 125, the much-touted Kawasaki world
bike, which has now actually become the world bike. Bajaj has discontinued selling the
low volumes Wind 125 in the domestic market and will now focus on marketing this
product in select markets abroad. The Wind 125 was probably a bit of an early entrant
into the 125cc segment. Its design and finish qualities were also quickly overshadowed
by rivals in the category.

But buyers in the lower priced entry-level segment would appreciate the design, fit and
finish of the bike. Bajaj has also upped the bike's appeal with some flamboyant
stickering. So, the Platina sports the same fuel tank, headlamp, tail lamp and turn
indicators that were featured in the Wind 125. The seat and body side panels have also
been borrowed with minor changes to the design to suit the new colour and sticker

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theme. The bikini fairing that house the headlamp and the exhaust pipe have also been
altered compared to that of the Wind 125.

Another change in the Platina is the new, attractive twin-pod instrument cluster. It
features speedo and fuel gauges with concentric circles and looks like etched glass
panels. The Wind 125 had sported a more Plain-Jane three-gauge cluster. A brushed
aluminium, aircraft-type cap tops the fuel tank in the Platina. Of course, the big change
in the Platina is the heart. The 125cc KTEC engine in the Wind 125 has been replaced
with the same 100cc mill from the Bajaj CT100.

This 99.3cc, four-stroke engine develops a peak power of 8.2 bhp at 7,500 rpm and a
peak torque of 8.05Nm at 4,500 rpm. To distinguish the CT100 and the new bike, and to
offer the latter a more premium feel, the engine and crankcase in the Platina gets a
smooth, grey-metallic coat, compared to the CT100's raw aluminium finish.

The rear grab rail gets a similar polymer coat. The silencer and exhaust pipe, in the
meanwhile, gets a matt-black epoxy finish to match the rest of the colour and finish
theme for the bike.

The Platina also employs a constant mesh-type four-speed gearbox that feels much
more refined than the transmissions that we have seen in this segment from Bajaj and
TVS. In addition, a feature that did not accompany this engine in the CT100, TRICS III
and the patented ride control switch of Bajaj will attempt to push the fuel efficiency limits
for the riders of Platina.

The same size tyres, 2.75-inch for the front wheel and 3-inch for the rear wheel are
featured in the Platina as were available with the CT100. The only addition is the option
of choosing alloys for about Rs 2,000 more in the Platina. Steel spoked wheels are
offered as standard fitment.

Longer travel front forks and twin SNS (spring-in-spring) suspension at the rear perform
the job of keeping the ride on the Platina comfortable. The Platina's alloy wheels option
is also offered with a slightly larger 130mm drum brake for both the front and rear
wheels.

Compared to the CT100, the real advantage that the new Platina will offer to its users
will be its bigger dimensions, which should be able to improve stability and ride quality.
The Platina's wheelbase is a full 4 cm longer than the CT100's.

Even if you missed the prominent Platina logo and sticker that adorns the rear side panel
of the new bike, the moment you sit astride and kick-start this new bike, it becomes clear
that it does not have anything much else in common with the Kawasaki bike than its
looks. The CT100 mill in the Platina will feel tired and underpowered for the riders who
are used to more reserves of power in the bigger engine segments.

But for the entry-level bike buyer, the rationed power delivery and the rather shrill,
unassertive exhaust note will all be less important than easy drivability, low maintenance
costs and class leading fuel efficiency.

Of course, the Platina will target buyers who are little loose stringed with their purses
even amongst the entry-level bike buyers. But those expectations will hold true even for
this set of people. Overall, the new Bajaj Platina would be an attractive option for buyers
looking to break into the premium entry-level bike segment. The Platina has what it takes

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to improve Bajaj's market share in the entry-level segment, but it may take much more to
shake Hero Honda's dominance in this category.

Distribution Channel

Meanwhile, the first of the specialized ‘Probiking’ showrooms for premium products has
come up in Pune and the company plans to set up 50 such showrooms across major
metros and urban centres, beginning with Delhi and Bangalore, in the next couple of
years. The Probiking showrooms are designed to give the customer a complete feel of
the product they are buying.
Mr Rajiv Bajaj said that the probiking showroom has been designed for the biking
enthusiasts and the showroom offers prospective `probikers' a chance to test-ride the
bikes on specially-designed, indoor dynamometers.Asked whether all showrooms would
be company-owned or dealerships, he said that BAL would try to understand the channel
and then decide on the mode.

Spread across an area of 2,300 sq ft, the centrally-located showroom has a specially-
designed, indoor dynamometer for a static test-ride, wherein riders would be able to put
the bike through the ultimate driving conditions and check out parameters such as
acceleration, time, power, torque, top speed etc, which is not possible on a normal road
test, he said.

He also said that technology would be the nucleus of the probiking chain of showrooms
with every showroom's local server connected to BAL's central SAP (ERP) system.
Interactive computer terminals would provide hassle-free self-service transactions
wherein the probiker could also print quotations, book test-rides and order the bike.

He said that Probiking would also take post-sales to the next level. A chain of off-site
service facilities is being set up for probikers such as smart cards, special vans that
would offer doorstep pick up and drop and a lounge in the service area to enable the
probiker see his vehicle being serviced.

”PROBIKING is only the tip of the iceberg. What we are planning is to have specialized
channels for our vehicles and we have identified four such channels," said Mr Rajiv
Bajaj, Managing Director, Bajaj Auto Ltd (BAL), after the inauguration of the first
Probiking showroom in Pune in September 2005.

He said that the company was all set to restructure its entire dealership network across
the country. We are trying to move from a push-based need, where we tell the customers
that we have different products at attractive prices, to a pull-based need, where we offer
the customers better products at comparative prices," he said.

Plans are now being firmed up to rationalise its 500-strong dealership network, in some
cases closing down un-viable city dealerships or asking them to move to the rural areas.
The company has identified 20 cities outside which rural dealerships will come up,
including Chakan near Pune, Niphad near Nashik, and the outlying areas of Surat and
Kanpur to begin with.

"The needs of financing, selling, distribution and even after-sales service are completely
different in the rural areas and do not makes sense for city dealers to control this," Mr
Bajaj said.

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The company also plans to set up exclusive dealerships for its three-wheeler products
instead of having them sold through an estimated 300 of its existing dealers. "The three-
wheeler business is very different from our other products with even the buyer profile
varying from that of a two-wheeler," Mr Bajaj said. Bajaj Auto plans to appoint 100-150
dealers exclusively for its three-wheelers so that they can focus on the job, get in
volumes and make the business viable.
Growth of Motor Cycle Business

For the last two years, Bajaj’s motorcycle sale has been growing at more than double
the industry average giving it an additional 4.3% of the motorcycle market in one year,
while Hero Honda’s market share declined by 2.4%. and there’s no sign of a slowdown
in its growth streak. With each passing month, the race seems to be tightening, as Bajaj
reduces its sales gap with Hero Honda. The former already leads the entry and premium
segments. At its current growth of around 40%, Bajaj will be knocking at Hero Honda’s
door in another three years or so.
Mr Rajiv Bajaj said: "Over the last two years, we have increased our market share from
24 per cent to 31 per cent along with increased operating margins which have grown
from 15-16 per cent to 17 per cent, the best in the industry."
But Bajaj Auto is up against a formidable competitor, which continues to grow at a brisk
pace. A slight rise or decline in their respective growth rates may add years to Bajaj’s
dream — if it has any — to re-emerge as India’s number one two-wheeler maker. A lot
also hinges on how the industry grows. A slower than expected industry growth will make
it harder for Bajaj Auto to maintain its current growth streak.

THE MAJOR COMPETITORS

HERO HONDA

In 1999-2000, the company’s sales grew 51.50 per cent to Rs 2248 crore. Net profit rose
from Rs 122 crore to Rs 192 crore, a 58 per cent growth. The company’s dominant
presence in the motorcycle segment has enabled it to achieve this kind of growth. Hero
Honda has one of the strongest brand equity in the motorcycle segment in India. It is
ideally positioned to cash in on the acceleration in the demand shift from scooters to
motorcycles. Till recently the company was offering just five products, the CD 100,
CD100SS, Splendor, Street, and CBZ, but its sales have grown the fastest in the
industry. Its Splendor (the costliest 100 cc bike) is the single largest selling two-wheeler
model in the world. Its latest motorcycle, the CBZ, has been a big success.

In 1999-2000, Hero Honda had a market share of 42 per cent, up from 38 per cent the
previous year. And while the motorcycle segment grew at 28 per cent, the company
managed a 43 per cent growth. Backed by a strong foreign partner, superior products
and well thought out marketing strategy, the company has managed to rally ahead of
competition and maintain its lead.

Hero Honda launched in 2000 Passion, a four-stroke 100 cc designer bike for about
Rs.46,000, approximately Rs.2,000 more than the Splendor.
The entry-level 100 cc motorcycles segment was built, almost brick by brick, by Bajaj
into a large and growing segment through its persistent efforts with Boxer. It was natural

10
that Boxer rulse this domain. But Hero Honda was the one which created and built the
main domain of 100 cc four-stroke bikes. Therefore, Hero Honda could look at it as a
challenge to its overall dominance of the 100 cc segment or as a logical space made
available to them for growth.

Hero Honda had launched Dawn earlier, targeting this segment, but that was a makeshift
effort and its cost structure did not permit the kind of pricing required to seriously
challenge Boxer. CD Dawn, then, was the vehicle conceived and developed for this
purpose. CD Dawn overtook Boxer some four months after its launch. In October, when
Hero Honda's promotional campaign was at its peak, CD Dawn's sales soared to over
60,000, a figure not reached by any vehicle but Splendor. By the year-end, it was
inevitable that the largest and the second largest selling bikes would be from within Hero
Honda's stable.

There was more to come. Within Hero Honda's 100 cc stable, Passion was the most
vulnerable model because its basic platform is styling. Aging was obviously its biggest
enemy. Passion was suffering from it. And, as it happens, it was also suffering from
every new product launch in the segment. And there were so many of them.

For a vehicle to compete on styling with the latest offerings, Passion Plus with a new
headlamp, new stickers, a two-tone paint job and a protector on the exhaust seemed to
have made only a nominal effort at rejuvenation. But, here again, it is hard to argue
against figures. Passion, which was selling less than 20,000 vehicles per month, more
than doubled its volumes in two months after its launch. And it has stayed steady there
ever since. In the bargain, it has hit every vehicle had threatened it earlier, including
Victor, Freedom, Caliber and Wind.

A resurgent Passion would normally have cannibalized Splendor to some extent.

Therefore, the launch of Splendor Plus almost simultaneously with Passion Plus was a
good piece of marketing thinking. If Passion took from Splendor, Splendor Plus took from
the others. The net impact was that a million Splendors were sold in a year. And
Splendor had already attained the status of the best-selling motorcycle brand in the
world a couple of years ago, when its annual sales reached 650,000 units.

Thus Hero Honda continues to dominate the 100 cc realm. There appears to be no
profitable and enduring space for the others in it. If taking Splendor head-on is no option,
Hero Honda has covered its flanks so well that the competition sees this entire segment
as insurmountable.

If Hero Honda's realm is a fortress that is hard to scale, the obvious thing to do is to build
another, sufficiently distant to be seen as different but close enough to attract those from
the periphery who are inclined to move up. Therefore, it is no coincidence that the
launches of Wind 125, Freedom Prima, Victor GLX 125 and Fazer are all 125 cc bikes.
The much anticipated Discovery from Bajaj is a 125 cc vehicle. And it is likely that the
vehicle that Hero Honda is giving finishing touches to be its next major launch is also a
125 cc vehicle.
While the backing of Honda has so far helped the company attain leadership in the
industry, the future could pose problems. A major concern is Honda’s setting up a 100
per cent subsidiary in India. But analysts do not think this will have a major effect, since
the subsidiary will launch only scooters and not motorcycles in the next five years. But
when Honda decides to enter the motorcycle segment in the long term, a major casualty

11
could be Hero Honda. Hero Honda relies on Honda for its products. And Honda’s solo
ride could stop the flow of products to Hero.
If Bajaj Auto believed that the path to the consumer was by providing them choice, Hero
Honda was pursuing good old customer satisfaction. The passport program - Suhana
Safar - gives Hero Honda motorcycle owners points each time they get their bikes
serviced and every time they buy accessories and spares. It already has 150,000
members.

If Bajaj's gambit was to attack with a flurry of launches and carve up the consumer base,
the Hero Honda tack was a bit different. ''Our surveys tell us that the customer will be
happy with two products, if they are close to what he is looking for,'' said Hero Honda's
Sobti.

TVS

TVS is the third largest player in the motorcycle segment and had a market share of
about 18 per cent in 1999-2000, a shade lower than the 19.20 per cent it had last year.
In mopeds, the company is by far the leader and has a market share of 53 per cent. The
second largest player Kinetic Engineering has a market share of 22 per cent.

The company has seen its fortunes sag to an extent because of the failure of its much-
awaited four-stroke scooter Spectra. This stylish bike failed to generate the kind of
interest it was expected to. TVS had set up a new plant at Mysore for the Spectra. It had
intended to relaunch the Spectra with a revamped engine by last August but has
deferred it. It will instead concentrate on the motorcycle and moped segment and has
even begun to use the unused capacity of the Spectra to manufacture motorcycles and
mopeds.

The passion, preoccupation, resources, and time that were put behind Spectra left the
company bare on the crucial motorcycle front. Thus, between 1992, when Samurai was
launched, and 2000 when Fiero was launched, the company has really nothing new to
offer in the motorcycle segment. A lot now seems to be riding on its latest offering, the
four-stroke, 150cc motorcycle Fiero launched formally in June 2000. The Fiero was
competing with the highly successful CBZ from Hero Honda. Auto magazines had rated
Fiero as the best bike in 2000. Fiero, a premium bike, had picked up sales of 62,000
units during 2000 - 2001. This was better than the sales of Hero Honda’s CBZ.

Once a strong contender in the motorcycle industry, TVS today is struggling to get its
product positioning and pricing right. From an 18-20 per cent share of the market two
years ago, TVS is today down to 12-13 per cent. In the meantime, motorcycle sales
grew 14 per cent and 19 per cent in FY04 and FY 05 respectively (Source: SIAM).

The spoils have been shared by Bajaj Auto, which has upped its share from 22-24 per
cent to 30 per cent, and market leader Hero Honda, which has cornered an additional 6
per cent and today sells one out of every two motorcycles in India.

That’s quite a comedown from the time TVS parted ways with Suzuki and went into
motorcycle manufacture on its own. Its first independent bike, the Victor - introduced in
2001 with in-house technology - raced to success almost immediately. Trouble is, since

12
then the company hasn’t launched any motorcycle with the same degree of success - it
hasn’t been able to get the timing, positioning and pricing right for its other bikes. So, is
TVS in danger of becoming a one-match wonder?

TVS was a two-stroke motorcycle company during its tieup with Suzuki. As petrol costs
mounted, though, customers began switching to four-stroke bikes, which are more fuel
efficient. But even as other motorcycle manufacturers started cutting back production of
two-strokes in favour of four-stroke machines, TVS continued with its entry-level two-
stroke, the Max 100. By the time the company got around to beginning the Max phase-
out (in 2001-02), it had already committed another error - there was no suitable
replacement ready.

“We were a relatively late entrant in the four-stroke economy segment of the motorcycle
market. Our slippage is a result of that,” concedes Prasad Narasimhan, vice president,
marketing, TVS.

The delay has cost the company. Volumes fell 4 per cent in FY05: from around an
average 59,900 bikes every month in FY03, sales dropped to about 57,000 a month in
FY05 and haven’t increased since. That’s mainly because while the motorcycle industry
has been racing ahead by 21 per cent over the past year, the economy segment (100 cc
and below; under Rs 37,000), which accounts for close to half the market, has been
speeding even more - it grew over 40 per cent. And TVS had no offering in this segment.
At least, not until October 2004, when the company launched StaR, a new 100-cc, entry-
level bike. By then, however, Bajaj Auto’s CT100 (launched in May 2004) and Hero
Honda’s CD Dawn had already established their presence in the economy segment.

Of course, TVS is still hopeful that StaR will shine through - it’s logging sales of over
30,000 a month at present, and the company believes momentum is still building up. In
fact, StaR will probably form the bulk of TVS’s volumes. That may not be all good news,
point out competitors. If 60-70 per cent of the company’s volumes are sold at a Rs
31,000 price point, TVS’s margins may come under pressure.

TVS may have missed out on the economy space, but there’s no denying the success of
its executive segment (100-125 cc; Rs 38-42,000) offering, the 110 cc Victor. After initial
sales of 18-20,000 bikes a month, Victor hiked its run rate up to 35-40,000, by August
2002. But Victor’s victory also hides a lost opportunity - TVS launched the first brand
extension only in May 2004, almost three years after the original launch. By the time the
Victor 125 GLX hit the roads, TVS had again yielded ground to rivals. Consultants agree
with that reasoning.

Says Ramesh Srinivas, partner, IBM Consulting Services, “TVS, though technologically
comparable with its peers, needs a more complete coverage of products across
segments.” Not surprisingly, Narasimhan differs, “We don’t believe we are slow to launch
variants. In 2004-05, we had one new variant and one re-stage of the core brand, which
is more than what others achieved.”

While Bajaj and Hero Honda hadn’t been setting the streets on fire with launches, they
had been busy innovating. Apart from cornering economy segment volumes by pricing
its CD Dawn at a low Rs 32,000 in early 2003, by October that year, Hero Honda had
also consolidated its hold on the executive bikes market with Passion Plus and Splendor
Plus.

13
And while Bajaj Auto’s initial offerings in the executive segment — Wind and Caliber,
launched between July and October 2003 - bombed, its September 2004 launch,
Discover, is selling over 30,000 units a month. Meanwhile, CT100 and Pulsar (premium
category) are zooming from the showrooms, too.

Meanwhile, in January 2004, TVS launched another 100 cc bike, the Centra - and got
the pricing horribly wrong. The Centra was marketed as a fuel efficient, “fill it once a
month” kind of bike, and TVS was targeting selling 25,000 units a month. Aimed initially
at the executive segment, the Centra was billed as a reliable, rugged bike that gave
great mileage. But at Rs 37,000, there have been far fewer takers than anticipated.

“Centra sales are below internal expectations,” admits Narasimhan, adding “it should
have been priced significantly lower.” It was - but the damage was already done. In late
2004, Centra’s prices were slashed to Rs 32,000 and it was repositioned as an economy
segment offering. Market estimates place Centra current sales at under 10,000 a month,
nowhere close to TVS’s initial target.

That’s a charge seconded by industry watchers. TVS has not been able to position its
vehicles properly and customers don’t identify with the products, they point out. “While
the Hero Honda brand stands for mileage, Bajaj Auto is identified with performance.
However, TVS’s brand does not have a strong-enough personality,” says an analyst.

He adds that the trouble lies in TVS’s inability to read the customer’s mind. For instance,
while customers demand better mileage, ultimately, the bike’s look swings the sale.
Sanjay Upendram, director, KPMG, points out that in the past, the company has
captured customer imagination with the Victor. “TVS needs to focus on more such
products with a clear value proposition,” he adds.

Given TVS’s technological strengths, that shouldn’t be too tough. In 2002, the company
was awarded the prestigious Deming award for total quality management. The award
was significant on two counts: TVS was the first two wheeler company in the world to
win the Deming; and the recognition came after Suzuki’s exit. Industry analysts believe
TVS is technologically as advanced as Bajaj, if not better.

“In Victor we have seen their engineering promise: they just have to take it to the next
level. If the Tatas can do it, so can they. The don’t necessarily need foreign technology,”
declares KPMG’s Upendram.

Meanwhile, competition in the motorcycle is only becoming more intense. Even as the
incumbents add to their arsenal, newcomers Suzuki Motors and Honda Motors and
Scooters India are gearing up for festive season launches.

For its part, TVS is readying itself for battle, too. It has three variants lined up for the
coming buying season and is also likely to launch two new 150-cc bikes this fiscal. “We
hope to end the year with a 16 per cent market share, with some creative marketing and
sales,” declares Narasimhan.

Both IBM’s Srinivas and KPMG’s Upendram believe that TVS will be able to fight back,
though they admit it won’t be easy. Says Srinivas, “It’s an uphill task, but don’t write them
off.” Like Tendulkar, TVS needs to return to form — soon.

14
THE INDUSTRY

The two turning points of the two wheeler industry in the late 1980s and early 1990s are
worth highlighting. One, Hero Honda launched India’s first 4-stroke mobike, which
started the 100cc wave and fed a hunger or fuel-efficiency that kept growing over the
years. And two market-oriented strategies of LML resulting in the emergence of a
genuinely demanding scooter consumer.

The motorcycles market got segmented sharply, with 100cc bikes making a different
appeal altogether from the big roarers, Yezdi and Royal Enfield. The 100cc segment got
sub-segmented into fuel-efficient bikes (led by Hero Honda) and performance bikes
(Yamaha and Bajaj).

By then, the scooter market entered a new phase of evolution. Menfolk got over the
feeling that manhood has little to do with kick-starting two-wheelers (or using gears), and
slowly started adopting the gearless, button-start Kinetic Honda scooter for sheer
convenience.

A utilitarian product, a scooter has always been a family transport vehicle in India.
Before Kinetic Honda appeared and LML went the styling way, marketers hadn’t
imagined that ego-gratification and look were important.

Bajaj has also adopted styling, aesthetics and fuel-efficiency as selling points in
scooters, starting with Legend, its first 4-stroke scooter. But then, Legend has a stylish 4-
stroke scooter in the form of Spectra from TVS-Suzuki to contend with.

In the 1990s, as marketers detected need zones in between the established market
segments, came the wave of description-defying two-wheelers. Scooterettes like Bajaj
Sunny, TVS Scooty and Hero Motors Winner have smudged the line between scooters
and mopeds. A moped with the characteristics of a scooter is probably be a close
description of scooterette. Though Bajaj Auto's Sunny was probably the first scooterette
to be launched in the country, the credit for popularising the concept goes to TVS-
Suzuki's Scooty.

Others such as Kinetic and LML followed suit with products such as Trendy (LML's) and
Kinetic Pride. Scooty, however, continues to be the market leader in the segment. Bajaj
Auto appears to be consolidating its position with the recent uptrend in its Spirit model.

Hero Honda, on its part, came up with a step-through motorcycle (a motorcycle designed
like a scooter). Though the product met with limited success, more such hybrid products
would be the order of the day.

Among Indian youth, motorcycle still reigns supreme, given the individualism, styling and
vroom appeal. In this age group, there are a significant number of performance seekers
who don’t give damn about fuel economy. But there are also those who prefer a
combination. If the latest launch from Escorts, Yamaha YBX 125, is any indication, the
distinction between fuel-economy and performance bikes may become less pronounced
in the years to come. This is a 125-cc bike with 4-stroke technology, with a powerful 11-
bhp engine, thanks to modern engineering. Bajaj’s Caliber is another example of this
kind. With Hero Honda also launching a performance bike, things should really hot up in

15
this band. By all indications, India will go the way the world has. In the West, even 50
cc two wheelers have reasonably high horse power, thanks to engineering advances that
have broken the traditional piston displacement correlation with power.

Scooter marketers, commendably, have not responded altogether by panicking, but by

examining the reason behind the trend and rushing to endow scooters with the missing
benefits. Consider the rationale behind Bajaj’s Legend and TVS-Suzuki’s Spectra
scooter projects. Partly, it was the pressure to develop a 4-stroke engine, per se, to
meet strict year 2000 emission norms. But perhaps more important was the opportunity
in bringing fuel-efficiency to the scooters market (among mobikes, it has been the fuel-
saving models that have done exceptionally well).

In October 1998, Bajaj Auto and TVS Suzuki launched India's first four-stroke scooters
with great fanfare. Unlike their motorcycle counterparts, four-stroke scooters haven't
exactly zoomed away with the market. The lacklustre performance of four-stroke
scooters is being seen in the context of decelerating growth rates in the scooter market
since 1992-93 and the lack of awareness of the benefits of four-stroke technology.

Four stroke scooters cost almost the same as motorbikes and are more expensive than
two-stroke scooters. A regular customer has to pay a difference of almost Rs 9,000
between the basic Super/Chetak and Legend and the initial investment is almost 30 per
cent more. Price has also been at the bottom of TVS Suzuki's struggles with its four-
stroke Spectra. When TVS launched in October 1998, it priced its offering at Rs 39,000.
Soon after, the company introduced a stripped-down version at Rs 33,000, which helped
sales limp up to a limited extent.

However, one major plus point is the substantially better fuel efficiency that four-stroke
scooters offer at 50-plus km to the litre to the conventional scooter's 40 plus.
Manufacturers are also banking on tougher environmental norms.

A closer examination of the success of mobikes reveals that it has been the rural and
semi-urban zones - where poor roads demand large wheelbases – which have been
voracious buyers. Around 50 per cent of big-wheeled motorcycles sell in rural areas
while only 30 per cent small-wheeled scooters go there. Also, the rural market has
continued to do well while urban India was adversely affected by the industrial
slowdown.

When urban sales start perking up again, scooters could regain their stride. A fuel-
saving engine was perhaps all that was needed. If India is to go the world way, the
numbers could remain in the favour of scooters.

Until recently, the two-wheeler industry had players with presence in niche areas. For
instance, Bajaj Auto had a strong presence in the scooter market while Hero Honda was
the undisputed leader in the four-stroke motorcycle segment. Escorts Yamaha
dominated the upper end of the motorcycle segment while TVS-Suzuki positioned itself
in the value-for-money segment. Thus, the business boundaries were clearly
demarcated, with hardly any territory encroachment.

With Euro-II emission norms coming into force from April 2000, there is a shift to four-
stroke two-wheelers. The growing popularity of motorcycles in the meantime has
prompted almost all players to eye this segment, in particular, the four-stroke models.

16
With the growth in scooters tapering off and that in mopeds hardly exiting, companies
are now vying for a share in the fast growing motorcycle segment.

The big fear that ‘niches may turn into graves’ is driving the two-wheeler industry, with
one player after another seeking to straddle all the segments. Japanese automobile
giant Honda has also decided to focus as much attention on scooters as on motorcycles.

With competition getting tougher, the two-wheeler industry is slowly acquiring the traits of
a consumer durable product industry. With practically all producers having a foreign
technical collaborator, concerns on product quality would fade as in the traditional
consumer durable industry. The emphasis would now probably shift to other factors such
as the product positioning, aesthetics, design and performance. As a result, existing
producers would find it imperative to come out with new products at shorter time
intervals to stay afloat.

With the competition getting stronger, the existing companies would also find the
expenses on product promotion and advertisement going up steadily. The scope for
growth in margins would, therefore, be rather limited. The growth in earnings would
henceforth be volume-driven rather than by a rise in profit margins.

Unlike in other industries, the competition in the two-wheeler industry would be from
within and not from any new entrant. With relatively strong cash flows and entrenched
position of existing players in their respective segment, there will be an intense battle as
companies try to encroach others' domain for sustenance and growth.

The emphasis would also now shift to the premium segment of the market, as
consumers are ready to pay for special features, superior design and add-ons. The
steady rise in the off take of Bajaj’s Pulsar, Hero Honda's CBZ, and TVS-Suzuki’s Fiero,
the premium four-stroke motorcycle, is a testimony to the fact that price would be no
deterrent if backed by superior styling, improved product features and good
performance.

Given that the two-wheeler industry has transformed from a sellers market to a buyers'
paradise, the ability to launch new and improved products at regular intervals assumes
further significance. This trait would be the key behind sustaining profit margins as it
lends the producer the option to price new products at relatively higher levels. This, in
turn, help companies overcome the pressure on profitability arising out of the inflexibility
to hike prices of well-established models due to typical consumer resistance to such
price hikes.

Other factors such as brand image, rural penetration and wide geographic presence
would also prove to be critical in withstanding the competitive shakeout in the industry.
From an investment perspective, existing shareholders may hold on to their exposures in
the industry. Profit booking, at least partially, could be contemplated on any sharp price
rallies.

The gearless scooter segment is fast emerging as the second largest in the two-wheeler
market and could account for 25-30 per cent of the overall two-wheeler industry over the
next 3-5 years. Currently, un-geared scooters account for just 12 per cent, followed by
geared scooters at 5 per cent, mopeds at 5 per cent and the step-throughs at one per

17
cent of total two-wheeler sales. The growth in sales of gearless scooters had not taken
off earlier as the cost of such vehicles was high and they were less fuel-efficient as
compared to motorcycles," says Anang Dev Jena, Business Head and Motor Research
Head, Synovate India.

HMSI's launch of new-styled un-geared scooters, however, helped turn the market
around. HMSI has three products in its portfolio: Activa, Dio and Eterno.

Says Francis Xavier, Managing Director, Francis Kanoi Marketing Planning Services:
"The decline of the market for scooters was directly related to neglect of this segment
over decades vis-à-vis critical benefits (mileage), contemporary technology and non-stop
excitement of launch of newer and newer models offered on the motorcycles platform.
The revival of the market for scooters was solely due to the single-minded attention paid
by Honda scooters through the launch of Activa, Dio and Eterno, which is in the
conventional scooters category. It is doing reasonably well with a volume of 10,000
vehicles/month within its sights. But the overall action in this segment will remain
nominal and, therefore, the geared scooters business will remain small. If you take both
the geared and ungeared scooters together, the recent growth is definitely due to Honda
Activa."

Adds Jena, "The turnaround could be attributed to styling, pricing strategy and
convenience. The geared scooters have been available in similar styling for years, but
there was no excitement around scooters till the gearless Honda Activa came to the
market with all-new modern styling - a scooter nonetheless but better than existing
geared scooters and less than a motorcycle - a classic cross between the looks and
aspirational aspects of a motorcycle and the safety of a scooter. Basically, customers did
not have any hesitation in "showing off" their mode of transportation with gearless
scooters. Another key reason is the convenience of owning and riding a gearless two-
wheeler, the core audience for which are teenagers, women and older people."

Also, consumers were more `comfortable' in being associated with the gearless scooter,
as opposed to the earlier conventional bulky one.

Agrees Ravi Shankar, Senior Vice-President, TNS India. "HMSI has actually been one of
the main contributors to the revival of this segment. With many more urban centres
being created over the last five years, the demand for two-wheelers in general has
grown at a rapid pace. The new breed of scooters, especially of HMSI, is technologically
advanced with new-age features, adequate power and speed, fuel-efficient 4-stroke
engine and overall economy. Gearless scooters also offer ease of operation in start-stop
city driving. The ones on offer earlier lacked adequate power and therefore were not
suitable for commuting longer distances with a pillion rider."

The new breed of scooters is finding an increasingly captive market among young
women, teenagers and even the elderly. Further, gearless scooters are conveniently
priced in the Rs 25,000-Rs 35,000 range.

Meanwhile, two-wheeler major Bajaj Auto, in a bid to get a foothold in this growing
category, rolled out a 110 cc gearless scooter called the Wave. "This category is seeing
a growth of 20 per cent year on year, with volumes having stabilized at about 60,000
units per month. We only have one model, Spirit, in this segment at present and had a
market share of about seven per cent last year. We recently upgraded the Spirit to a 70
cc engine from 60 cc. In addition to rolling out the Wave, we are working on new designs

18
for further launches," says R. L. Ravichandran, Vice-President (Business Development
and Marketing), Bajaj Auto.

This, however, does not mean that Bajaj is lowering its thrust on its erstwhile bread-and-
butter segment - geared scooters. While the geared scooters market is declining, Bajaj
continues to hold a 50-60 per cent market share in the segment with its trusted
warhorse, Chetak. "We introduced a new gear system in the Chetak called the
`wondergear', in which no gear shifting is required.

The company expects the geared scooters segment to settle at volumes of about
2,50,000 units per annum. "The profile of the consumer buying the geared scooter is
different. The consumer is not looking for style, but the longevity of the product. The
market for the basic metal scooter is mainly in the North, East, Gujarat and parts of
Andhra Pradesh," he says.

Introduced in early 2006 Hero Honda's latest product is the scooter `Pleasure'. This is a
unique experiment for Hero Honda, a company, which unlike the others in the industry
will take the road backwards in developing a scooter after being the market leader in the
bikes segment.

The Pleasure has been under development for quite sometime now, and at first glance it
impresses with its fit and finish quality. There are no signs that it is a first attempt at the
segment for Hero Honda. Its design cues, attention to detail and shared components are
indicative of the co-development efforts that the two partners have put in for the
Pleasure.

In fact, many of the features, such as the tuff-up tube (first featured in the Honda Activa),
have actually been carried forward from scooters currently being offered by the
Japanese partner's wholly-owned subsidiary — Honda Motorcycle and Scooter India.
The benefits of hindsight and on-road experience are evident in the Pleasure, though it
is Hero Honda's first foray into this segment.

Hero Honda calls the Pleasure its first scooter, but its looks and feel gives one the
impression of it being smaller than the Honda Activa or the Bajaj Wave. This feeling of it
being more compact, and in terms of size closer to the TVS Scooty, is more due to its
sleek frontal appearance. Thumb the self-start switch and the Pleasure's performance is
obviously on a par with its fuller-sized rivals.

At first glance, the Pleasure looks like a scooterette that will only feature an engine that
is in the 80cc class or thereabouts. The air-cooled, four-stroke, single cylinder, 102cc
engine gives the Pleasure as much power and torque as the Activa and the Dio which
have similar-sized engines, and is about one bhp lower than the peak power output of
the Bajaj Wave's 110cc engine. Peak power rating for this engine has been set at 7 bhp
at 7,000 rpm and the maximum torque output is 7.85 Nm at 5,500 rpm.

No wonder, the Pleasure is as much fun to drive as the Honda scooters. With its kerb
weight being a shade lower, the Pleasure's handling and fuel efficiency should also be
marginally better than the Activa's and the Dio's.

The ex-showroom price of the Pleasure, only one variant of which is currently being
offered, is about Rs 36,500. Optional accessories offered include a side stand and a
saree-guard with an integrated step for the pillion. The scooterette is available with eight

19
body colours and many of them, especially orange, candy blazing red, aqua green, light
purple and moon yellow, are meant to attract women.

Being a latecomer to the variomatic two-wheeler party, Hero Honda has focused its
marketing and promotional efforts at attracting women buyers, in the hope of creating a
niche in this increasingly crowded segment. It is also offering other exclusive services
and features to attract women, such as the `Just4Her' chain of Pleasure showrooms that
will exclusively cater to women customers, a first in the industry.

Other femme features and freebies include membership to the `Lady Rider' club that will
offer women free gifts, discounts on spare parts and deals on vehicle insurance. Hero
Honda also plans to offer free pickup and repair assistance for lady scooterette owners.
The company is also giving a two-year/ 24,000 km warranty on the Pleasure.

`Why should boys have all the fun?' is the punch line of the Pleasure ads. Other
scooterette manufacturers were hesitant to take this line though market research
showed that women riders were always the targetfor this segment. In fact, the original
Kinetic Honda was the harbinger of this trend. But Hero Honda's sharp focus on women
could lead to lower acceptance amongst male buyers who, of course, still constitute the
overwhelming majority of two-wheeler owners.

Buoyed by demand from college girls and housewives, the gearless scooter segment
has emerged as the second largest category in the two-wheeler segment, after bikes. In
fact, some estimates suggest that while gearless scooters account for 80 per cent of
total scooter sales (about 10 lakh units per year), about 60 per cent of the customers for
gearless scooters are women. This would imply that about 4.8 lakh scooters are sold to
women every year!

"The scooter segment in India is over one million units and has been witnessing an
impressive growth for the past few months. Further, there is a huge untapped segment
of women customers, which offers immense growth potential. With this launch, we are
now ready to extend our products and services to this vast customer profile," says
Pawan Munjal, Managing Director, Hero Honda.

The company has taken its strategy a step further by opening exclusive women's outlets
called `Just4her.' Hero Honda is planning to open 22 such outlets for Pleasure across
the country. These outlets will offer special facilities to women customers and have
female service supervisors and sales executives.

Market analysts point out that the Pleasure will compete directly with the Honda Dio from
Honda Motorcycle and Scooter India (HMSI). It is priced about four per cent lower than
the Dio. But whether the women-oriented positioning will work in Hero Honda's favour is
a moot point.

While the Pleasure is targeted at women buying into the scooterette segment, which
TVS Motors dominates, Xavier feels that the Pleasure, being a heavier scooter, could
well end up eating into the Activa (HMSI's ungeared scooter) segment. The Activa is
heavier than the 75 cc Scooty Pep.

More than 50 per cent of Scooty buyers are women. While both men and women are
buying Activa, the Pleasure's distinct positioning as a women's scooter could well
alienate a male buyer who may have bought this scooter otherwise, says Xavier.

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Bajaj Auto too is taking entrenched players TVS Motors and HMSI head on, with two
launches in the gearless scooter segment in late 2006. The company recently unveiled
two gearless scooters, Kristal and Blade, and is trying out a new strategy with gender-
exclusive products.

The Kristal, which sports a sub-100 cc engine, is meant for college girls and sports the
dual twin spark ignition system, a wider seat and 22 litres of storage space. The Bajaj
Blade is designed to attract young men. It has a sportier style, large 12-inch alloy wheels
and disc brakes. Company officials said both the launches are aimed at tapping the
growing gearless scooter market.

Pune-based two-wheeler major Kinetic Engineering too is all set to fire away with new
launches this year. Says Sulajja Firodia Motwani, Joint Managing Director, Kinetic: "The
future will clearly belong to gearless scooters. Much innovation will be seen in terms of
product design and specifications and new segments will emerge. The gearless scooter
segment has been growing at 15-20 per cent annually. Gearless scooters have become
popular based on their strong comfort-convenience proposition.

"Features such as electric start, smooth gearless transmission and storage space set
them apart from all other two-wheelers in terms of utility; and also make them universal
in their appeal, i.e., both men and women can easily use them. Even in terms of age
group, they have a 16-61 appeal. They are especially popular in cities and other urban
areas."

Kinetic will soon launch Italjet's range of scooters in the market. The Italiano series
includes a range of designs from classic and retro to maxiscooters and sportscooters
and will feature engine capacities from 50 cc to 250 cc.

"The first launch will be a large, powerful, macho scooter, of course, with electric start
and variomatic transmission. This will be the most solid and comfortable vehicle in
India," says a gung-ho Motwani.

Further, industry watchers say even Japanese company Yamaha, which has been
conducting a feasibility study of the scooter market, may start selling gearless scooters
before the year-end in India.

The rumblings in the scooter market this year are sure to affect the sales of current
market leader, HMSI. The company has been credited with spearheading and
developing the gearless scooter category in the country with Activa and Dio.

"I feel HMSI had a very big role to play in reversing the trend in the category with Honda
Activa. The key strategy that appears to have clicked with customers is styling - more
modern, up-to-date and bordering on unisex. It also provided the convenience and
pricing which was quite appropriate for consumers to see value for money. HMSI's
current product portfolio is adequate. However, it needs to maintain the excitement
around its product portfolio by continuously introducing new products and styling options
in its portfolio," says Anang Dev Jena, Head, Synovate Motoresearch India.

Jena says there will be substantial investments in this category as manufacturers have
realized the potential in this segment. "I won't be surprised if gearless scooters garner
25-30 per cent market share of the two-wheeler market in the next three years. This is
likely to come both from eating into the current scooter/ moped shares and also the
growth of the segment," he says.

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Surely, with a multitude of launches planned, the gearless scooter segment is set for a
smooth drive this year.

It has been hypothesized for sometime now that the centre of gravity for bikes will shift
from 100 cc to 125 cc bikes. That would mean that much of the nearly 70 per cent of the
two-wheeler space occupied by bikes below 125 cc will gradually be occupied by the
125 cc bikes. The basis for this hypothesis is that, globally, 125 cc is the entry-level
platform for bikes. The 100 cc four-stroke bikes have dominated the Indian market for so
long because they created and built the market for mileage-oriented bikes in the country.
They not only took over the position held for long by geared scooters, they also
expanded on it enormously. Most of the action in the bikes segment has been in this
category. And now with the action shifting to 125 cc bikes, the expectation is that the
customers would increasingly go for 125 cc bikes with the natural process of ageing and
the desire for progress and change.

There can be no doubt that the 125 cc segment will become sizeable with so much of
action focused on it by so many companies. But the question really is whether the centre
of gravity will shift in the foreseeable future. There is also the question as to the extent to
which this hypothesis is popular because two-wheeler companies want this to happen. It
is perhaps a wish and not a vision or a forecast. The idea is that only a shift in the centre
of gravity will offer other companies a profitable space in the volume segment of the two-
wheeler market.

For years, competitors have been trying to break the stranglehold that Hero Honda has
had on the 100 cc four-stroke segment using price, styling, pickup, 110 cc engine
capacity and so on. There have been so many spurious attempts at establishing a
differential on mileage that such claims stand discredited, en masse, among customers,
making it very difficult for even genuine claims to get across.

The hard-core Hero Honda buyers have also been indifferent to inducements on the
price front. At times, the price difference between Splendor and the lowest priced 100 cc
bike was as much as Rs 8,000. While such offerings created another sizeable segment,
they did not really touch Hero Honda's space. The question now is will the action on the
125 cc front do what all the action on the 100 cc and 110 cc front failed to achieve?

Thus the 125 cc platform will attract only the two-wheeler buyers who seek to upgrade
and buy something better. They account for only 20 per cent of all buyers at present. To
the others, 100 cc bikes provide all things that a commute or functional buyer needs.
There is no discomfort on price, pick-up, mileage, riding comfort that can make a
quantum difference as it happened in the transition from geared scooters to 100 cc four-
stroke bikes.

However, even without a shift in the centre of gravity, it is easy to see the 125 cc
segment being sizeable. At 20 per cent of two-wheeler buyers, the potential for all bikes
of 125 cc or higher capacity is over a million. Pulsar and other vehicles which come
under the 125 cc plus category account for only around 500,000 vehicles, at present.
That leaves open a space for 500,000 vehicles. And this space will grow.

Yamaha was one of the first to see an opportunity in the 125 cc platform. It has had YBX,
YD125 and Enticer as options in it. But these offerings were weak and Yamaha's own
footprint was too small to stir up the market. Nor did it go to town presenting its vehicle
as a differentiated platform, as LML is doing with its Freedom Prima.

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Thus the real action in the 125 cc segment has just begun. It is likely that at least one of
the 125 cc launches will be exciting enough to reach volumes of 200,000 or more over
the next two years. That would be a very nice and profitable volume to posses for a
brand but certainly not enough to seriously threaten the 100 cc platform or Hero Honda's
hegemony over it.

QUESTIONS:

1. Identify the various market segments in the Indian two-wheelers market, key benefits
being sought by each of these segments and their growth potential.

2. Compare the value propositions all the players in each of these segments.

3. What are your recommendations to Bajaj Auto Limited for stopping the slide and
moving up to a strong market leader position considering the opportunities and
threats in each of the two-wheeler segments and its (Bajaj’s) competitive strength in
these segments?

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 Exhibit 1
Projected Age Distribution of Indian Population

Age Groups (Years) 2001 (million) 2006 (million)

0–4 108.5 113.5
5 – 14 239.1 221.2
15 – 19 109.0 122.4
20 – 24 90.2 108.5
25 – 34 156.6 170.6
35 – 44 121.6 139.0
45 – 54 85.7 100.2
55 – 59 31.1 36.9
60 & above 70.6 81.1
Total 1,012 1,093

Exhibit 2
Distribution of Households by Socio-Economic Classification

Socio-Economic Class Total Urban Rural

(Million) (Million) (Million)
A 4.8 (2.7) 4.8 (9.8)
B 8.9 (5.0) 8.9 (18.1)
C 10.5 (5.8) 10.5 (21.3)
D 10.8 (6.0) 10.8 (22.0)
E 14.1 (7.9) 14.1 (28.7)
R1 2.6 (1.4) 2.6 (2.0)
R2 7.8 (4.3) 7.8 (6.0)
R3 39.5 (22.0) 39.5 (30.3)
R4 80.3 (44.7) 80.3 (61.6)
Total Households 179.5 49.2 130.3
(In Millions)
Note: Figures shown in brackets indicate percentage

Exhibit 3
Estimated distribution of Indian Households by Life-style

Socio- Principle Oriented Aspiration

economic Oriented
Class

SEC A 30 70
SEC B, R1 50 50
SEC C, R2 80 20
SEC D, R3 90 10

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